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Wednesday, November 20, 2013

Transparency is collateral damage when major work is contracted out

I have previously mentioned the debated issue whether procurement transparency laws follow on to the contracts let for government work. See Will FOIA be foiled by outsourced subcontracting? 

The article cited below (click link)arises in Minnesota where its Supreme Court ruled, in the factual context of that case, that private contractors are immune from the State's equivalent FOIA law by a contract clause excluding them from the coverage of the law.

Minnesota high court: Business not subject to open-records laws
The Minnesota Supreme Court ruled Wednesday that a private business that contracted with a northern school district to renovate buildings isn’t subject to state open-records laws. The high court reversed the Appeals Court’s October ruling, which had been viewed as a victory for public access to government contracts.

Under the law, private residents or businesses contracting with the government must comply with the state’s Data Practices Act “as if it were a government entity.” A notice of the requirement must be included in the contract. In this case, the notice was excluded. Without it, the Supreme Court concluded there wasn’t a provision in the Data Practices Act that made the contract between Johnson Controls and the architectural firm public.

In 2011, the state Department of Administration sided with Helmberger, but an administrative law judge threw out the request because the subcontract “did not involve the performance of a government function.” The Appeals Court disagreed, arguing that the planning of five public schools falls under state laws that mandate the duty of a school district to “furnish school facilities” to children, including constructing and renovating buildings.

The state Supreme Court’s ruling didn’t address the question of whether Johnson was performing a government function. In a concurring opinion, Justice Alan Page wrote that he didn’t agree with the court’s “blanket conclusion” that data held by an individual, corporation or association performing a government function are nonpublic. It should depend on whether the contract calls for the contractor to perform a government function.

“If the court had ruled on the question of government function, it may have gotten into Alice-in-Wonderland complexities that would have been extremely difficult to resolve from case to case,” said Anfinson.

Todd Wind, who represented Johnson, said the Supreme Court struck the right balance for the business community and citizens of Minnesota. The ruling recognizes the Data Practices Act doesn’t make all information public just because somebody does business with a government entity, he said. “The ruling makes the requirement of the notice abundantly clear,” he said. “But we believed Johnson wasn’t performing a government function anyway.”
It seems fairly well settled, on Guam, that a procurement contract executed with the government of Guam is a public record that must be disclosed to the extent it is not protected by provisions regarding proprietary information or trade secrets.

But notice that this case did not involve a question of a government contract, rather, a subcontract between the government contractor and a subcontractor. That becomes a more iffy question, but would probably be covered by a governmental function rule -- if there is a governmental function criteria applied to FOIA coverage.

Since government is now engaging in larger and more complex acquisitions than in times past, times need to keep up and legislate to include -- or exclude if that is the preferred policy -- subcontracts of government contracts within the scope of public record transparency requirements, subject, of course, to matters determined by the government to be proprietary information or trade secrets. Issues like the contract definitions and descriptions of the scope of work, as appeared to be at issue in this case, would hardly ever be considered proprietary information or trade secrets.

Contract administration is equally important as contract acquisition

The following article was written by Danielle M. Conway. Guam readers will hopefully remember her presentations to us in 2012, where she also emphasized the importance of contract administration.

The Importance of Strong Government Oversight
I wonder if President Obama and Governor Abercrombie would like to push a “do over” button on the roll out of the Affordable Healthcare Act website, Healthcare.gov, and the Hawaii Health Connector project. More importantly, I would like to know how each of them plan to address and correct the glaring lack of oversight that is apparent throughout the administration phases of these contracts.

Any qualified procurement professional will tell you, the administration phase of a public procurement is equally as important as the solicitation phase. The administration phase of a public contract is critical to success of the project. It is during the contract administration phase that the government contract managers assess whether the contractor’s performance meets the government’s strategic objectives as expressed in the contract’s “Statement of Work.” If the contractor is not meeting the Statement of Work requirements, the government contract manager has the oversight authority to demand corrective action that will ensure the contractor meets its obligations.

The contract’s Statement of Work is the government manager’s key tool to evaluate contractor performance and ensure the contractor’s work accomplishes the purposes of the contract. The Statement of Work is a clear, comprehensive, and concise statement of the contractor’s obligations. It also delineates the performance measurements and milestones the contractor must meet to ensure full and timely completion of the contract Statement of Work.

Even small government failures in overseeing the contractor’s compliance with the Statement of Work can cause big problems. Inadequate oversight and enforcement of the contract Statement of Work will lead inevitably to the kinds of failures we are seeing now in the development and operation of the websites intended to achieve the Affordable Care Act policy goals and objectives.

To ensure successful performance of every public contract, the government must do two things:

• First, the government must ensure its contract managers are fully trained and fundamentally competent in the “Best Practices” of public contracting.

• Next, the government must demand real accountability on all parties to the contract, including its own technical staff and contract managers.

The government’s commitment to competence and accountability must apply to all procurement steps from the drafting of the Statement of Work, the inspection and evaluation of contractor performance, and the final acceptance of the contractor product or service.

If the government does not ensure its contract managers are trained and competent or if the government does not ensure accountability, the risk of failure is high. Worse yet, there will be no meaningful way to determine who is at fault for the failure.

The result is often a dramatic waste of public funds and long delays in obtaining what the public needs. In the context of the Affordable Healthcare Act website and the Hawaii Health Connector website, we are all a bit to blame because we have not insisted on real accountability, transparency, and competency of those to whom we entrust with the public procurement function.

The best way to avoid the failures we have seen in these procurements is to determine whether our state procurement procedures are based on common sense business considerations and whether they conform to “Best Practices” in public contracting. From this perspective, Healthcare.gov is an example of political objectives eclipsing procurement best practices by attempting to obtain a deliverable according to a political timeline as opposed to establishing a more realistic timeline for delivery of a properly functioning, well integrated and fully tested system.

Further, the initial indications are that the government relied upon unqualified or uninformed managers to exercise necessary contractor oversight. This failure to ensure qualified officials enforced a clear Statement of Work is emblematic of the problems that will occur when contracting officials are unfamiliar with public procurement best practices.

The Hawaii Health Connector website seems riddled with similar problems. Part of Hawaii’s procurement difficulties stem from the government’s almost immediate reaction to exempt certain agencies, such as the Hawaii Health Connector, from the state’s procurement code laws and rules.

Many state officials rely on arguments that “streamlining” is necessary for the special procurement they must oversee. To achieve the necessary “streamlining,” these officials seek (and often obtain) exemption from the procurement code’s statutory and regulatory scheme of “Best Practices.” These public officials seem to overlook the fact that Hawaii’s procurement code is built upon more than 100 years of contracting experience and offers the very streamlining needed for successful completion of complex government requirements.

Our state and local public contracting shortcomings have nothing to do with the need to “streamline” existing procurement procedures. Our shortcoming is in failing to ensure competency of our contracting professionals and their inability to ensure accountability in contract performance. We can correct these failures by ensuring (1) comprehensive training and education of government contracting personnel about procurement “Best Practices”, and (2) by making a concerted effort to create a professional corps of contract managers who know how to hold the contractor accountable for successful performance of the contract Statement of Work.
Hattip to the Hawaii Procurement Institute for alerting me to the article.

