Unsolicited bids

A paper presented by Tony Harris, a former Auditor General of NSW, on 27 April 2016

Introduction

Governments that have - and follow - a sound policy for considering unsolicited bids can help the development of worthwhile projects. If there is no adherence to sound policy, or if the framework is lacking, governments are liable to be gamed by developers proposing unsolicited bids, at the expense of the community. They also expose themselves to allegations of corruption.

Unsolicited Bids

Most if not all governments lack entrepreneurial skills. This is not necessarily a weakness: communities are likely to suffer when elected or non-elected officials use taxpayers’ funds for what the officials believe are profit-making purposes. Bureaucrats do not typically have commercial skills and they do not typically work in an environment that rewards entrepreneurship. Using public money to finance your commercial ideas is loaded with dangers.

So, what should governments do when faced with sound opportunities for the use of public assets when those opportunities fall outside of what is traditionally seen as the governmental realm? Some of these ideas will be worthy of government consideration and some of them should be developed.

This is best illustrated with examples. In my view, the first recent successful unsolicited bid in NSW was the 1998 approval to use the Sydney Harbour Bridge for tourist purposes. You could not expect the state’s roads authority to develop the idea that tourists would likely pay for the opportunity to walk across the top of the spans of the Harbour Bridge. The authority’s legislation and skills is directed to identifying how to develop the state’s main arterial road network.

But the tourist concept has been profitable for the state government, the state economy and, of course, the private sector proponent. While the process for dealing with that unsolicited proposal was sub-optimal for the state, the development was still a win-win for each party.

Another NSW proposal that meets the criteria for unsolicited bids was the development of the air space above the railway lines at St Leonards near North Sydney. The state rail authority has limited commercial skills associated with the use of its rail property, but the idea of building a large set of apartment and commercial blocks that straddled the railway lines was, when the idea was developed, new and worthwhile.

Most of the so-called unsolicited bids listed on the NSW Government Web Site do not meet the essential characteristic that ought to be required for unsolicited bids. These proposals ought to meet three tests: they must involve ideas that are unique to the proponent, that allow optimum use of government assets and that provide value for money to the state as well as benefiting the proponent.

The first successful unsolicited bid as identified by the NSW government, the Sydney Harbour tunnel, does not meet these criteria. For a start, the idea of a second harbour crossing was not unique. Transport economists and engineers had identified a need for a second harbour crossing many years before the joint venture of Transfield and Kumagai Gumi proposed its plans. Second, we shall never know, because there was no contest, whether the plans developed by Transfield- Kumagai represented the best option for the state. Third, because Transfield-Kumagai was awarded the contract without a tender process, we shall never know whether the costs borne by the state was reasonable.

The government argues that the particular design proposed by Transfield-Kumagai was unique to it. Even so, that does not rule out a tender process for a second harbour crossing. A properly designed tender would have allowed Transfield-Kumagai to maintain its intellectual property rights while determining whether other developers could advance better designs or a better cost. This process is not as simple as calling for tenders for a precisely specified project, but it does inject competition into the process. The lack of a transparent, competitive process and its replacement by a negotiated process gives rise to the real prospect of corruption. The Sydney Harbour tunnel development allowed the possibility, commonly expressed in NSW at the time, that government officials had corruptly profited from the closed negotiated processes that were used to seal the deal.

Another factor to be considered is that the entire financial risks of the Sydney Harbour Tunnel are borne by the NSW government. While Transfield-Kumagai took construction risks and took the profits from the construction phase, the tunnel’s construction costs and its financing and maintenance costs - all of which exceed the tunnel’s revenues - are being borne by the state.

A Process for Considering Unsolicited Bids

The optimum process for considering unsolicited bids needs to address two goals: the intellectual property of the proponent has to be guarded and the government’s interests have to be protected. If the former is neglected, there will be little incentive for the private sector to advance unique ideas that would profit the community. If government assets are not protected, the public purse will suffer: the state will pay too much or receive too little.

It seems that the ACT Government recognised these needs when it developed its policy for considering unsolicited bids. The latest expression of this policy available on the ACT website is dated March 2015. It rightly sets out four objectives, one of which concerns value for money. But the immediately following text addresses only three objectives. It is evident to the authors that ensuring value for money from unsolicited bids in the absence of a tender is indeed difficult if not impossible.

 The guidelines discuss six methods to inject some form of contestability in the absence of a tender. Each has major faults. The so-called Swiss Challenge allows the original proponent – in this case GWS and Grocon – to match the successful bid determined after an open bidding process. This option would inappropriately allow GWS and Grocon to assume the intellectual property of the successful bidder.

The second option would allow a bid premium to the GWS-Grocon bid. How the value of this premium is determined in a transparent and objective manner, if that is possible, is not disclosed. The third option involves compensation to GWS-Grocon for its development costs. Determining the fair value for those ideas is also difficult, if it is at all possible.

The fourth technique is to allow GWS-Grocon to develop detailed bid criteria and plans for a defined rate of return, presumably a fee paid for by the government. This would then be the basis for a public tender which is open to GWS-Grocon and other likely competitors. Under this approach, the criteria and material defined by the original proponent would not have been contestable.

