Market-led proposals

Tabled: 27 November 2019

1 Audit context

In an MLP, the private sector makes an unsolicited approach to government for support to deliver infrastructure or services through direct negotiation rather than a competitive procurement process. The private sector usually asks the government for financial support but may also ask for regulatory or other forms of assistance.

The government issued a new guideline and established a five-stage process for considering MLPs in early 2015 and declared that MLPs would only succeed if found to be unique, VFM and in the public interest.

1.1 Why this audit is important

This audit considers the WGT project and the new VPC. The government procured both projects, which involve significant public expenditure, through MLPs.

MLPs do not result from standard government investment planning and evaluation processes and are not fully tested in a competitive market. While the MLP process may elicit innovative solutions, governments must take care to ensure they do not overspend in what is a non-competitive process.

Given these risks, DTF and relevant agencies must rigorously assess MLPs against the guideline requirements to give confidence to the government and the community that successful proposals are genuinely unique and provide VFM.

1.2 The MLP assessment and approval process

DTF first issued guidelines for unsolicited proposals, now called MLPs, in February 2014. DTF's amendments to the guidelines later that year addressed our recommendation that proposals of more than $100 million be subject to HVHR requirements.

In February 2015, the government replaced the guidelines with the Market-led Proposals Interim Guideline. It updated this document in the Market-led Proposals Guideline November 2015. The current version of the guideline is the Market-led Proposals Guideline November 2017.

Current five-stage process

The current MLP guideline specifies the five-stage assessment and award process outlined in Figure 1A. A proposal must pass each step to proceed to the next.

Figure 1A
Current MLP five-stage assessment and award process

Stage

Action

1

Preliminary assessment

Assess sufficiency and relevance of information.

Assess whether the proposal is within the scope of the guideline.

2

Due diligence and strategic assessment

Assess proposal against assessment criteria.

If suitable to proceed, consider whether it should be through exclusive negotiation or a competitive tender process.

3

Procurement preparation

Agree with the proponent on:

  • terms of the exclusive negotiation, or
  • approach to a competitive tender process.

Undertake further due diligence.

4

Exclusive negotiation or limited competitive process

Evaluate and benchmark a final offer for government consideration.

Assess affordability, value for money, expected benefits, and scope.

Recommend whether to award contract.

5

Contract award

Enter binding contractual arrangements.

Agree governance structure and publish project summary and executed contract.

Source: Market-led Proposals Guideline November 2017, Diagram 1: Market-led proposal assessment process, page 4.

This assessment process has been in place and broadly consistent since February 2015.

The process does not rule out competitive delivery. However, it allows for situations where an innovative idea or competitive advantage means awarding a contract to a private party without competition.

The guidelines emphasise that, wherever possible, a proposal should incorporate competitive downstream tendering to ensure VFM outcomes.

The government bases its decision on whether procurement should be through exclusive negotiation or a competitive process on advice from DTF and lead agencies.

1.3 Key assessment criteria for MLPs

The MLP guideline includes the government's key criteria for assessing proposals. Proposals must:

  • have unique characteristics resulting in outcomes that are not likely to be obtained using standard competitive processes within acceptable time frames and therefore justify exclusive negotiations with government
  • meet a service or project need that is aligned with government policy objectives
  • represent VFM for Victorians
  • have significant social, environmental, economic or financial benefits for Victorians
  • be affordable in the context of budget priorities
  • be commercial, feasible and capable of being delivered.

Proposals need to satisfy these criteria to proceed under the MLP guideline.

Uniqueness and VFM are critical criteria.

Unique characteristics

For a proposal to be considered outside of the usual competitive process, it must have 'unique characteristics'. Figure 1B shows how the approach to determining whether a proposal is unique has evolved in iterations of the MLP guideline.

Figure 1B
Evolution of uniqueness criterion in the MLP guideline

 

February 2014

February and November 2015

November 2017

Preliminary assessment

(Stage 1)

Assessed in Stage 2

Potential to demonstrate a level of uniqueness

Minimum information requirements for a detailed description of the unique characteristics

Potential to have unique characteristics resulting in outcomes not likely to be obtained using standard competitive processes, within acceptable time frames

Key assessment criteria (to justify exclusive negotiation)

(Stage 2)

Proponent may have a unique idea or intellectual property, be in a unique position, or have ownership of strategic assets integral to delivery

Government cannot reasonably engage another party to:

  • deliver the proposal or an equivalent outcome if a standard competitive process was pursued
  • achieve similar benefits (including VFM, policy/service delivery outcomes, reduced delivery time frames or risks not borne by government) if a standard competitive process was pursued