Its the little things that give the appearance of impropriety

Bits and pieces from a couple of cautionary tales from the Public Spend Forum.

A Reminder of Why Those Pesky Bureaucratic Rules Matter in Procurement
While the national media has had endless stories over the past two months with the problems enveloping the Obama Administration with the botched launch of the HealthCare.Gov website, at the state level, there have also been massive expenditures and serious technical issues in the fifteen states that opted to develop their own health insurance coverage websites under the Affordable Care Act. Idaho is one of these states, and the state legislature there set up a Health Insurance Exchange Board. Frank Chan was one of 19 appointees to this board, which included representatives of insurance companies, medical service providers, legislators, small businesses and consumers. The board had a tight timeline to build-out Idaho’s state-run health insurance exchange, as its members were appointed on April 10th of this year by Idaho Governor C.L. “Butch” Otter, and the body had to have the state marketplace up and running by January 1, 2014 to comply with the provisions of Obamacare.

In Idaho, the state procurement regulations require almost all contracts over $25,000 to be subjected to a competitive bidding process. However, with the tight timeline to get the exchange up and running to meet the federal mandate, the state legislature exempted the Idaho Health Insurance Exchange Board from the state’s acquisition rules, authorizing the exchange to establish its own procurement guidelines. And for the major contract to be issued by the board to accomplish that task—setting up the website for the exchange—Your Health Idaho Executive Director Amy Dowd awarded Robert Chan’s company a $375,000 contract—without the opportunity being put out for competition—to help the state develop and operate the exchange’s website. Chan stepped down from the board later that same day. The awarding of the no-bid contract immediately brought a firestorm of publicity for the board and its executive director.

And how did the two main characters in this story react to the findings of the investigation. Remarkably, in the aftermath of the controversy, Your Health Idaho Executive Director Amy Dowd characterized her decision to award the no-bid contract to Chan as a “misstep,” saying that: “I think we were given an incredibly tight timeframe and limited resources. I think the board has done a remarkable job. We made a misstep on this. We’re going to face up to it and use it as a way to learn and grow as an organization so we can succeed with the mandate we were given by the governor and the legislature.” And as the other the central figure in the case, Frank Chan commented that: “I believe the intent for me to be able to help out Your Health Idaho was that I do have the experience and my company has the experience to really provide the help that they need right now. It’s unfortunate that given what actually happened and transpired, it went sideways.”

What are we to make of the “missteps” in Idaho and the thing going “sideways”? For all involved in the affair, while the decisions made did not break any laws, the executive director’s choice to award the no-bid contract to a board member did cost the parties a great deal in credibility and opportunity. For Chan, he and his company may have been able to do a great job for the state and its residents, but now, we will never know. For the Health Insurance Exchange Board, they have lost valuable time and credibility through this incident for the state’s health insurance effort. Coming on the heels of the national issues with Obamacare and the HealthCare.gov website, this only creates more uncertainty within the state concerning the health care exchange.

Overall though, the problems with Your Health Idaho illustrate the importance of having some level of oversight and control in making acquisition decisions and serve as a positive reminder of why a degree of bureaucratic control is so critical in the public sector. While we involved in government may indeed tire of “jumping through hoops,” the events in Idaho makes a good case for all public sector entities to make certain that they have hoops in place. The delicate balancing act is in figuring out just what is the right amount and kind of hoops to have in effect. The other thing is that all of those affiliated with an agency should have to play by and be subject to the same rules, from the front lines to executives and board members. And so while the Idaho legislature wanted to remove the hoops to fast-track the development of the state’s exchange, others—like Chan and Dowd—saw it as an opportunity to take advantage of (however bad their decisions look in retrospect).
Magic Bullet: How a Small Gift Shot Down a Huge Contract
How would you feel if what you did was headlined on the local paper? And what was the headline splashed across the front page of the Albuquerque Journal? Well, it involved skeet shooting…

Antonio Sedillo is a construction supervisor with the Los Lunas Schools, and as a hobby, he is a skeet shooter who recently participated in a skeet shooting competition in Albuquerque. The problem arose when another skeet shooter, who was employed by a local construction firm, saw that Sedillo was actually shooting in the event as part of a team from McCarthy Building Companies. Sedillo’s $125 entry fee for the competition had been paid for by McCarthy Building, which had recently been awarded a $24 million construction contract by the school district for the new Los Lunas High School. And who was on the school district committee that evaluated the bids from McCarthy Building and four other competitors? You guessed it—Mr. Sedillo! And who did the curious fellow shooter who reported Sedillo being on McCarthy’s team? As you probably guessed, he was employed by one of the losing firms!

So now, if you are school Superintendent Bernard Saiz, you have a real predicament on your hands. Your employee, who was on the committee to decide the contractor on the district’s largest construction project to date, accepted the “gift” from the firm that won the competition. To make matters worse, it should be noted that the skeet shooting competition actually occurred in the interim between the time the four firms made their proposals and when the award was actually made.

In public comments on the situation, Superintendent Saiz characterized Sedillo as a good employee, but his decision to accept the entry fee was a “clear violation” of the district’s procurement rules. Saiz commented that: “He (Sedillo) is an avid shooter, and I think he just let his desires get ahold of him here.” Saiz has announced that the contract will have to rebid, and that McCarthy will indeed be allowed to compete. However, he has also expressed his belief that in this situation, “I think McCarthy and my employee could have used better judgment.”

So, what have we learned here? The “lesson learned,” and one that should be make this a “teachable moment” for all involved in acquisition at any level of government, is that appearances do matter—greatly! No matter the amount, no matter the circumstances, no matter the timing, those involved in procurement decision-making have to strive to avoid the appearance of impropriety. Antonio Sedillo’s decision to accept that $125 entry fee cost the school district and the competing construction firms probably 1000 times as much in terms of rebidding of the project. Additionally, it cost the district a great deal in credibility—both with the public at large and with the business community.

Tuesday, November 12, 2013

Shhhh... IT is a procurement problem child

A Few Places Where Government Tech Procurement Works
The botched start of HealthCare.gov is just the latest big federal tech system to fail at launch. Information technology research group Standish found that during the last decade, of the large-scale federal IT projects 94 percent have been similarly unsuccessful.

Critics say the real root of government website woes is procurement, or, government's process for buying technology. So we sought out a few places where IT procurement is actually working smoothly.

Philadelphia, like the federal government, had a hard time getting innovative businesses to compete for government tech contracts. "Startups, they may have great ideas and great technology but they're not necessarily built to make it through the procurement process. Those who make it through are those who have experience working through this cumbersome process that can take a lot of time," chief digital officer Mark Headd says.

That favors large, entrenched vendors who often turn in subpar services. As the system is now, it's just not easy for young companies to find or bid on government contracts. And because all governments — federal, state and local — fear wasting taxpayer dollars on bad results — they write layers of regulations and rules around contracting. That's a turnoff for many potential bidders.

