How the NZTA has paid more than NZ$30 mln to help cover roading contract bidders' costs and why Macquarie thinks other government entities should do the same

By Gareth Vaughan

The New Zealand Transport Agency (NZTA) has paid out NZ$30.8 million over the last six years to bidders for national roading projects, including unsuccessful ones, to help cover the cost of their bids.

NZTA released this figure to interest.co.nz as part of a responses to questions about its policy of reimbursing a proportion of bid costs for losing bidders. The NZ$30.8 million includes NZ$19.2 million paid out last year to two bidders for the NZ$1.5 billion Waterview Connection tunnels project, which the NZTA describes as its largest, most challenging and most expensive project to date. The NZ$19.2 million works out at about 1.28% of the project cost.

NZTA's revelation comes as Macquarie Capital calls on central government, and potentially local government, to effectively mimic the NZTA and offer to reimburse a portion of short-listed but unsuccessful bidders' bid costs for public-private partnerships (PPPs) to help get more PPPs off the ground.

A consortium named the Well-Connected Alliance was ultimately chosen by NZTA to manage the design, construction and operation of the now underway Waterview project.

It includes NZTA itself, Fletcher Construction, McConnell Dowell Constructors, Parsons Brinkerhoff NZ, Beca Infrastructure, Tonkin and Taylor, and Japan's Obayashi Corporation. The Well-Connected Alliance pipped a second consortia, led by Australia's Leighton Contractors, which was short listed for the contract, with a third consortia, led by Baulderstone Pty - another Australian firm - "narrowly" missing the short list.

Other roading projects where bidders had help from the taxpayer purse to cover their costs include the Manukau Extension, the Tauranga Harbour Link, the Manukau Harbour Crossing, the Hobsonville Deviation, the Christchurch Southern Motorway project, Matahorua Gorge, the Tauranga Eastern Link, Te Rapa Bypass, and the Ngaruawahia Bypass. (See full details, including the size of the payments, in the table below).

NZTA keeps the IP

So why are the payouts made?

NZTA spokesman Andy Knackstedt says for larger State Highway projects, where tenderers are asked to do significant proportions of the highway design work as part of their submissions, NZTA buys the intellectual property (IP) rights of these tender designs.

"This ensures any value in the tender designs developed by unsuccessful tenderers remains accessible to the NZTA," Knackstedt says.

"Depending on the contract model the intellectual property rights payment can be made to just unsuccessful tenderers, or both the unsuccessful and the successful, where a compliant tender is provided."

The NZTA says it applies this policy to up to three tenderers for each contract. In instances where more than three tenderers want to bid, it short lists two or three. Generally the policy applies to contracts worth more than NZ$50 million with the level of payments to each tenderer typically about 0.5% of the cost of the contract, NZTA says, although some payments - such as the Waterview ones- amount to more than this.

"This reflects the complexity of the project and the subsequent time and cost required for tenderers to prepare their bids," David Darwin, NZTA's acting national manager for professional services said in written responses to questions.

"For example, the Waterview Connection project is three times the size of a typical roading project, and unlike other projects, there was little historical data available on tunnelling that tenderers could draw on in preparing their bids," Darwin added.

No one has said 'no'

Tenderers aren't obliged to accept NZTA's offer to cover some of their bid costs by buying their IP but thus far all have.

Knackstedt says for each of these tenders, an assessment of the expected cost to bid the project is made by NZTA, including the design work required in the tender phase. The level of payment offered to tenderers is then set at up to 50% of this expected bid cost, reflecting a "reasonable contribution" to the estimated costs to complete the tender design, without necessarily covering full design costs. All bid costs above this are met by the bidders themselves.

"It is the NZTA’s view that the intellectual property rights payments reduces the overall cost of our large projects in that it: reduces the overheads of bidding large projects thereby encouraging greater market competition on our projects; and it provides us access rights to valuable design information developed in the tender period," Knackstedt adds.

Macquarie advocates widespread adoption of the NZTA model to help struggling PPP market

The details of the NZTA payments comes with Duncan Olde, Macquarie Capital New Zealand division director, suggesting reimbursing some of short listed parties PPP bidding costs could see more, especially smaller companies, prepared to put their hands up for PPPs, potentially helping more such projects get off the ground in New Zealand. With the notable exceptions of the NZ$900 million Wiri prison and a Hobsonville schools project, PPPs have been thin on the ground in New Zealand despite an expectation more would come to fruition under the current National-led government.

This has seen Steven Proctor, executive director of the HRL Morrison & Co managed Public Infrastructure Partners Fund, say some money set aside for New Zealand PPPs will go to Australia instead.

Australian investment bank Macquarie, renowned for its involvement in PPPs around the globe, is financial adviser to the SecureFuture Consortium which was selected by the Government to design, finance, build and operate the Wiri prison.

Olde says the number of contractors, especially building contractors, who might want to participate in PPPs worth, say less than NZ$150 million, are relatively small because the bid costs are a material amount of money to them.

"So the way they're going to look at it is if they've got the alternative of playing in a traditional procurement project where the opportunity is of a similar scale and the bid costs are significantly less, or they can play in a PPP opportunity where the bid costs are high and the scale of the opportunity is around the same, it seems pretty obvious to me that they would participate in the traditional procurement," says Olde.

Therefore to motivate them to "play in the PPPs" and to increase the competitive tension for projects, Olde suggests reimbursing a share of their bid costs could help.

"Certainly not all of their bid costs as people need to be incentivised to take risk. If we want to have an active PPP market I think that would attract more players into the market," Olde says.

He suggests such a development could be especially useful for the construction market because if activity were to pick up outside of the Christchurch rebuild, it might not be easy to attract contractors to bid for the work.

"There was plenty of interest in the schools project, there were five or six expressions of interest. But that interest may wane if the construction market becomes more vibrant because of people having other alternatives," says Olde.

"The reason I've picked on the small projects is for the large projects it's going to be the larger contractors who have the capacity to absorb those costs. (But) I'm not saying they're going to be happy doing it."

PPP lemons

Overseas some PPPs have gone pear shaped for the public sector partner, its taxpayers or ratepayers and/or consumers. In Australia, for example, the financial lemons have included Sydney's Cross City Tunnel and Lane Cove Tunnel, Brisbane's RiverCity Motorway, and Reliance Rail projects.

Meanwhile Olde says bidders who've bid for but lost PPP contracts can be reluctant to bid again.

Olde did acknowledge that to support the concept of reimbursing some of the bidding costs for losing bidders, you have to believe the argument that such a policy would result in an improved competitive process with the benefit of this more than offsetting the additional cost of reimbursing losing bidders. He also acknowledges such a move wouldn't be an easy sell to taxpayers or ratepayers.

"It's done in some other PPP jurisdictions (including some US and Canadian states and provinces), but certainly it's not widely and commonly accepted here and you're absolutely right that there would be resistance. But I think it's a matter of understanding the potential benefits of doing it," Olde adds.

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