Market-led proposals - still a unique opportunity

In brief

In brief: Australia has seen a significant increase in market-led proposals for infrastructure projects. This is having an important effect on how government interacts with the private sector, with all states and territories having released detailed guidance intended to boost these submissions even more. Partner Penny Alexander and Associate Amy Byrne report on the resulting opportunities and challenges.

How does it affect you?

• Recent commentary from the Australian Competition and Consumer Commission (the ACCC) and the Victorian Opposition in relation to market-led proposals (MLPs) (also known as unsolicited proposals in some states) highlights the challenge for governments in striking the right balance between ensuring value for money outcomes, and transparency in the context of exclusive negotiations with the proponent of a MLP, while still encouraging innovation by the private sector.
• For the private sector, a proposal with merit is alone not sufficient to justify the government negotiating exclusively with the proponent, rather than testing the market through a competitive process. The key challenges for proponents in preparing a MLP are: establishing that the proposal is sufficiently unique, that they are uniquely placed to deliver the proposed project, and that exclusive negotiation is the best procurement approach.
• Recent commentary highlights the importance of uniqueness, and indicates that where a MLP's proponent is at a structural advantage due to its ability to leverage existing assets, the proponent's challenge of establishing uniqueness will be particularly acute.

Background

In recent years, Australia has seen a dramatic rise in private-sector-initiated proposals for the development of infrastructure projects. This trend is having a major impact on the way government has traditionally interacted with the private sector in relation to infrastructure projects, and presents both new opportunities and challenges for government and private sector proponents.

All states and territories have now released detailed guidelines to further encourage MLPs from the private sector. Most recently, the Western Australian Government released for public consultation a draft Market-led Proposals Policy and Supplementary Guidelines. This new policy is expected to become operative in late 2018 or early 2019, and is intended to replace the various separate guidelines that are currently in place in WA for evaluating specific types of MLPs.

The guidelines in each state and territory give private sector proponents increased transparency and certainty about how their proposals will be assessed, as well as the potential outcomes from submitting a proposal. Although there are different processes and criteria in each state and territory, the key elements of a successful proposal are similar in each jurisdiction. In particular:

• Preparation: Proponents need to develop an in-depth understanding of the assessment process and what is required for a proposal to be successful. Given the early stages can be extensive, and the proponent typically bears the cost and risk (at least in the early phases of a proposal), this will help to ensure both that resources are expended in a targeted manner and that proposals are more likely to progress.
• Timing: As government will be assessing whether any given proposal is consistent with its current policy objectives and priorities, proponents need to time the submission of their proposal as best they can to accord with the objectives and priorities of the day, bearing in mind government electoral cycles.
• Value for money: Proponents need to demonstrate how their proposal provides enhanced value for money, compared with other approaches; their clear understanding of risks associated with the proposal; and the reasonableness of costs to government. It is also in proponents' interests to establish the benefits to government of pursuing exclusive negotiations with the proponent, rather than opening the process to competitive tender.
• Demonstrating uniqueness: Demonstrating the unique characteristics of a proposal and a proponent's unique ability to deliver it is fundamental, as we discuss further below.

Importance of uniqueness

Recent commentary in relation to MLPs, particularly in the area of transport, has questioned whether they always result in good outcomes for taxpayers, while emphasising the importance of a MLP having truly unique characteristics.

Although different tests are adopted in each state and territory for determining whether a MLP will be successful, the common theme is that a proposal having merit will not alone be sufficient – proponents need to demonstrate that they have a unique idea and only they are able to implement it. Examples of uniqueness have included:

• an innovative idea, such as the Port Phillip Ferries MLP in Victoria, which would provide an alternative way to get to and from the Melbourne CBD;
• a unique funding / financing solution, evidenced in toll road projects in Australia that have involved utilising existing concessions to lower the upfront funding required from government or to allow government to bring forward the development of projects;¹ and
• the characteristics of the proponent, as recently seen with the partial long-term lease of Ausgrid in New South Wales, by an all-Australian consortium comprising IFM Investors and AustralianSuper.²

Incumbency through ownership or access to assets can also enable a party to demonstrate uniqueness. This has been an important factor in a number of successful MLPs in Australia. Eg the Port of Brisbane's ability to leverage its existing adjacent facilities and systems as part of the Brisbane International Cruise Terminal project was key to its success.³

In its review of the proposed acquisition of a majority interest in WestConnex by a Transurban-led consortium, the ACCC also recently observed that this could increase Transurban's ability to submit a successful MLP in New South Wales for the acquisition of a new toll road concession in Sydney in the future.

A few weeks ago, the Victorian Opposition stated publicly that, if elected in November this year, it would follow recent comments made by ACCC Chair Rod Sims and refuse MLPs for major transport projects in the absence of a truly compelling reason. The Shadow Treasurer, Michael O’Brien, expressed his view that MLPs are only justified 'where there is a level of uniqueness about what the proponent brings to the table'. Although, importantly, Mr O'Brien did acknowledge an 'exceptional' circumstance would involve the incumbent carrying out upgrades to its own property or infrastructure. This certainly reflects the category of uniqueness referred to above that relates to incumbency through ownership or access to assets.

These recent comments in relation to transport sector MLPs are particularly relevant to both incumbents and non-incumbents who may be planning to submit a MLP, given transport has been, and remains, a key area of opportunity for MLPs. In fact, half of the proposals received in New South Wales in 2016–17 were transport related, as were approximately two-thirds of proposals approved in Victoria.

Our view is that MLP proponents should not be discouraged by this recent assessment of what a successful MLP should look like, as it stands to renew focus on the critical criterion of uniqueness that all successful MLPs must show, regardless of Australian jurisdiction. As referred to above, this has been achieved in different ways by successful proponents – through having an innovative idea or a unique funding / financing solution, or due to the characteristics of the proponent or its ability to leverage existing assets.

Striking the right balance

The recent MLP commentary also highlights the need for governments to find the right balance between different, and often competing, considerations when formulating their approach to assessing MLPs.

On the one hand, MLPs allow the private sector to propose new and innovative ideas to government, outside of traditional procurement processes. This can result in a number of important benefits and help to solve community needs, including by allowing new infrastructure to be delivered more quickly, or without significant upfront investment by government, and by providing access to innovative ideas and new technology.

On the other hand, by their nature MLPs involve the government negotiating exclusively with a private sector proponent, which can give rise to concerns around a lack of competitive pressure, and the government's ability to drive value for money outcomes. A further challenge is ensuring an appropriate level of transparency and public reporting in relation to MLPs, while also protecting proponents' intellectual property and confidential information.

Recent updates to the MLP guidelines in each state and territory seek to address these and other issues, including by providing greater clarity about the assessment criteria and process, and setting out more detailed requirements in relation to probity and disclosure. Application of the assessment criteria is critical to ensuring that only appropriate proposals progress through the framework, and that the need for a competitive process is considered as part of the process.

The future of MLPs

Some have perceived the ACCC's and the Victorian Opposition's recent comments as signalling a potential demise in MLPs, particularly in the transport sector. However, our take on this commentary is not so much that it foreshadows a stark move away from MLPs as that it is a strong reminder of how important it is that the proposal itself must be unique, and the proponent must be uniquely placed to deliver it successfully. If these elements are able to be satisfied, and government can show that each MLP delivers value for money, MLPs will continue to be effective structures to deliver successful infrastructure projects.