But bidding's getting easier in the City of Brotherly Love. Philadelphia leaders decided to put technology at the heart of government, hiring Headd to team up with existing tech talent in the city, and simplify bidding for government projects. To "go where the developers are," Headd created an account for the city on GitHub, a transparent code repository, and posted its open data policy there. "It's good for us, because we're gonna get more bids, it's good for [the outside developers], because it's business they might not otherwise be aware of," Headd says.

"What we've done in Kansas City is to be a little more proactive," the city's head of procurement, Cedric Rowan says. "By being willing to look at the marketplace and willing to interject into our scopes the ability for providers to give some solutions that are maybe a little more than what we're asking for but at least give them the opportunity to be innovative in their solutions back to us."

At the federal level — the Consumer Financial Protection Bureau gets praise for its approach to tech. "We wanted to show how government could work," says Merici Vinton, who served as the agency's digital lead and oversaw the launch of the CFPB's first website, which included projects like a simple complaint submission system and a redesign of mortgage disclosure forms.

Here's what Kansas City, Philadelphia and the CFPB have in common: Encouragement and cover from the top of their departments and cities; openness in sharing requirements behind IT projects from the very beginning of the procurement process; and eagerness to have smart tech people inside their departments, and to bring them together with existing government teams.

"The website and your services that you're providing to the citizens are now your storefront. So those have to be in alignment across the agency," says Vinton.

Michael Slaby — who was one of the people who built President Obama's much-lauded 2008 and 2012 campaign technology says, "the idea that things are stacked against government — the way that we procure, the way we design projects — is all true, but it's all something we have to fix. We should make it simple for technology to empower citizens to get things from their government in a way that's seamless and easy."
You may feel as I do that this article is short on detail, implying more questions than giving answers. Read the comments to it at the link above.

So who's your customer now?

Knowing the Customer Is Key to Government Contracting
When dealing with the [US federal government], the members of your sales/business development team should be prepared for the often foreign language they will encounter when entering the environs of Washington, DC and Northern Virginia seeking federal contracting dollars. To be expected, there are the endless acronyms—some applicable across all agencies but many others that are specific to subagencies and even specific locales. There are also words and phrases that have meanings unique to the federal acquisition environment, none of which is more important than the notion of the “customer” and providing service to the “customer.”

There are actually multiple layers to the customer identity, and attendant to that—multiple layers of service provision involved in selling to a three-letter federal agency. When dealing with the world of federal contracting, you are really dealing with two levels of customers, not one. First, there is the “buying customer” level, the acquisition executives and staffers who represent the agency. And then there is the “using customer” level, the actual agency personnel who make use of the product or good in question or have the company’s service offerings delivered to them.

This becomes evident when you have meetings with contracting officers or other agency procurement staffers. They will speak about their customers and what they in the acquisition arm can do to better meet the needs of their customers. Thus, while the supplier is trying to please both the buying and using customers in federal agencies, contracting staff almost uniformly look upon the relationship with their agency’s front-line workers as providing an internal service to their internal customers.

Federal contractors will have to deal with the often conflicting needs and demands between buying and using customers, along with the dynamic interplay between them, which makes for complexity in the sales process and continued uncertainty going forward.

Is government contracting private market dominance in public interest?

UK government auditor questions reliance on big contractors
Two NAO reports on government contractors, based largely on information from Capita, G4S, Serco and Atos, will form the basis of two Public Accounts Committee (PAC) hearings later this month. A review of Britain's use of big companies to run services from prisons to hospitals raised questions about whether the rise of a few major contractors was in the public interest, the National Audit Office (NAO) said on Tuesday.

In some markets, such as private prisons, child custody and medical assessments, there are only a few large providers which the NAO said could be considered "too big to fail". Some 3 billion pounds of the 40 billion spent by central government each year on suppliers is with the four firms in the report.

"I asked the NAO to carry out this work after looking at case after case of contract failure ... in each case we found poor service; poor value for money; and government departments completely out of their depth," Margaret Hodge, the lawmaker who chairs the PAC said. "These reports together raise some big concerns".

The political spotlight is firmly on Britain's 187 billion pound public sector contracting market after a series of high-profile contract failures. The NAO said transparency on profit made from government contracts was limited, with firms' tax affairs hard to understand, setting the agenda for a parliamentary grilling of some of the state's biggest suppliers next week.
James Moore: Now the Government’s outsourcing responsibility for contractor debacle
In the wake of the recent scandal involving accusations of overcharging by Serco and G4S, combined with numerous previous foul-ups, you might think the industry was due a zinger. The NAO doesn’t quite deliver one. Its tomes are lengthy, and discursive, and sometimes have the air of a concerned but benevolent schoolteacher telling Humphrey from the civil service and Harry from the contractor that they could perhaps see their way to doing a bit better.

In outsourcing services, the Government has sought to outsource its responsibility for them. That needs to end.
Has government become too aggressive with outsourcers?
The NAO notes that from 1 January 2006 to 30 September 2013, the value of these businesses on the stock market has risen much more than the value of FTSE 100 companies in general. In that period, the FTSE 100 index increased 26%, whereas Capita's share price rose 141% and G4S's 94%. That would suggest investors aren't remotely worried that the profitability of government contracts is too slim. It implies that the reliability of the revenues from these contracts is what matters, and that therefore the profit margins are quite satisfactory.

Or to put it another way, the perceived balance of risk on rewards on these outsourced deals is changing, to the detriment of the private sector businesses.

But, and this is quite important, the story of the relationship between the private-sector providers and the government is - ahem - evolving. Since the 2010 general election, the Cabinet Office has aggressively tried to exercise greater central control over the awarding of outsourcing contracts.There have been big management changes at Serco and G4S, and their share prices have both fallen by around a sixth since May.

So probably the most interesting conclusion by the NAO is the one that goes against the grain of typical political and public discourse about private sector providers. The NAO warns the Cabinet Office that there is a limit to the financial squeeze it can put on the likes of the big four, and that it may not be too long before there will be a loss of "innovation and investment" which "could pose a risk to value for money in the longer term".

The watchdog takes seriously the private sector providers when they say they may choose not to bid for future contracts in certain public services. And that could be a problem, because - with so much outsourced since the 1980s - it is not obvious that the public sector retains the competence and skills to take back some of these services.

Friday, November 8, 2013

How to manufacture a bid protest?

Judge: IBM gamed procurement system in CIA cloud bid
A U.S. Court of Federal Claims judge said IBM "manipulated its pricing to create a bid protest" and "intentionally manufactured a protest argument" against Amazon Web Services, which went on to win a $600 million cloud computing contract from the CIA that Big Blue later protested. He overturned IBM's successful bid protest and ordered AWS to get back to work building a cloud computing infrastructure for the intelligence community.

"IBM appears to have intentionally manufactured a protest argument relating to the [scenario] pricing requirement, which it hoped to pursue if it lost the [cloud] competition with AWS," Wheeler wrote in his opinion. "Knowing full well from its pre-proposal questions what the [scenario] requirements were, IBM drastically departed from the approach followed in its initial proposal when it came to submitting its final proposal revision. If it did not win the award, IBM could argue that the agency did not evaluate . . . prices on a common basis."