The fifth option excludes the original proponent from any role other than to oversight the development. It is unlikely to suit the business model of GWS-Grocon and its desire for the prospect of super profits or economic rent from development.

The last option - the one GWS-Grocon will likely choose – involves a negotiation process between the government and the proponent. Past experience shows that the private sector parties will have negotiating skills and incentives sufficient to win these negotiations.

All states and territories now have guidelines for the consideration of unsolicited bids. And all stress the need for the unsolicited bid to have unique qualities. But what governments and proponents see as unique doe not always pass the reasonableness test. The bid by companies associated with the Packer family to develop part of the Barangaroo site to include a hotel with a casino instead of just a hotel was seen by the NSW government as a unique proposal. But there seems nothing unique about the Packer interests trying to secure a second casino license in Sydney at the cost of its competitor, the Star Casino group. The NSW government however, negotiated the payment for the licence for the second casino instead of putting the matter to tender even though a tender was possible and would have provided the best avenue to ensure value for money.

The GWS-Grocon Proposal

All guidelines say that the first test for the GWS-Grocon proposal is its uniqueness. The GWS manukagreen website does not describe the unsolicited bid in any detail. It does, however, claim the proposal is unique because the development of the Manuka Oval involves no government funding and because no other national sporting competition in partnership with a national code is able or willing to provide such an arrangement for Manuka Oval and the ACT.

Each of these claims has problems. The proposed Manuka oval development certainly involves government assets. It requires the government to pass leasehold over parkland and heritage sites to a developer in exchange for improvements to Manuka Oval. The unsolicited bid thus involves a notional sale of land with some proceeds devoted to improving Manuka Oval. The problem with this idea is that the government has no clear idea of the value of the land proposed to be swapped and no clear idea of the value of the Manuka Oval improvements. And neither value can be clearly ascertained without a competitive process.

The second claimed unique quality is the identity of the developer – GWS. But the uniqueness of the proponent has little, indeed no, bearing on the uniqueness of the proposed project. In fact, the true developer would be Grocon; GWS is merely a catalyst. No analysis would suggest that the development of public land near a sporting facility could be described as a unique idea.

On another website, gwsgiants.com.au, we see that a more completely specified outline of the proposal gives little weight to improvements to Manuka Oval. The 140,000 square metres of new floor space devoted to commercial, car-parking and residential purposes dwarfs the stated improvements to the Oval and adjacent park lands. This is evident in the reported costs of the development. Of the $800 million total costs of the unsolicited bid, around 10 per cent is devoted to the oval and precinct. The proposal is overwhelmingly about using public land for conventional commercial development and thus fails the uniqueness tests. In any event, we see that the proposed upgrade to Manuka oval has been superseded in part by recent announcements of government-funded improvements.

A Preferred, Alternative Approach

Economists with no interest in planning matters would say that the government should monetize the public land involved in the GWS-Grocon proposal. If the government were unconcerned about using dedicated parkland and heritage assets for commercial development, it should sell the relevant land in a public tender having firstly worked out the new planning limitations. It would thus have a transparent process aimed to maximize its revenues. The government would then determine the best use for the revenues obtained from the sale. If the government decided to apply these revenues to improving Manuka Oval (that is, if upgrading that sporting facility were the government’s highest priority) it would conduct a public tender on that proposal. 

 The value of transparency and arms’ length dealings is an important issue in the guidelines for unsolicited bids promoted by the ACT Chief Minister and Treasurer. These guidelines state more than once that any contact by the proponent of the unsolicited bid with ministers and other officials will be of no benefit to the proponent. The guidelines infer that there should be no nods or winks given by elected or non-elected officials to the ideas being aired by the proponent and unsolicited bids should not be a vehicle merely for avoiding traditional, proper processes.

Those Treasury officers who drafted these guidelines seem aware that such discussion are often held at a cost to the public interest, and that they can easily lead to corrupt conduct, at least in the sense of the NSW ICAC legislation which defines partial behaviour as being corrupt. In this context, Clive Hamilton’s recent article in The Canberra Times, discussing extensive contact between the proponents, the government and associated party affiliates, is of interest. The website manukagreen.com.au notes that the GWS-Grocon proposal was put to the ACT Government some 18 months ago, “in the final quarter of 2014”.

Conclusion

There is nothing unique about developing public land around a major sporting venue, although there might be particular features of the commercial development proposed by GWS-Grocon (intellectual property) that deserve protection.

Enjoining that proposal with plans to augment Manuka Oval facilities is unnecessary. It also camouflages the economics of the principal proposal.

Governments are ill equipped to conduct sound negotiations with developers and should engage in such negotiations only as a last resort.

In the interests of transparency and probity, to optimise the use of public resources and to reduce the prospect of partial behaviour, the proposals can and should be considered through traditional tendering processes following design competitions, if that is seen as worthwhile.

The tendering and design processes firstly require the government to determine what, if any, new planning requirements should be set down for the relevant public land.

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