Updated New South Wales PPP Guidelines Aimed at Reducing Bid Costs and Increasing Efficiency

In Short

The Situation: The New South Wales ("NSW") State Government recently released an update to its NSW Public Private Partnership Guidelines. The Guidelines are used by NSW Government Agencies in procuring projects through a public-private partnership ("PPP") model. All projects with a value over $100 million are eligible for PPP procurement.

The Result: Bidders should be mindful of the new processes and criteria the NSW Government will be applying in assessing bids and monitoring project delivery, which includes comparison through a "Shadow Bid Model". The new Guidelines are intended to reduce bid costs and improve PPP procurement efficiency through the introduction of pro forma documents. There will be greater involvement of NSW Treasury from an early stage and a clearer demarcation of responsibilities through the project life cycle.

Looking Ahead: The "PPP Toolbox" and template documents should simplify the bid process and reduce costs for bidders. This will result in easier bid comparison but will also add difficultly for bidders wishing to deviate from standardised risk profiles. The new assessment model should allow proponents with non-price offerings to more easily demonstrate value for money to the Government. However, greater involvement of NSW Treasury may make for more rigorous project assessment, and some projects may face difficulties or delays in obtaining approval.

Background

The NSW Public Private Partnership Guidelines (TPP17-07) ("Guidelines") apply to public service infrastructure procured through a PPP, including social infrastructure such as schools and hospitals and economic infrastructure such as roads and rail.

The Guidelines were last updated in 2012, and these most recent changes are intended to improve clarity and transparency in processes through all project phases (from business case and key procurement phases to construction and ongoing operations). The new processes also aim to reduce bid costs following industry criticism of high bid costs on the Sydney Metro Project and the White Bay Project (which the NSW Government ultimately failed to award, despite bidders allocating significant resources to a complex bid).

Principal Changes

Updated Goals, Approval Processes, Governance

There are significant changes to the Government's internal approval and governance processes, including:

• The updated Guidelines now deal in greater detail across all project phases, reflecting a new emphasis on value for money and delivery of improved services. There is also a new emphasis on consistency of risk allocation among all NSW PPPs, unless there are project-specific reasons to depart, which is reflected in a new "principle" and a requirement to use standardised documentation.
• There also is improved clarity in government agency roles in PPP procurement and delivery and greater emphasis on NSW Treasury's role. Generally, the "Responsible Agency" continues in its role for procuring and delivering the PPP, but there may also be a project Steering Committee when more than one agency is involved. In some cases, the Premier may authorise "Infrastructure NSW" (via the new unit "Projects NSW") to manage procurement and delivery as Project Director.
• At each approval milestone, Cabinet (or a Cabinet sub-committee) will consider any proposed material changes in risk allocation. During procurement of the PPP, Cabinet approval will now be required for any material changes that will affect business case conclusions, including if there is any material change to the agreed risk allocation or project costs of funding (previously, Expenditure Review Committee approval was required).
• Cabinet must be informed of the planning process that will be followed and likely approval conditions, and costs need to be updated during project approval phases. This change can be seen in the light of some of the planning difficulties faced on recent projects, including the cost blow-outs arising from the compulsory acquisitions of private properties in the three-stage toll road project, West Connex.
• There is expanded treatment of the relationship between PPP approvals and approvals under the Unsolicited Proposal process and the "Premier's Innovation Initiative" (in which private parties are invited to submit proposals in defined priority services areas). The updated Guidelines clarify that a proposal from an existing PPP consortium on an existing concession that may include new or modified infrastructure does not need to comply with the Unsolicited Proposal Guide (but will require Cabinet Approval). This could offer opportunities to existing PPP concession holders.
• The Guidelines make it clear that tax risk is the responsibility of the private party. This is particularly relevant given the Australian Taxation Office review of PPP tax arrangements at the federal level.

Business Case, Funding and Procurement Strategy

There are also changes in the project development phase of the PPP procurement process.

Reduced Bid Costs, Improved Transparency and Communication with the Market. Where possible, prior to or during procurement, the Responsible Agency will engage geotechnical experts to prepare reports that can be relied on by bidders. Where practical, the scope of the work will be provided to bidders for input. This is intended to reduce bid costs and will increase certainty for bidders. One of the difficulties that bidders usually face is how best to manage pre-existing site conditions risk, and more detailed geotechnical information should allow for more nuanced risk allocation.