Wheeler said GAO's decision to uphold IBM's bid protest was irrational because IBM "lacked any chance" to win the contract.
Amazon CIA cloud row: US judge slaps down IBM as 'manipulative', inferiorAmazon CIA cloud row: US judge slaps down IBM as 'manipulative', inferior
Amazon was awarded the contract on February 14, 2013. IBM formally protested this decision, claiming its offer should be reconsidered because Big Blue staff had failed to properly understand a key data-processing requirement.

But, far from not understanding that requirement, the court opinion indicates IBM grasped the requirement yet decided to submit a flawed proposal to give itself a chance to force a second evaluation if the contract went to AWS, as it did.

The contentious section asked the parties to price up a fault-tolerant cluster of 1,000s of commodity servers running a MapReduce scatter-gather job on about 100TB of data with a 100 per cent duty cycle. In other words, the CIA wanted Amazon and IBM to cost out a cloud cluster that would run MapReduce continuously for a year so spies could prod large chunks of data.

Both IBM and Amazon appeared to understand this in their initial bids, and submitted plans to do so, Judge Thomas C. Wheeler wrote in his court opinion. When it came to submitting its final official bid for the CIA contract, something curious happened: IBM handed in a "dramatically different interpretation" of the MapReduce cluster specification, by pricing out an analytics tool that would execute a single 100TB processing run. "There is no explanation in the record for this drastic IBM pricing change," the federal court ruled.

IBM's pricing dramatically reduced the apparent cost of its bid, but to effectively evaluate it against Amazon, which had priced out a full-year cost of a cluster, the government had to scale up IBM's cost to cover a 12-month period. It was this calculation that IBM subsequently disputed.

"It is obvious that when IBM deviated from its initial approach, it did so as a way to manipulate the situation in its favor," the court ruled. "Such gamesmanship undermines the integrity of the procurement process."
Selected and rearranged excerpts from In the United States Court of Federal Claims, No. 13-506C (Reissued for Publication: November 8, 2013)
At issue is the agency’s decision to take corrective action by inviting a new round of final proposal revisions from Plaintiff Amazon Web Services, Inc. (“AWS,” or “Amazon”) and Defendant-Intervenor IBM U.S. Federal (“IBM”). Previously, in its original evaluation of proposals, the agency had found AWS’s proposal to be far superior to IBM’s proposal, even though AWS had proposed a higher price. In a “best value” award decision, the agency determined that the higher price it would pay to AWS was justified. The agency awarded the C2S contract to AWS on February 14, 2013.

IBM filed a bid protest at the Government Accountability Office (“GAO”) on February 26, 2013 challenging various aspects of the agency’s procurement including the evaluation process. The agency initially stopped AWS’s contract performance pursuant to the automatic stay provisions of the Competition in Contracting Act, 31 U.S.C. § 3553(d)(3) (“CICA”), but later issued an override of the stay on March 15, 2003 to allow AWS’s performance to proceed. The GAO bid protest was sharply contested. AWS contends that it handily won the competition with IBM, and that IBM suffered no prejudice and lacks standing because it has no substantial chance of receiving the contract award. Absent a legitimate, prejudicial procurement violation, AWS objects to competing again with IBM to win the same C2S contract, especially where so much information has been released to IBM during the debriefing process.

As a threshold matter, IBM lacked any chance of winning a competition with AWS for this C2S contract, and therefore IBM could not show any prejudice from either of the two grounds on which the GAO sustained IBM’s protest. The GAO’s decision does not even mention the existence of any “prejudice” to IBM, thus indicating that the GAO did not apply any “prejudice” requirement to IBM’s protest. Similarly, the GAO did not consider whether IBM had standing to bring the protest.  If IBM did not have a chance of being awarded the contract, it did not have the necessary standing as an interested party to pursue its bid protest. See Labatt Food Serv., Inc. v. United States, 577 F.3d 1375, 1379-80 (Fed. Cir. 2009).


Moreover, IBM appears to have intentionally manufactured a protest argument relating to the Scenario 5 pricing requirement, which it hoped to pursue if it lost the C2S competition with AWS. Knowing full well from its pre-proposal questions what the Scenario 5 requirements were, IBM drastically departed from the approach followed in its initial proposal when it came to submitting its final proposal revision. If it did not win the award, IBM could argue that the agency did not evaluate Scenario 5 prices on a common basis. IBM was the only offeror who appeared to “misunderstand” the Scenario 5 pricing requirements.

The GAO made no mention of IBM’s manipulation of the procurement process, but instead sustained the protest allegedly for lack of a common basis to evaluate the offerors’ Scenario 5 prices. Even if the proposals from AWS and IBM presented a closer “best value” award decision, the Court could not justify rewarding IBM with another chance of competing for the C2S contract under these circumstances.

Although IBM was not satisfied with the agency’s answers, it did not seek further clarification or file a bid protest. Instead, IBM submitted its initial proposal with a Scenario 5 data analytics solution that processed 100 TB of data continuously throughout the year, at a price of approximately $[. . .]. The other offerors, including Amazon, interpreted Scenario 5 in the same way, as requiring continual data analytics deployment for a full year, or 8,760 hours. IBM continued to price Scenarios 1 through 4, which also specified a 100% duty cycle, based on the continuous operation of the called-for servers for the year. During discussions with IBM, the agency identified each instance in which IBM failed to follow the pricing scenario directions. However, the evaluators did not identify any issue regarding IBM’s approach to Scenario 5, because IBM had offered a solution operating at a 100% duty cycle for 12 months, and IBM’s proposed price was consistent with the prices of the other offerors. AR 10388, Holloway Test.; AR 3120 (noting issues with IBM scenario pricing assumptions, but not Scenario 5). The agency thus effectively conveyed to IBM that it had correctly followed the Scenario 5 instructions.

If “the agency entirely fail[s] to consider an important aspect of the problem[ or] offer[s] an explanation for its decision that runs counter to the evidence before the agency,” then the resulting action lacks a rational basis and, therefore, is defined as “arbitrary and capricious.” Ala. Aircraft Indus., Inc.-Birmingham v. United States, 586 F.3d 1372, 1375 (Fed. Cir. 2009) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) .

“[B]ecause the question of prejudice goes directly to the question of standing, the prejudice issue must be reached before addressing the merits.” Labatt, 577 F.3d at 1378 (internal quotation marks omitted). A bid protestor has been prejudiced when it can show that, “but for [a significant error in the procurement process], it would have had a substantial chance of securing the contract.” Id.

“De minimis errors in the procurement process do not justify relief,” and “[t]he protestor bears the burden of proving that a significant error marred the procurement in question.” Glenn Def. Marine (Asia), Pte Ltd. v. United States, 720 F.3d 901, 907 (Fed. Cir. 2013). This burden “is greater in negotiated procurement, as here, than in other types of bid protests because ‘the contracting officer is entrusted with a relatively high degree of discretion.’” Id. (quoting Galen Med. Assocs., Inc. v. United States, 369 F.3d 1324, 1330 (Fed. Cir. 2004)).

AWS’s offer was superior in virtually every way but price, and IBM’s advantage in that area was likely not as great as IBM attempted to make it appear. Nevertheless, the GAO sustained IBM’s protest on two grounds: (1) the agency’s Scenario 5 price evaluation lacked a common basis and was therefore unreasonable; and (2) the agency materially relaxed a solicitation requirement for AWS, but not for the other offerors. See AR 10706.

