A Decent Proposal

22 February 2017 With a growing list of US public sector agencies championing the use of unsolicited proposals, Dan Colombini reports on their rise in popularity across the region and why they have failed to take off in Canada

“We need every tool in the toolbox,” said Los Angeles County Metropolitan Transit Authority (LA Metro) CEO Philip Washington back in 2015. “LA should be the infrastructure capital of the US and the US should be the infrastructure capital of the world. We now have a great opportunity to do that.”

His words followed the announcement of the agency’s new unsolicited proposals policy, which has been used to spearhead the organization’s plan to launch an “aggressive” P3 program.

And with some initial success too. Metro has already received several proposals for new deals, including bids for the Sepulveda Pass project and the West Santa Ana Branch Light Rail project. In February, Metro advanced two bids for each of these projects, and also declined one proposal on each, meaning it had garnered interest from six teams on these two schemes alone. Of those that progressed, the teams included big names like Skanska, Kiewit and Parsons.

And that is not all. Metro announced in October that it was also in receipt of five other unsolicited proposals from ACS, Skanska, Parker Infrastructure Partners and Goldman Sachs. All these potential projects are now moving through phase one of Metro’s unsolicited proposal review process to determine if they have technical and financial merit.

Though not the first agency to adopt this policy – with the Pennsylvania Department of Transportation (PennDOT) launching a similar policy in April 2015 and Virginia operating a similar method before that – Metro is now certainly in the vanguard when it comes to use of unsolicited proposals across the US.

To many, this embracing of such a procurement tool represents a positive on several levels for both sides of the market. Firstly it allows the private sector to do what it does best and combine innovation with proactive ideas to get new projects off the ground.

Perhaps more importantly however, it represents a clear signal that there are public sector bodies out there that are finally coming to terms with the benefits that partnering with the private sector can bring.

In Metro’s case this is not just big talk either, as demonstrated by the response to the program. “We are currently undertaking one of the largest infrastructure programs in the world, as we build out the transportation system in Los Angeles County over the next 40 years,” explains Joshua Schank, LA Metro chief innovation officer.

“Unsolicited proposals allow the market to signal to us where they see an opportunity to advance the development and construction of major projects, without delaying other projects.

“They also signal to the private sector that we are open to new ideas not only for project delivery, but for new partnerships of any kind that can provide benefits to our constituents.”

And the organization is not alone. Across the US, more public sector agencies are now beginning to take note of the benefits of the process, with the District of Columbia becoming the latest agency to launch a program utilizing unsolicited proposals in November.

“We have always felt that we do not have the monopoly on good ideas,” says Seth Miller Gabriel, director of the district’s Office of Public-Private Partnerships (DC OP3). “So, if the private sector has a good idea we would like to learn more about it. The initial response has been strong, people are definitely interested.”

The benefits of this process for a government agency include greater interaction with the private sector and more openness to new ideas throughout the agency. But chiefly, supporters say it offers a potentially better, faster, and more fiscally responsible outcome for project delivery.

“As a result of this policy, we are regularly exposed to new ideas that put more focus on whether the way we do things currently is the best way to continue,” explains Schank.

“Sometimes it is and sometimes it isn’t, but the unsolicited proposal policy forces us to be open to change on everything we do at any time, and that is critical for public sector agencies.”

“Sometimes in government, having an idea laid forth in all the pieces with a political plan in place is very appealing,” adds Samara Barend, founder of the Performance-based Building Coalition (PBBC) and senior vice president and development director of Aecom Capital.

“It can solve a lot of issues at the upfront development stage, which can often be a huge obstacle. So unsolicited bids that factor in a predevelopment component are likely to become more popular in the future.”

Fair questions

But the subject can also be a controversial one. It is rare in life to find anything that is not without its problems and the unsolicited proposals policy is no different. One major concern stems from the fact that an unsolicited bid can take a public sector’s “destiny” out of its hands, with further issues arising over the competitive nature of the process.

“The public sector tends to lose leverage in these kinds of situations and the level of competition becomes suspect,” one lawyer explains. “If a company comes forward with an unsolicited bid, another company could perhaps come to the conclusion that the deal is as good as done already.

“There are transparency issues and questions often arise among rival bidders as to whether it is actually a fair process.”

This removal of competitive tension – something that is often held up as a benefit of the wider P3 process – leaves question marks surrounding whether the project being delivered is ultimately to the benefit of the public agency, or simply the firm that made the bid in the first place.

Despite many agencies signifying that any bid will be followed by a competitive tender process, it does not always end up this way.

“It is not uncommon for whichever team put the bid in to end up getting the job – and only then do the real contract negotiations begin,” the lawyer continues. “So, effectively what that means is that the public owner can lose bargaining leverage because there is no competitive edge to proceedings.”

But opening up the process to more bidders also comes with its downsides. The time taken from an initial bid to selection of winning bidder once an agency has launched a tender process can be lengthy, meaning that one of the key factors of private sector innovation is actually hindered in the long run.