In assessing uniqueness, the government will consider whether:

  • unique characteristics are present, verifiable, and enforceable
  • proposal provides value to government compared with alternatives
  • proponent is in a unique position to deliver the desired outcome for government

Has present, verifiable and enforceable unique characteristics

Provides value to government compared with alternatives

Proponent is in a unique position to deliver the desired outcome to government

Note: may be assessed holistically or have additional uniqueness test applied if uniqueness is still not determined

Note: The dark blue circle represents more comprehensive assessment guidance, lighter blue circle represents limited assessment guidance, and uncoloured circle represents no assessment guidance.
Source: VAGO, based on DTF's MLP guideline.

Before November 2017, the MLP guideline required proponents to demonstrate uniqueness by the end of Stage 2 to justify further exclusive negotiations with the government.

Under the current MLP guideline, a proposal that may not meet all of the uniqueness characteristics specified in the guideline may still be assessed as unique when considered holistically. If a proposal is not assessed as unique at the end of Stage 2, it will only progress to Stage 3 if an additional uniqueness test has been undertaken and the government has approved progressing with a limited competitive process.

Value for money

VFM is a key assessment criterion under the MLP process, and therefore critical to a proposal's success. The MLP guideline indicates that VFM is informed by multiple factors, including the proposal's risk and the reasonableness of costs to government to achieve promised benefits.

DTF's guidance on how to determine whether a proposal represents VFM for Victorians has evolved over time, as shown in Figure 1C.

VFM is assessed in two parts: a quantitative assessment of the proposal and a qualitative assessment of the value of the proposal.

The quantitative assessment includes comparing the proposal's cost to a state benchmark for the proposal, either a public sector comparator or a realistic alternative. The qualitative assessment involves assessing the proposal as a whole, including benefits and any commercial principles underpinning the proposal, including risk allocation.

The current MLP guideline considers VFM at each of the first four MLP assessment stages in varying degrees of detail.

Figure 1C
Evolution of VFM criterion in MLP guideline

 

February 2014

February 2015

November 2015

November 2017

Preliminary VFM Assessment

(Stage 1)

Proposal is required to address expected VFM (but no specific assessment criteria).

Assesses VFM as one of five key criteria.

Assessment of potential VFM

(Stage 2)

Prescriptive guidance. Suggested steps.

Assesses risk and reasonableness of costs to government.

Assesses likelihood of affordability given required investment.

Now informed by scope, time lines and risk allocation.

VFM Qualitative Assessment

(Stage 2)

 

Includes CBA and documentation of risks to achieving identified benefits.

VFM Quantitative Assessment

(Stage 2)

   

Now informed by scope, time lines and risk allocation.

Consideration of VFM in assessing uniqueness

(Stage 3)

 

Asks whether VFM is improved compared to other approaches.

Process for determining VFM

(Stage 3)

Only requires that the formal agreement includes the process for determining VFM.

Public-sector comparator or realistic alternative may be developed.

VFM Qualitative Assessment

(Stage 4)

Assess proposal as a whole and individual value drivers.

Document risks to achieving benefits identified in qualitative assessment. CBA included.

VFM Quantitative Assessment

(Stage 4)

Compare final proposal's cost to State Benchmark.

Finalise comparator or realistic alternative estimate.

Note: The dark blue circle represents more comprehensive assessment guidance, lighter blue circle represents limited assessment guidance, and uncoloured circle represents no assessment guidance.
Source: VAGO, based on DTF's MLP guideline.

1.4 MLP process governance and approvals

The MLP guideline specifies governance and approval arrangements for each stage of the assessment process. Figure 1D outlines the stakeholder responsibilities within these arrangements.

Figure 1D
Stakeholder responsibilities

Figure 1D shows stakeholder responsibilities

Source: VAGO.

1.5 MLP process probity and disclosure

Each version of the MLP guideline includes a government commitment to uphold the highest levels of integrity and transparency in assessing proposals and specifies requirements for probity and disclosure.

The November 2017 MLP guideline enhanced disclosure and probity requirements to ensure the framework upholds this commitment. It:

  • makes DTF responsible for coordinating disclosure and advising the Treasurer when information is disclosed
  • requires that the proponent and the public sector specify probity requirements, including the plans put in place at each stage.

Figures 1E and 1F outline the disclosure and probity requirements of the MLP assessment process.

Figure 1E
Disclosure requirements during MLP assessment process

Stage/time

Disclosure details

Published on

1

At any time

DTF reserves the right to disclose details of a proposal if a proponent has not complied with its probity requirements and the circumstances set out in the guideline*.