Regarding the first ground, the GAO makes no mention of prejudice whatsoever, despite its being raised and argued by both AWS and the agency. Regarding the second, the GAO notes—without any explanation—that “[i]n [its] view, IBM’s assertion that the level of risk to the contractor was reduced by this modification is sufficient to establish prejudice.” AR 10712 n.4, IBM U.S. Federal, 2013 CPD ¶ 142. In neither instance is there any consideration of the proper legal standard for prejudice, nor is there any evidence that IBM met its burden of proof for establishing such prejudice. Consequently, there is no justification for even reaching the merits of IBM’s protest.

The bottom line is that IBM did not lose the competition because of the Scenario 5 price evaluation or AWS’s post-solicitation negotiations, but because of the overall
inferiority of its proposal. This proposal contained numerous weaknesses, including some “significant” weaknesses, a technical deficiency, and an overall high risk rating.
AR 4638-69; AR 5065-67 (describing “multiple weaknesses,” a technical “deficiency,” and “multiple concerns” creating a high price risk).

“[S]tanding is a threshold jurisdictional issue,” and “prejudice (or injury) is a necessary element of standing.” Myers Investigative & Sec. Servs., Inc. v. United States, 275 F.3d 1366, 1369 (Fed. Cir. 2002). To establish prejudice, IBM had to “show that there was a ‘substantial chance’ it would have received the contract award but for the
alleged error in the procurement process.” Info. Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1319 (Fed. Cir. 2003) (quoting Alfa Laval Separation, Inc. v. United States, 175 F.3d 1365, 1367 (Fed. Cir. 1999)).

IBM failed to make such a showing, and the GAO failed to make relevant findings or apply the proper legal standards. In fact, other than the GAO’s unexplained acceptance of IBM’s speculation that it had suffered prejudice, see AR 10712 n.4, IBM U.S. Federal, 2013 CPD ¶ 142, the GAO made no mention of prejudice to IBM at all. Such a “fail[ure] to consider an important aspect of the problem” is, by itself, sufficient to render the GAO’s decision arbitrary and capricious. Ala. Aircraft, 586 F.3d at 1375 (quoting Motor Vehicle Mfrs. Ass’n., 463 U.S. at 43).

Timeliness, like prejudice, is a threshold issue that must be addressed prior to reaching the merits of a bid protest. See, e.g., Goel Services, Inc., B-310822.2, 2008 CPD ¶ 99 (Comp. Gen. May 23, 2008) (“Our timeliness rules reflect the dual requirements of giving parties a fair opportunity to present their cases and resolving protests expeditiously without unduly disrupting or delaying the procurement process. In order to prevent these rules from becoming meaningless, exceptions are strictly construed and rarely used.” (citation omitted)).

Where, as here, an offeror misses its opportunity to fairly challenge the terms of a solicitation, it cannot then be allowed to avoid the timeliness bar by mischaracterizing its case as an evaluation challenge. This timeliness rule aptly describes what IBM attempted to do. Nevertheless, the GAO concluded that the agency’s “price evaluation” method was unreasonable and sustained IBM’s protest on that ground. AR 10707-10. This conclusion, however, completely ignored the blatant manner in which IBM manipulated the situation to its advantage.

IBM filed its protest and feigned ignorance of the reasons for the agency’s actions, pretending not to understand why “the agency determined that the solution should be available throughout the year.” In reality, IBM was well aware that the agency had made this determination long before its final price evaluation. Such gamesmanship undermines the integrity of the procurement process and should not be rewarded with circumvention of the timeliness requirement.

There is no such thing as a perfect procurement. Thus, a bid protestor must show prejudice, not mere error, for “[n]ot every error compels the rejection of an award.” Grumman Data Sys. Corp. v. Dalton, 88 F.3d 990, 1000 (Fed. Cir. 1996). Rather, it is “the significance of errors in the procurement process [that determines] whether the
overturning of an award is appropriate,” and it is the protestor who “bears the burden of proving error in the procurement process sufficient to justify relief.” Id. IBM never met that burden, and the GAO neglected to address it. Even if IBM’s arguments regarding the price evaluation and modified solicitation requirement were persuasive, it remains implausible that there would be any effect on the outcome of the procurement. AWS’s offer was superior, and the outcome of the competition was not even close.
So, was this a "frivolous protest"?

Thursday, November 7, 2013

PPPs past and future

Note: There is a lot of information in the cited article, making it worth your while to click the link to read the whole thing. I've only cut, rearranged and pasted tempting parts, as usual for this blog.

Public-Private Partnerships Are Popular, But Are They Practical?
Public-private partnerships (P3s) are clearly on a roll. Last year’s congressional highway authorization vastly expanded the scope of federal mechanisms that provide low-interest loans for projects that typically involve privatization. In addition, the number of states that have passed legislation to enable privatization is on the rise. Many people see P3s as a game-changer: the best, and possibly only, way to repair and replace the country’s public works. “The only way we will be able to advance our system is with public-private partnerships,” said Jeff Austin, a member of the Texas Transportation Commission, at a recent event in Washington.

Little, however, is said about the downside. There’s a growing cadre of academics, activists, and state and federal auditors who question these public-private deals, but their voices aren’t always heard. At that Senate hearing, for instance, none of those dissenting views was represented on the panel. Nor did the hearing highlight what the governments’ own accountants say about P3s—namely that they are unlikely to solve the country’s infrastructure funding gap and, in some cases, may carry risks for state and local governments. “Whenever I see advocacy [for P3s], I look for real economic analysis that justifies privatization,” Cate Long, a municipal finance blogger for Reuters, recently wrote. “It’s never there.”

Increasingly, it seems the discussion of P3s isn’t about whether it’s wise for governments to enter the deals; it’s about how governments can best facilitate them. there’s a basic question that states and localities ought to be asking: Are the deals accomplishing all they claim to?

Advocates for P3s say they make sense for four reasons. First, the contractors are involved in the engineering stage of a project, which means they can design features that will promote savings over a project’s lifetime. Second, investors have their own money in the game, so they have a major incentive to come in on budget since every overrun eats into their profits. Third, because the deals include long-term maintenance components, they remove the temptation of governments to defer upkeep when times get tough. Fourth—and perhaps most important—governments can transfer risks to the private sector, such as the possibility that construction costs are higher or toll revenue is lower than expected.

The deals gained traction in Europe and Australia before they became prominent here, largely because their citizens are used to higher taxes in general and toll roads specifically. Moreover, the deals are easier to pursue in other parts of the world, where governments have more central authority. And finally, the U.S. is somewhat unique in that it allows municipalities to borrow money extremely cheaply on their own.

But the big firms involved in P3s abroad have been gaining a foothold in the United States. A few projects emerged here in the early 1990s. But the deals really got attention in the mid-2000s, when Indiana and Chicago took upfront payments in exchange for long-term concessions that gave private-sector firms the ability to collect tolls for decades. Today, those types of deals are less in vogue. It’s now considered by many to be fiscally imprudent to sacrifice stable, long-term revenue for a one-time payment used to fund short-term needs. Instead P3s are typically used to build new roads or lanes, generally through arrangements where private companies pay for construction and maintenance, and in exchange collect toll revenue.