This is demonstrated in Latin America, where Colombia has utilized unsolicited bids with some success to develop its Fourth Generation road program.

Colombian law says that, following an unsolicited bid, the process is opened up to the market for additional offers to be received.

However, where the country differs from its North American neighbors is that the original bidder is then given the opportunity to match the best and final offers that have been received from other groups.

“Without that kind of provision, no-one will invest the money,” explains Santiago Klein, managing director of McBains Cooper International.

And there are further negatives to this approach. “It is a double-edged sword,” says Klein. “It heavily limits the competition, as sometimes people are reluctant to bid if they know that a rival will simply match the offer and win the contract.”

Barend agrees that there are some difficulties with the model in the US, too. “The overall process can certainly take a while and the danger can be that if a state or municipality is not ready to procure the project on the table it can lead to political problems as well,” she says.

“If you are going to open up a process and give competitors 90 days, for example, to bid on it then that can certainly minimize the value for teams that have operated on their own initiative to come up with an idea. This can minimize the incentive to create the project in the first place.”

This reluctance is perhaps the driving reason why, as yet, there are few examples of successfully completed unsolicited bids.

Nowhere is this more prevalent than across the border in Canada, a market that has a far deeper pipeline – and history – of P3s than the US.

Obviously, the Canadian market is a very different beast to its US counterpart, something which is reflected in the country’s differing attitude to unsolicited proposals.

While acknowledging the potential merits if done correctly, the industry in Canada has tended to shy away from such bids as a result of a well-earned confidence in its public sector’s ability to select the deals it really needs.

“The Canadian market is mature and as a result procurement agencies, municipalities and other public owners often start with the premise of a P3 solution for large complex infrastructure problems,” says Plenary Concessions CEO Mike Marasco.

“Furthermore, most of these entities do not have procurement guidance on how to deal with unsolicited proposals, so those that have been received in the past, are not actioned.

“When they look for evidence of successful solutions that resulted from unsolicited proposals to help justify a process, there are very few.”

This supports the theory that it is the agencies with little P3 experience that turn to the unsolicited bids model to kickstart their pipeline.

After all, there are fewer markets with more experience in the successful procurement of P3s than Canada, so why change a winning formula?

However, experts agree that the correct utilization of unsolicited proposals could enhance growth in the country. Could it be that a certain element of laissez faire and an unwillingness to tinker with what has been a successful and profitable model might be stifling new opportunities?

“The procurement agencies often lock in to a solution because that is the way they have handled that type of project in the past,” explains Marasco. “For example, projects that have a large brownfield or renovation component are often assumed to be poor candidates for DBFM, when in fact that may not be the case, especially in a mature market where more expertise in managing risk is developed.”

Marasco believes that an unsolicited proposal to respond to this kind of need could generate a stronger value proposition than previously thought.

“Another example is the St Paul’s hospital project in BC that has been in the planning phase for more than a decade,” he continues. “It has some very challenging and complex timing issues with respect to realizing the value of the existing site to help pay for the new facility. Perhaps an open call for unsolicited proposals from the private sector could generate solutions that had not previously been identified or thought feasible.”

The key difference in the two North American countries’ attitudes to unsolicited proposals is reflected in their respective legislation for such projects. While Canada is sticking resolutely to its method of operating, many US governments are now making unsolicited proposals a central part of their underpinning P3 legislation. This way, the political risks associated with such bids is minimized.

It could perhaps be viewed as the one area in the P3 space where Canada lags behind the US, which now seems to be firmly grasping the potential that these bids can offer and acting swiftly to have that reflected in statute.

After all, the US is not as mature a market as Canada and the broad consensus for the country now appears to be that any help to develop a pipeline will be much appreciated – especially in the context of a federal government that seems determined to ramp up infrastructure delivery.

“Despite the perceived loss of control from the government planning side of things, the potential benefits can be very good for the US,” says Thomas Mulvihill, managing director at KeyBanc Capital Markets. “In reality, government retains significant control in P3s with the benefit of sharing risk.

“From an investor standpoint, submitting proposals aren’t without risk. It takes a lot of effort to put these bids in and it can sometimes go nowhere. This is where regions that have the right legislation are in a stronger position. Unsolicited proposals are not something to be taken lightly but ultimately I think it is a healthy thing for the market.”

A lot of eyes are now on the US agencies that have adopted this approach. LA Metro has shown that the private sector appetite for this method of procurement is out there, so all that is required now is actual deals to show if it can be as successful as many feel it can.

“I believe that in at least a few instances it could really now spur additional growth in the US market,” concludes Marasco. “PenDOT, LA Metro and the DC OP3 office have all open periods for unsolicited proposals that have and will bring forward a number of projects that otherwise may never come to market. These will no doubt drive future procurements.”

This page was last updated on:
15 June 2017.

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