Guideline does not specify

2

During

Where a proposal is subject to an additional uniqueness test, the desired outcomes and/or key elements the proposal seeks to deliver.

Victorian Government Tenders website

End

Proposal including:

  • Name of proponent
  • Proposal title and description
  • Reasons for progressing/not progressing.

DTF website

3

Start

Stage 3 Probity Plan.

DTF website

End

Detailed proposal description, covering:

  • Proposal overview
  • Proposed scope
  • Proposed benefits
  • Reasons an exclusive negotiation or limited competitive process is being pursued.

DTF website

4

Start

Stage 4 Probity Plan.

DTF website

End

Update of previously disclosed detailed proposal description.

DTF website

5

Within 60 days of close**

  • Project summary
  • Contract.

DTF website

Victorian Government Tenders website

Note: *In the Guideline Appendix: Terms and Conditions.
** Within 60 days of contractual or financial close.
Source: VAGO, from DTF's MLP guideline.

Figure 1F
Probity requirements during MLP assessment process

Stage

Proponent

DTF

Lead agency

Government

Comments

Submission

Must declare any conflicts of interest.

       

1

 

Assesses proposal in accordance with DTF Probity Plan for Stage 1 Assessment.

     

2

Signs formal commitment at start of stage covering confidentiality, communication protocols and conflicts of interest.

Assesses proposal in accordance with DTF Probity Plan for Stage 2 Assessment.

Prepare Stage 3 Probity Plan.

 

Approves Stage 3 Probity Plan.

 

3

Must appoint a probity adviser for Stages 3 and 4 to advise and represent them on any probity issues that arise.

Agrees Stage 4 Probity and Process Deed with lead department.

 

Assess proposal in accordance with Stage 3 Probity Plan.

Agree terms of Stage 3 Probity and Process Deed.

Agrees Stage 4 Probity and Process Deed with proponent.

Approves Stage 4 Probity and Process Deed if the proposal progresses to Stage 4.

Interactions between the public sector and proponents are guided by the Stage 3 or Stage 4 Probity and Process Deed.

This includes agreeing the process for any cost reimbursement.

4

   

Exclusive negotiations to be based on Stage 4 Probity and Process Deed.

Assess proposal in accordance with Stage 4 Probity Plan.

   

Source: VAGO based on DTF's MLP guideline

1.6 MLP process application:three examples

This audit examined whether DTF and lead agencies assessed the following MLPs in accordance with the MLP guideline:

  • WGT Project: Transurban submitted a proposal in March 2015, with a contract finalised in December 2017.
  • VPC: Cbus/Australia Post submitted a proposal in May 2015, with a contract finalised in January 2017.
  • Development of a unique disease surveillance system and production of disease prevention products for Victoria: proposal submitted in June 2017 and rejected in June 2018.

The audit focused on the application of the MLP process. This included examining alternative proposals received for both the WGT and VPC.

The audit did not examine delivery of the approved proposals.

Relevant guidelines

Figures 1G and 1H shows the MLP guideline versions that DTF and lead agencies used to assess the three proposals across the four assessment stages.

Figure 1G
MLP Interim Guideline (February 2015) proposals

Figure 1G shows MLP Interim Guideline (February 2015) proposals

Source: VAGO.

Figure 1H
MLP Guideline (November 2015) proposals

Figure 1H shows MLP Guideline (November 2015) proposals

Source: VAGO.

1.7 Gateway Review and HVHR process

The Gateway Review and the HVHR processes are project assurance mechanisms overseen by DTF to review and improve project selection, management, delivery and outcomes.

The Gateway Review Process involves short, intensive reviews by a team of reviewers independent from the project at six critical points or 'gates' in the project life cycle. The reviews check that projects are on track before continuing to their next stage and are intended to support project owners.

The Gateway Review Process has been mandatory for all high risk projects since 2003, and for projects that are considered high risk or high value (over $100 million) since 2011. The onus has been on departments and agencies to opt in to the Gateway Review Process.

The government's HVHR project assurance framework was introduced in 2010. DTF performs HVHR reviews for the Treasurer. The HVHR process aims to achieve greater rigour in investment development and oversight, increasing the likelihood of timely project delivery and benefits realisation for Victorians.

A project is classified as HVHR if it is a budget-funded project that is:

  • considered high risk using DTF's risk assessment tool, the Project Profile Model
  • considered medium risk using the Project Profile Model tool and has a total estimated investment of between $100 million and $250million
  • considered low risk using the Project Profile Model tool but has a total estimated investment over $250 million, or
  • identified by the government as warranting the rigour applied to HVHR investments.

