Australia's flipside view of P3 procurement

While most may resist change, Australia’s superannuation industry is actively seeking it through the Inverted Bid Model that would turn the existing P3 procurement process on its head.

As a country that has seen several major privatisations in the past year alone, has successfully educated the public about the benefits of public-private partnerships (PPP; P3), and is one of the few undisputed leaders globally when it comes to infrastructure investment, it came as a surprise when a recent report found that there is room for improvement in the Australian infrastructure market.

According to Australia’s Productivity Commission, an independent research and advisory body of the government, improvements in infrastructure financing, funding and procurement could lead to savings of up to A$1 billion (€689.32m; $933.62m) a year.

One of the suggested reforms related to procurement of greenfield projects is the Inverted Bid (IB) Model.

“As the name suggests it tips the current process on its head,” Brett Himbury, chief executive of IFM Investors, told Infrastructure Investor in a recent phone interview. “Bringing the equity investor into the process at the beginning would make an enormous amount of sense,” he said.

The IB model – a collaborative effort between IFM and Industry Super Australia (ISA), an organisation representing superannuation funds – calls for tendering parts of a project under separate contracts.

The government would tender for the long-term owner-operator first, followed by separate bids for construction, operation and maintenance (O&M) and debt.

“The equity investors are brought in at the design stage to get a degree of comfort on the scope of the project and therefore on the costs, returns and risks of the project,” explained Himbury, who presented the model and its merits to the business group of the Group of 20 (G20) when the group convened in Singapore earlier this month.

“The G20 has four priority areas that it’s trying to solve – one of which is that up until 2030 there is about $57 trillion worth of infrastructure needs across those 20 nations,” he said. While governments would be able to fund about $27 trillion of the total, that still leaves a $30 trillion funding gap.

Reforming the procurement process would therefore attract more private capital, according to Himbury and ISA.

“At least eight major infrastructure investors in Australia typically do not participate in greenfield PPP projects either as bid sponsor or primary equity investor,” ISA stated in a February 2014 report. “Long-term equity investors like superannuation funds do not see the relative value to divert resources away from pursuing brownfield infrastructure to greenfield PPP projects that involve such costly, lengthy and uncertain processes.”

Asked whether issuing separate bids for various parts of a project would make a lengthy process even longer, Himbury replied: “I seriously doubt it because an equity investor has a motivation clearly to optimise their long-term return and I think given the fact that time slippage costs money, I imagine that there is alignment and motivation to get this done in a timely manner.”

According to IFM’s chief executive, the market has shown a fair amount of interest in the Inverted Bid Model.

“I believe the theory has been well accepted,” Himbury said. “The next step would be to continue to finesse it and then frankly get into a case and actually get it done. It’s like social privatisation – it’s good to talk about those things and engage with relevant parties to make sure that the discussion is robust, but then let’s put an actual case to work and get it done.”