Procurement's hidden risks

A possible legal challenge is brewing as unions rage against UK job losses stemming from the award of a train PFI contract to a Siemens-led consortium.

Controversy surrounded the award earlier this month of preferred bidder status to Siemens, the German engineering giant, for the £1.4 billion (€1.6 billion; $2.3 billion) Private Finance Initiative (PFI) contract to deliver, maintain and finance 1,200 trains for the Thameslink rail network upgrade in south-east England. But if that controversy results in the decision being challenged or even overturned, investors in the infrastructure asset class might have another entry to add to what we might term its growing list of hidden risk factors.  
    
Why the controversy? In winning preferred bidder status, the Siemens consortium – which also included infrastructure fund managers 3i Infrastructure and Innisfree – saw off competition from Bombardier, the Canadian transport company. Bombardier then promptly announced, following the decision, that it would be shedding 1,400 jobs at its UK train-making subsidiary. Cue wailing and gnashing of teeth from the Rail and Maritime Transport (RMT) union, with general secretary Bob Crow portraying it as a “jobs massacre” and “the destruction of the UK train building industry”. It called on the government to overturn the decision.    

The government’s transport secretary Philip Hammond countered that the award resulted from the application of European Union procurement rules, which stipulate that there should be no discrimination based on where within the European Union bidders happen to be based. It also said the Siemens bid offered best value for money and that, in any case, it was now legally obliged to honour the deal. 

These arguments sound credible, but is that where the matter gets laid gently to rest? Unlikely.  

Contracting authorities have only two justifications for the award of a tender: one is that the bidder is offering the lowest price; the other is that the bidder best complies with “MEAT” criteria (the “most economically advantageous tender”). The basis of the Thameslink award is not known, but Hammond’s reference to ‘best value for money’ indicates it may have been purely on price criteria. In which case, it may have been the ‘right’ decision but does not answer the oft-levelled charge that the UK tends to be obsessed with value for money to the exclusion of all else – including a coherent industrial policy, so the charge goes.  

In fact, according to procurement experts, tenders of this type are most commonly based on “MEAT”, which means that the procuring authority would be able to take into account all kinds of criteria beyond price – and which might be expected to support the case of a ‘domestic’ bidder. These might include, for example, availability of support teams and the ability to provide new components quickly and cheaply. 

If it emerges that Siemens won on a MEAT basis, anger at the process is unlikely to be assuaged. Moreover, talk of legal obligations to honour the winning bid may be misplaced. Typically, contract awards are subject to a three-month period in which they can be challenged. Interestingly, the RMT today announced it was seeking legal advice over the possibility of just such a challenge. 

If a challenge indeed materialised and was successful – admittedly hypothetical on two levels – the fallout would likely include increased tendering costs, delays and the possibility of a counter-challenge. For investors in infrastructure, it might mean a further addition to a growing list of unforeseen risk factors. 

Subsidy adjustment risk for renewable energy investors? Check. ‘Complicity’ risk of profits being clawed back where investors have complied with investment programmes of dubious fiscal soundness (as in Portugal)? Check. Risk of investors that are part of winning consortia being subject to legal challenge on the basis of the ‘wrong’ approach to procurement? Check.

So for those who still think of infrastructure as an asset class that is virtually risk-free, perhaps it’s time to revisit that notion.