The Council for Public-Private Partnerships, which acts as a clearinghouse for P3 advocacy and counts as its members such P3 players as CH2M Hill, Deloitte and United Water, phrases it this way: “By establishing public-private partnerships, government authorities have achieved goals that would otherwise go unmet because of budget limitations.” The language taps into a state or local official’s greatest concern—that they lack the wherewithal to build infrastructure. “It’s perceived as free money,” says Puentes of the Brookings Institution. “That perception has to be dealt with,” largely because, Puentes and others say, the capital often comes at a cost that can exceed the expense of typical municipal borrowing.

The most attractive aspect of a P3 for many lawmakers is that the borrowed money may not count as debt the same way a municipal bond does. The distinction is hard to grasp since the same citizens ultimately pay for the project, either through tax dollars or tolls. A recent report from New York state Comptroller Thomas DiNapoli says that the deals can be viewed as a form of “backdoor borrowing” that helps lawmakers get around laws requiring voter approval for issuing certain types of debt. They can also act as an end-run around a jurisdiction’s debt limit, imposed by statute or simply by the political realities of their state.

“A lot of the time public officials say, ‘We don’t have any money, let’s do a P3,’” says Joshua Schank, head of the Eno Center for Transportation, a think tank. That’s a misperception, and one that is fueled by private-sector firms who want to pump up the concept, but also, Schank says, “by public officials who want to escape the reality that if they want better infrastructure, somebody’s got to pay for it, and that somebody’s got to be taxpayers.”

Yet a recent report from the U.S. Department of Transportation’s inspector general said unambiguously that P3s are unlikely to reduce the infrastructure funding gap, since they don’t increase funding levels. The only way P3s could be seen as generating revenue for state and local governments, the report concluded, is through whatever savings they might achieve through lower construction costs. But even those aren’t certain.

“There are people who say P3s create money. That is largely not true, but it’s not entirely untrue,” says Geoffrey Yarema, a partner at the law firm Nossaman, who has served as an adviser on some of the country’s largest public-private partnerships. “They don’t produce funding, but they can reduce costs significantly.”

William Reinhardt, editor of the Public Works Financing newsletter, generally believes in the promise of the deals, simply because the public sector has a poor record when it comes to on-time, on-budget construction of major projects. But even he says it’s hard to prove which method is best for a given project. “All my life I’ve been looking for the perfect example to compare one to another,” Reinhardt says, “and you can’t.”

The challenge lies in how governments analyze potential P3 deals. To do so, they estimate the cost of traditional procurement compared to a hypothetical P3 offer. But the analysis can include some factors that are subjective, and it may not consider factors that can’t be easily quantified. A recent California Legislative Analyst’s Office (LAO) study of two P3 deals—one for the Presidio Parkway in San Francisco and one for a new courthouse in Long Beach—found that state officials were making assumptions that favored privatization. By the LAO’s own estimates, traditional procurement would have saved $300 million on the two deals.

Julie Roin, a University of Chicago law professor, also questions whether the “risk transfer” argument carries any weight. Ostensibly, for the private sector to turn a profit, a deal only makes sense if the government overestimates its risk and underestimates the project’s revenue potential. “It’s not as if any investor is going to accept risk without demanding compensation,” Roin says. “You’re just paying for the risk in a different way.”

Watchdogs note that in entering into the deals, governments actually may take on all kinds of new risk they didn’t face before—like the implications of entering into long-term deals that can constrain lawmakers’ policymaking options for decades. In a famous case, the California Department of Transportation used a P3 to build and operate express lanes that opened in the center of California State Route 91 in Orange County in 1995. When the government wanted to expand parts of the roadway to alleviate congestion, it was blocked by a “non-compete” clause in the 35-year contract. Following litigation, the government ultimately bought out the private partner. Just seven years after the express lanes opened, the county’s transportation authority paid $207.5 million for the $130 million project. That’s a worst-case scenario, of course. Those who study P3s say governments have learned their lesson about non-compete clauses. But “compensation” or “stabilization” clauses—in which governments owe the contractor money for taking actions that could reduce toll revenue—continue.

The CBO notes that P3s “can end up costing the government more than it anticipates” if it has to renegotiate a deal due to disputes over control. The New York comptroller in a 2011 report said that the deals may even cause uncertainty about such basic questions as who’s responsible for snow and ice removal or accident repair. “Projects that seem worthwhile initially,” the report found, “may turn out to be less beneficial than thought.”

But Reinhardt of Public Works Financing doesn’t buy those claims. “None of these issues are hidden,” he says. “The advisers on the public side are exactly as smart as the advisers on the private side. Believe me: Nobody is getting away with nothing.” But others insist that even though governments employ consultants in the negotiations, the lawmakers themselves ultimately have to approve the deal. Legislators face a huge disadvantage since few of them have negotiated those type of deals in the course of their careers. And lawmakers focused on re-election may not be as concerned with the implications of a 50- or 75-year deal, since those implications may only be fully understood long after a lawmaker has left office.

Chicago Mayor Rahm Emanuel’s approach to the potential privatization of Midway Airport is a case worth studying. Operating under the cloud of Chicago’s widely panned parking meter transaction, Emanuel took an approach that emphasized protections for taxpayers. He insisted on a shorter-term lease of 40 years. He helped develop a “Traveler’s Bill of Rights” designed to ensure reasonable parking and food prices at Midway.

And he required the private partner to share profits with the city.

After initially receiving interest from 16 firms, the city was left with one bidder and opted against privatization, citing lack of competition.

“It’s a tool that can be valuable but needs to be used very carefully and with a complete understanding,” says Bob Ward, New York’s deputy comptroller for budget and policy analysis. He notes that public-private partnerships aren’t the only way to do big projects. “We went to the moon without a P3.”
I was struck by the statement that PPPs first gained traction in Europe and Australia. I watched as several critical road projects were developed by PPPs in Sydney from the 1990's into the new millennium. To me it seemed it was a grand scheme to privatize the profits of public projects and socialize the costs.

Lane Cove Tunnel company is guilty
SIX years after a section of roof collapsed in the $1.1 billion Lane Cove Tunnel, an engineering firm working on digging the tunnel has been convicted of endangering the lives of more than a dozen workers and nearby residents.

Pells Sullivan Meynink, which was hired to assess the risk of falling rocks during construction, could be fined up to $1.1 million when it is sentenced later this year. On February 17, the Industrial Relations Commission found that the firm flouted workplace safety laws. The commission ruled the firm failed to warn workers excavating an exit ramp that the roof was "in imminent danger of collapse" in the days leading up to the November 2, 2005, incident.

It also ruled that the North Ryde-based geotechnical experts risked the safety of workers and of residents of a three-storey apartment block above the tunnel because they failed to communicate with the project's construction team and designers about vital "rock bolts".