The HVHR has linked gateway reviews to key project approval points and mandated that projects costing over $100 million and/or assessed as high risk must be reviewed at all six gates.

1.8 Prior reviews relevant to this audit

Applying the High Value High Risk Process to Unsolicited Proposals

In our 2015 audit we found that, in some instances, when DTF applied the HVHR process to unsolicited proposals there was inadequate:

  • assurance about the deliverability of the proposal's benefits
  • assessment of the alternative funding options
  • engagement with stakeholders about the likely impacts.
East West Link Project

This audit, also published in 2015, found that the business case for the East West Link project did not provide a sound basis for the government's decision to commit to the investment.

1.9 Who this audit examined

This audit examined whether DTF and lead agencies assessed the selected MLPs in accordance with government requirements.

Department of Treasury and Finance

DTF is responsible for the MLP guideline and process, and:

  • receives all proposals and does not progress any until the Deputy Secretary, Commercial Division or the Treasurer approves the Stage 1 assessment
  • leads the assessment of proposals at Stage 1 and Stage 2 of the guideline in consultation with relevant departments
  • is responsible for chairing the IDC to oversee assessment of proposals
  • provides support when another department or agency leads an assessment, by contributing to the assessment as required (this varies depending on the nature of the proposal) and providing advice to the lead department or agency regarding application of the MLP Guideline requirements
  • briefs the Treasurer throughout the assessment process.

DTF is required to consult with relevant portfolio agencies and IDC members to undertake the strategic assessment of all proposals. This consultation feeds into the recommendations provided to government on whether to pursue the proposal and, if so, how it will be procured.

Lead agencies

During Stages 3, 4 and 5, the government-approved lead department, which can also be DTF, undertakes the MLP assessment. When another department or agency leads an assessment, DTF provides support. DTF and relevant departments and agencies brief the MLP IDC throughout the assessment process

The former Department of Economic Development, Jobs, Transport and Resources

DEDJTR (now DoT and DJPR) was represented on the IDC and involved in assessing the MLPs for the WGT project and the development of a unique disease surveillance system.

The government-operated Pig Services Centre at Epsom, near Bendigo, then part of DEDJTR's Agriculture Policy branch (now within DJPR) was involved in assessment of the unique disease surveillance system.

Department of Premier and Cabinet

DPC is represented on the IDC and was part of the steering committees established to oversee the assessment of the WGT project.

DPC also engaged an independent review panel to examine the Stage 2 assessment of the WGT proposal and the business case for the WGT project.

West Gate Tunnel Project

West Gate Tunnel Project is a project office within the Major Transport Infrastructure Authority in DoT. It is responsible for the delivery of the WGT project. It was previously known as the Western Distributor Authority and more recently the West Gate Tunnel Authority.

Victoria Police

Victoria Police provided input into the Stages 1 and 2 assessments of the VPC proposal and led negotiations with the proponents from Stage 3 onwards. Victoria Police also developed the Stages 3 and 4 assessment reports on the VPC in consultation with DTF.

1.10 What this audit examined and how

This audit analysed whether DTF and lead agencies assessed MLPs in accordance with government requirements. We examined whether DTF and lead agencies:

  • complied with the MLP guidance and other relevant process and review requirements when assessing selected proposals
  • applied the MLP process rigorously and comprehensively to provide assurance on the merit of selected proposals and a sound basis for government decisions on whether and how these proposals should proceed.

We also assessed whether DTF and lead agencies:

  • met the due diligence, probity, governance and approval, consultation and public disclosure requirements in the MLP guideline
  • complied with other applicable oversight, assurance and review mechanisms such as the HVHR and Gateway Project Assurance frameworks.

Our original audit scope also included the development of a unique disease surveillance system and production of disease prevention products for Victoria.

The MLP for this was submitted in June 2017 and rejected in June 2018. We did not evaluate this in depth because our initial inquiries indicated there were no significant issues with the MLP process.

We conducted our audit in accordance with the Audit Act 1994 and ASAE 3500 Performance Engagements. We complied with the independence and other relevant ethical requirements relate to the assurance engagements. The cost of this audit was $1 115 000.

1.11 Report structure

The remainder of this report is structured as follows:

  • Part 2 examines the uniqueness assessment for the WGT MLP and the business case, including options assessment and cost benefit analysis.
  • Part 3 examines the VFM assessment for the WGT MLP.
  • Part 4 examines the assessment of the VPC MLP.
  • Part 5 examines the assessment of alternative proposals for the VPC.

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