The Bid Costs Challenge
Published on 28 December 2018
In response to one of my PPP posts I received a question from a much-appreciated former colleague on the excessive levels of the costs for bid preparation in a PPP. “What happens if the contractor's cost of preparing a PPP proposal is so sky high, that he cannot afford to lose the bidding”. A valid question that is worthy of some further reflection.
It is indeed a correct observation that costs for preparing a bid for a PPP project are substantially higher than for more conventional projects. EIB research concludes that such costs can be 0.5 – 2.5% of the project costs whereas the bid costs for more traditional contracts tend to be in the range of 0.5 – 1%. It is fair to assume that the bid costs for PPPs are at least twice the amount for traditional procurements. Makes sense given the need for a PPP bid to acquire a good understanding of all of the risks over the life of the contract and the necessary and costly financial and legal expertise to translate this into the financial model and the bid documents. Obviously the ratio will depend on the project value and the specifics of the project and the procurement process.
The extensive due diligence underlying the bid preparation is one of the reasons why PPPs tend to be delivered on average more effectively in terms of schedule and price. On the other hand, the excessive bid costs may also tempt bidders to submit an opportunistic bid in order not to risk losing the project and having the bid preparation done for nothing. “We have seen that happening several times in the Netherlands. It damages the sector and it is not fair if a big contractor with limited resources and too little working stock has no other option than to join, to spend, to win the bidding and to put his company in danger”.
It is fair to conclude that it’s in the interest of both the public authorities and the private investors to lower the bid costs reducing the risk of opportunistic bids and increasing the level of competition. And competition is definitely something public authorities should seek to pursue. Avoid direct contracting at any costs as tempting as it might be as history learns that awarding contracts without competition rarely leads to successful projects. The underlying principle is that competition is the best assurance of value for money.
In order to lower bid costs, it may be worthwhile to take a look at the experiences in Canada, one of the most sophisticated PPP markets to date and able to reduce the average bid costs to 0.7% of the project costs. Substantially lower than for example in Europe, UK and Australia.
Why is Canada able to manage the bid process more efficiently than other countries? Some possible explanations:
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A steady pipeline of well-structured economic and social infrastructure projects
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Standardised procurement processes, including consistent project agreements and payment mechanisms, evaluation methodologies, and financing requirements
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Rigorous adherence to project timetables and the disciplined avoidance of further bid stages after the Request for Proposal (RFP) stage
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Fewer information requirements, relying more on the preferred bidder developing its proposal (before and after commercial close) and on protections within project agreements
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Greater discipline in avoiding ‘scope creep’, especially after the selection of the preferred bidder
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Some form of substantial contributions from the public sector towards bid costs
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Fostering a collegiate approach both among and within the provinces, including the sharing of lessons learned and new approaches
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A well developed and diverse market for project finance with active involvement from pension funds
Canada has implemented over 200 PPP projects in the past 2 decades. As such the Canadian PPP model is one of the most successful in the world. At the heart of that success is the high level of political commitment across all levels of government. To create and nurture a productive PPP market, such support is essential.
"The future is bright for public-private partnership (P3) in Canada",
Canada’s minister of infrastructure and communities
told delegates at a national P3 conference.
The stability of the PPP market has been crucial in securing competitive contract prices and high-quality bids. It has allowed both the public and the private sector to benefit from the learning curve in terms of capacity building and mainstreaming the necessary procedures.
Also, the institutional framework is comprehensively and cohesively designed and facilitates the efficient and effective implementation of PPPs. Aside from the central coordination through Infrastructure Canada there are also a range of centers of infrastructure expertise at the Provincial level.Furthermore, at a national level, the Canadian Council for Public-Private Partnerships (CCPPP) is promoting innovative approaches to infrastructure development and service delivery through public-private partnerships with all levels of government. The Council is a not-for-profit, non-partisan, member-based organization with broad representation from across the public and private sectors. A proponent of evidence-based public policy in support of PPPs, the Council facilitates the adoption of international best practices, and educates stakeholders and the community on the economic and social benefits of public-private partnerships through among other supporting APMG’s Certified PPP Professional (CP3P) program.
In conclusion, Canada demonstrates that PPP can be implemented effectively and efficiently with reasonable transaction costs for all parties involved. A carefully designed framework is essential to be successful. However, such a level of maturity does not come overnight. It requires vision, commitment, endurance and determination.
“Patience, persistence and perspiration make
an unbeatable combination for success.”