An earlier report into the collapse found it was caused by geological faults discovered in the early planning stages.
Lane Cove Tunnel in receivership
It's the latest in a number of debt-heavy Public Private Partnerships in toll roads around the country to hit financial difficulties, Sydney's Lane Cove Tunnel meant to be a boon for the city's long suffering drivers is in the hands of an administrator after falling more than a billion in the red.

Transport analysts say the project was doomed because it's financial viability was based on wildly optimistic traffic forecasts. What does the setback mean for the controversial public private model?

BRONWYN HERBERT: Lane Cove Tunnel's financial woes centre on its foolish traffic forecasts a problem mirrored in other debt-heavy toll roads around the country. From Brisbane airport link known as BrisConnect, to Melbourne's ConnectEast Motorway, and Sydney's controversial Cross City Tunnel, which also went into receivership

LEE RHIANNON: The Public Private Partnerships model is really a spin that was brought forward by the industry, by the Government to try to make out that there's partnership. But all the time what we see is the public are the losers.

DAVID CAMPBELL, NSW TRANSPORT MINISTER: The question here is how did the private sector get the numbers so wrong. The private sector did their own due diligence.

BRONWYN HERBERT: Dr Michelle Zeibots is an urban transport planner, specialising in traffic growth in new urban motorway, and says repeated failures of toll roads show it's time for an independent authority to investigate.

MICHELLE ZEIBOTS, UNIVERSITY OF TECHNOLOGY: The culture of failure is something we inherited from the days when motorways were just being built by governments, and basically we had environmental impact statements, but once again, there's no requirement for the science in any of those statements to be robust. And I think that that, I guess, you know, that cowboy type attitude towards the science has been carried over into these [private] sector ventures. We’ve seen the developments fall over, and until somebody in Government decides that this needs to be regulated more strictly, then I don't think we'll see particular change in the way that this is done.

BRONWYN HERBERT: Dr Michelle Zeibots says governments are giving the green lights to projects that use unrealistic forecasts. Connector Motorways predicted up to 115,000 vehicles a day in the Lane Cove Tunnel, yet last month the average daily hit was barely half that mark.

MICHELLE ZEIBOTS: The investors don't understand that it's not physically possible to get the sorts of traffic volumes on these roads that are being cited in the prospectus.

BRONWYN HERBERT: Tony Shepherd is the Chief Executive of Infrastructure Partnerships Australia. A lobby group promoting Public Private Partnerships. He says the NSW Government has not lost a cent from the financial collapse of the Lane Cove Tunnel.

TONY SHEPHERD: I think that private sector's big and ugly enough to look after itself. I think the private sector has got the capacity to learn the lessons. One thing which will not happen in the future will be there'll be no upfront payments from the project developers to the Government for the right to toll. Australia has pioneered PPPs of this nature. We are a world leader; they've made an extremely valuable contribution to the development of Australia. Obviously there has been some loses. But we learnt from that experience, and I'm sure these projects will continue to provide a great service to the people of Australia.
Tunnel to Nowhere
 Alaska is not the only place they build infrastructure projects to nowhere. Sydney has its share, too.

Several years ago, Sydney decided to enter into Public and Private Partnerships to build some tunnels, ostensibly to alleviate the maddening traffic mess, but, as speculated at the time, more likely to line some Public and Private Pockets. And how does it all look now? [Read on at article link.]

Cross City Tunnel
The Cross City Tunnel is a 2.1 km-long tunnel located in Sydney, New South Wales, Australia. It links Darling Harbour on the Western fringe of the central business district to Rushcutters Bay in the Eastern Suburbs. In 2002, the government of Bob Carr awarded Cross City Motorways the contract to build, own, and operate an east-west tunnel underneath the Sydney CBD. It is privately owned and operated, but will revert to public ownership in 2030.

The $680M tunnel was originally financed by a combination of international equity and both locally and internationally sourced debt. Equity of $220M was provided by three international companies, Cheung Kong Infrastructure (50 percent), DB Capital Partners (30 percent) and Bilfinger Berger BOT (20 percent). The remaining $580 million was financed through a syndicate of Australian and international banks led by Westpac and Deutsche Bank.

  >>  Disruption to traffic in the CBD not using the tunnel: The tunnel has attracted significant media attention, as many of the diversions put in place on the streets above caused increased traffic congestion and motorist confusion. Some resentment regarding surface road changes has been expressed in the media. The disruption that has generated the most complaints is the reduction of William Street to one general lane, and one bus lane in each direction, which has exacerbated traffic jams. The bus lanes are now T2 transit lanes. On 6 December 2005 the head of the Cross City Tunnel said under oath that the company would not seek compensation if some of the controversial road changes were undone; but on 7 December that decision was reversed.
  >>  Undisclosed contract conditions: It is generally thought that the state government agreed to the lane reductions in William Street as part of contract for the Cross City Tunnel. However, the government has repeatedly refused to make the contract which it agreed to public, much to the dismay of the media and the state's auditor-general. A summary has been released, which contained details of more possible road disruptions which would result in making traffic congestion worse for motorists not using the tunnel. It was also revealed that 50 cents of the toll price is due to a $105 million payment that the operators had to make to the government for permission to build the tunnel. In late October 2005 after ongoing criticism, some contract terms were released to the public, but the government is still refusing to release 3,000 pages of material. A few days after this, the head of the Roads and Traffic Authority was sacked, for failing to disclose an amendment to the contract, which allowed the toll to be increased by 15 cents. In November 2005, the ICAC was asked to investigate allegations that sensitive Cabinet documents were leaked to the Cross City Tunnel operator during negotiations. The investigation found that the allegation was not substantiated.
  >>  Misleading signage: There have been complaints in the media after the opening of the tunnel about deceptive signage indicating the tunnel was the only route to get to the Harbour Crossings (in particular, the Sydney Harbour Tunnel) from Sydney's Eastern Suburbs. In response, the NRMA motoring group published a route outlining how to reach the harbour crossings while avoiding the Cross City Tunnel toll.
  >>  Price of the toll: The price of the toll for a one-way trip is $4.32 with an E-tag, and $6.75 without an E-tag (westbound and eastbound) $1.87 with a tag when exiting on Sir John Young Crescent/Eastern Distributor, and $5.35 without. Some would say this is a rather high price for a short 2.1 kilometre journey when a slightly slower but free alternative is available. The Government's then-Roads Minister, Joe Tripodi, has pressured the tunnel's operators to reduce the toll, but has admitted he cannot force them to do this. The tunnel's operators have previously ruled out a toll reduction. Additionally, the price of the toll is automatically increased by the CPI each quarter, whereas other tolls are usually increased less frequently, but in neat increments of 50 cents.
  >>  No cash payment, and higher price for drivers without an E-Tag: This is the first cashless motorway in Sydney. Drivers who do not have an E-Tag and who use the tunnel need to phone the tunnel operators or go the tunnel's website after their journey, and pay the toll, plus an additional $2.50 administration fee. Those who don't do this will receive 2 warning letters, then a $130 fine.
  >>  Concerns about exhaust fumes from the tunnel: After opening, the tunnel proved to be quite poorly ventilated for the expected number of vehicles, and even for the much lower number of vehicles actually using it. Currently air is released from the tunnel via the single 65-metre high ventilation stack located between the existing Western Distributor viaducts above the eastern side of Darling Harbour. There is general unease in Sydney about exhaust stacks from any motorway, after reports in the media about people living near motorway exhaust stacks experiencing health problems. However, since the tunnel's opening there has been almost no discussion of this topic, with most of the focus directed towards the issues listed above, together with general concerns regarding "Public Private Partnerships" (or PPPs).
No light at the end of Sydney's city tunnel, September 11, 2013
Sydney's Cross City Tunnel is attracting only about half the number of cars its first owners said would travel through it eight years ago. Weak traffic numbers mean the motorway continues to struggle financially, and is facing receivership for the second time since it opened in 2005. The tunnel opened in 2005 at a cost of $680 million and went into receivership in 2006.