Bids will now be submitted electronically rather than in hard copy. This, in addition to the standardisation of documents, is in an effort to save bid costs.

A requirement for a Market Communication Strategy has been introduced. "Market soundings" can be conducted early in the process, particularly on complex PPPs, to establish interest and help inform project and service and scope and resolve any complex design engineering and commercial risk allocations and mitigations.

New Model for Assessing Bids—Comparison between Public Sector and Private Sector. There is a new model for assessing bids. In addition to preparing the Public Sector Comparator Model ("PSC"), agencies must also prepare a Shadow Bid Model ("SBM") and compare the outcomes of the two models. The SBM is an estimate of a private bid price, assuming private capital structure and payment terms. Inputs (including the discount rate) need to be verified and stress tested with the involvement of NSW Treasury. Both models must be updated during the course of the procurement for new information. The principles for PSCs for economic infrastructure projects now include a requirement for a commercial rate of return on the Government's equity investment.

Bidders may be advised to clearly articulate any differences between the bidder's assumptions and the SBM assumptions; otherwise, the bidder's bid may appear to be overpriced when the agency compares the bid with the SBM.

"Value for Money" and Non-Price Assessments and Price Comparisons. There is new detail on the assessment of bids, including an emphasis on assessment of non-price benefits. Evaluation of bids is undertaken by:

• assessing bids against the non-price criteria;
• comparing price proposals; and
• making a value judgement on which bidder provides the best value, taking into account both the non-price assessment and the price comparisons of each bidder.

The new Guidelines expressly state that the NSW Government does "not use a formulaic approach in evaluating bids because weightings and formulas may place undue emphasis on price rather than overall value for money drivers, including design or operating innovation and efficiencies".

This new emphasis bodes well for proponents looking to bid on quality outcomes and not just price.

Template Documents and the "PPP Toolbox". There is a new suite of template documents for agencies to use during the procurement phase of Social Infrastructure PPPs as well as the "PPP Toolbox", which includes PPP Governance Plans, Expression of Interest Documentation and Request for Proposal documentation. NSW Treasury approval is required to use alternative templates.

If these template documents are used consistently by agencies, it is likely to lead to market standardisation and reduced bid costs as proponents will be able to have a standard marked-up bid response. However, the standard markup will still need to be supplemented by project-specific risk identification and appropriate departures. The Guidelines also specify that clearer principles are performance regimes and key performance indicators.

The template project deed allows the State to make capital contributions during the construction period if, for example, there are capacity constraints in the debt and equity capacity markets at the time. The "template project documents" differ from the National PPP Guidelines in certain key respects, including the State's ability to pay down a portion of senior debt (conditional debt pay-down) and an adjustment of the relief and compensation regimes to align with delivery and operational phases.

Contract Management: Delivery and Operations

There is greater emphasis on contract management in the delivery and operations phases, including a requirement for a project director to be engaged. There is also a continuing role for a delivery steering committee or advisory board to ensure that "value for money is maintained throughout the project delivery and operations phases".

Four Key Takeaways

1. Bid costs and time should be reduced by the introduction of standardised documents.
2. Risk from pre-existing site conditions may be able to be better allocated through the provision of the geotechnical report early in the bid process. Other new communication measures, including the "sounding-out the market", may also improve the bid process.
3. The changed bid evaluation process and the introduction of the PSC/SBM evaluation model should result in more "real-world" evaluation of bids with the ability for bidders to highlight non-price benefits.
4. However, the greater involvement of Treasury and the requirement for Cabinet rather than ERC approvals during procurement may slow down the procurement process and make it more difficult to achieve project specific departures, especially if the template documents become market standard.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/.

Bill Napier
Sydney
+61.2.8272.0730
billnapier@jonesday.com  

John B. Cooper
Brisbane / Sydney
+61.7.3085.7010 / +61.2.8272.0718
johncooper@jonesday.com  

Paul Riethmuller
Perth
+61.8.6214.5714
priethmuller@jonesday.com

Margot L. King
Sydney
+61.2.8272.0577
margotking@jonesday.com  

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.