How do market-led proposals make it into a budget?

On the eve of the 2015-16 Victorian Budget, the Andrews Government announced it was considering a proposal from Transurban for a major new road project, the $5.5 billion Western Distributor.

Effectively an alternative to the western-end component of the previous Coalition Government’s East West Link project, its announcement took all by surprise.

So how does such a major infrastructure proposal, in this case requiring complex engineering works and a financing package based on tolling, an extension of a current concession and Federal Government funding, suddenly appear out of the blue, welcomed and hailed by the Government as a project under serious consideration?

The truth is that (obviously) it wasn’t a scheme that was dreamt up over night, and (perhaps less obviously) it didn’t receive the government’s blessing courtesy of a sell-job over a long lunch.

It has come to light, now, courtesy of a codified process that protects both the public interest and the intellectual property of the private sector proponents in designing the project.

The Victorian Government has in place a framework that encourages the non-government sector to develop and bring forward ideas that address public policy needs.

Unsolicited proposals, as they are generically known, have been accommodated by governments around the world, including the USA and UK, for some time.

Victoria has followed other Australian states – South Australia and New South Wales – in establishing policy to deal with unsolicited proposals.

The Baillieu Government announced in its economic statement released in December 2012, Securing Victoria’s Economy, that “the Government will implement a clear framework for consideration of unsolicited private sector proposals for infrastructure investment.”[1] This came into practice in early 2014.

The new Labor Government in Victoria in its first months in office has already amended the unsolicited proposals framework to bolster and provide greater transparency of process, and to articulate a number of procurement models that may be applied through a competitive tender.

Prior to these developments under the Baillieu and Andrews Governments, the existing policy to deal with unsolicited proposals at that time, as outlined in the Partnerships Victoria handbook, was vague in process and placed responsibility for consideration with individual line agencies.

A sophisticated, comprehensive policy that codified Government consideration processes was necessary to provide further confidence and encouragement to the private sector.

The key issue for consideration in the design of such a process and policy is to balance the competing interest of recognising the private firm’s internal cost of generating an innovative idea and, if the project (or components) are accepted by Government, to ensure a market-testing process that delivers value for money to the tax payer.

This addresses an imbalance whereby non-government idea generators are constrained and cannot readily submit ideas due to the internal costs associated with developing a ‘public good’ but at a private cost, with little likelihood of recovering sunk costs or recognising and protecting intellectual property.

The potential private sector entities or proponents need to know that there is a clear and transparent process for consideration of unsolicited proposals, which graduates supporting information and evidence requirements over a staged assessment process, to keep costs and expenditure by proponents to a minimum.

The proponent must have confidence that the Government will genuinely consider the idea and there is a mechanism to ensure the policy merit of the idea is appropriately considered by the right area of Government.

A Process

The Victorian Government has long had sophisticated mechanisms to guide internal decision-making on infrastructure investment. For instance, it has a ‘high value high risk’ (HVHR) process of consideration for certain types of assets that either:

• Exceed $100m
• Are deemed high risk from the Gateway process (DTF’s investment evaluation process)
• Nominated by the Government as requiring extra scrutiny

The HVHR framework and the use of the Investment Management Standard inform the consideration and evaluation processes that comprise the five stages of the Victorian Government’s Market-Led Proposals Interim Guideline, as it is now known.

The five stages of assessment are:

1. Filtering of proposals.The  Government will determine whether the proposal complies with information requirements and is appropriate for consideration under the guideline.
2. Strategic assessment and recommendation.The Government conducts a strategic assessment of the merits of the proposal to determine whether the proposal should proceed, and if so whether this should be through a competitive tender process or through an exclusive negotiation.
3. Investment case and procurement preparation. The Government agrees with the proponent either the terms of the exclusive negotiation or the approach to a competitive tender process;
4. Negotiation, development and assessment of final offer.The Government either conducts an exclusive negotiation or a competitive tender process to develop a final supplier offer for Government consideration.
5. Contract award.The Government awards the contract.

 

What qualifies as a Market-Led Proposal?

The Guideline sets out the key criteria that a proposal must meet to be considered a Market-Led Proposal.

The four key assessment criteria are:

1. 1. the proposal has unique characteristics that are expected to result in outcomes that could not otherwise be obtained in the marketplace within acceptable timeframes. This includes where government cannot reasonably:
   • engage another private party to deliver the proposal or an equivalent outcome; or
   • achieve similar benefits, including value for money, policy or service delivery outcomes, reduced delivery timeframes or risks not borne by government if a standard competitive market process outside of the guideline were pursued.
2. 2. the proposal meets a service or project need that is aligned with government policy objectives and priorities;
3. 3. the proposal represents value for money and provides benefits to Victorians; and
4. 4. the proposal is feasible, affordable and capable of being delivered.

The Guideline defines ‘unique characteristics’ as including:

1. 1. a unique idea, or ownership of intellectual property; and
2. 2. being in a unique position or having ownership of strategic assets to deliver the desired outcome, including but not limited to having:
   • rights under an existing contract;
   • ownership of land, technology or software; or
   • exclusive access to, or control over, strategic assets integral to delivering the proposal or improved outcomes for government.

Proposals assessed to date

Transurban’s Western Distributor initiative has come to public attention now in line with the requirements of the Guideline that all proposals are publicly disclosed when they reach the end of Stage 2 of the assessment process.

The Western Distributor proposal is not the first project to be considered under Victoria’s unsolicited proposals framework. 

Transurban has already had success with its CityLink-Tulla Widening project, which will widen the CityLink and Tullamarine Freeway and introduce a Freeway Management System.

The Cranbourne- Pakenham Rail Corridor project, which arose under the Napthine Government, was terminated at Stage 4 by the new Andrews Government.

[1] Pg 36