Lenders to the consortium that owns the motorway - Leighton Holdings, the Royal Bank of Scotland and EISER Infrastructure Partners - are understood to be considering putting the tunnel into receivership, due to concerns over a disputed $60 million stamp duty bill, and the lower traffic numbers. Annual reports issued by its current owners, who bought it out of receivership in 2007, show toll revenue growth has increased only at the rate of inflation since 2009.

A spokesman for the motorway said the Cross City Motorway company was "still actively renegotiating to refinance the debt", referring to a $79 million loan it had wanted to renegotiate this month.
Cross City Tunnel in administration, September 13, 2013
“Naturally we are disappointed at this outcome," said the chairman, Ed Sandrejko. He blamed its demise on the refusal of the previous government to funnel enough traffic into it. “While a range of factors caused the original receivership, there was a significant impact on profitability due to the previous government's decision to alter without compensation the surrounding traffic arrangements in contravention of the contractual arrangements," Mr Sandrejko said.
The main thing about these PPPs is not the infrastructure but the financial structure. Finance vehicles spur these things on. The following pieces are from blog posts from Guambat Stew, but do not provide the internal cites to articles quoted in the posts. Please click the post link to find the source material.

Too sexy
The engine of this humming little sexy model is the ability to syphon off fees from every conceivable angle. It is user pays run rampant. The bank gets fees going into the deal, during the term of the deal and going out of the deal. They don't have to make a zack on the selling price (though that doesn't stop them from trying), because their main course is the fees.

When they acquire an asset, such as a toll road, they "package" the asset, set themselves up in a management facility, do the contract between the asset package and the management facility that sets their own fees, and often provide for a fabulous payout should the asset owners decide to sack them. Oh, and they get performance fees. They are getting hedge fund payments for running a municipal road.

As it works, most of the fees they pull out of a project are front loaded; they're no strangers to the present value concept. So, once a project "matures" they bail out. Then they move on to more assets. It's a great little earner for them, and a means to part pensioners, mainly, from their pension returns.

A system has now developed that involves financial advisers channelling money through platforms and master funds into wholesale fund managers who in turn partly invest in other funds called infrastructure trusts, which are paid extra performance fees [simply] for doing their job.
But the main purpose of them for the investment industry is to facilitate the extraction of an average of 2 per cent in fees, which are then divided between the fund managers, the financial planners and the platform provider (usually a bank). And as with supermarkets, the platform providers have the market power.

There are about 100 investment platforms and master trusts in Australia, but the top 10 have about 85 per cent of the market. They are, in order, NAB/MLC, AMP, CBA/Colonial, ING/ANZ, BT/Westpac, St George/Asgard, Axa (Summit), Aviva (Navigator), Mercer, Macquarie Bank. The vast majority of financial advisers has a relationship with one of these groups and most of their clients' money, whether it's allocated pensions, superannuation, or just private wealth to be invested, goes on the platform. The adviser then helps the client choose several of the often hundreds of options available within the platform.

The platform operators choose which investment products to have in their store and, as with food manufacturers dealing with supermarkets, the key job of a fund manager is to get onto the platforms.

Fee Pie Fo Some
Macquarie Airports (MAp) faced tough questions from security holders at its annual general meeting about the $91 million in fees it paid backer Macquarie Bank last year.

MAp, which has investments in airports in Sydney, Rome, Copenhagen and elsewhere, paid Macquarie Bank a total of $54 million in base fees and $37 million in performance fees in 2005.

That was on top of the fees MAp paid to Macquarie Bank for financial advice on matter such as the refinancing of Sydney Airport.

THE MAp director whose job it is to monitor fees paid to Macquarie Bank has vowed to ditch his shares if investors "punt" the Millionaire Factory as manager of the $5 billion airports fund. Trevor Gerber made the admission to The Daily Telegraph yesterday after MAp's annual meeting, where the board was repeatedly questioned over $92 million in fees paid to MacBank.

[W]hen Mr Gerber was asked about whether it was possible to seek "expressions of interest" from MacBank rivals, he said the question displayed a "commercial naivety".

"We have no desire to certainly no reason to seek alternative bids because the performance has been exceptional," Mr Gerber said. Later he said investors were able to "punt" Macquarie as MAp's manager if they wanted to – it only required majority backing.
Macquarie model mocked
Macquarie Bank has found a way to spin the straw of infrastructure into fields of gold. It has leveraged boring old roads and bridges and airports and other public monopolies inlto bucolic income streams. It has discovered a bit of financial alchemy (chutzpah, maybe) that has gone undetected by the whole rest of the financial world.

And it has made itself wildly wealthy and become the Pin-up Girl of the Australian market in the process.

But it has pretty much exhausted the supply of such projects in Australia and has extended its quest onto the larger world stage, where other financial types are not so starry eyed that they have allowed Moss to grow on their feet.

Jeff Mathews is one of that type. He has a blog that is widely followed in America. He took Macquarie Bank into his sights and saw a similarity of boom and bust that has precedent.
He blogs,

What Macquarie figured out was this: it could buy public utilities such as airports, bridges and toll roads, package and resell those assets to Australian asset managers looking to redeploy the cash being accumulated by that country’s far-sighted and highly successful public pension plan, and take out fees along the way. The impetus behind Macquarie’s willingness to pay 40-times revenue for an asset that could be rendered obsolete by any variety of means—acts of God, acts of State Legislatures, or drivers’ unwillingness to pay tolls when they can drive for free elsewhere—comes from the very brilliant notion that such long-lived assets neatly match the long-lived nature of Australia’s pension liability.

As insights go, that’s a powerful one—and ranks right up there with Mike Milken’s discovery that, contrary to popular perception, junk bonds provided better returns, on average, than non-junk bonds, because the default rate on junk was, on average, lower than generally assumed by bond investors at that time.

I am sure the Maquarie folks are as brilliant as their reputation, and that they know what they’re doing. But I’m not convinced that everybody else who wants to get in on the action now, by buying toll roads or airports or bridges or whatever else bankers decide to monetize, knows much more than the simple fact that it is, for the moment, a highly profitable way to leverage up the public infrastructure.
Alan Kohler has had a few knocks of the model himself:
Sacking MacBank would help

IT IS surely only a matter of time before Macquarie Bank's management of its stable of infrastructure funds begins to fall like dominoes.

It is so obvious that unit holders in the 24 funds should sack the Macquarie bankers that it must even dawn on the fund managers who are under their spell or still grateful enough for the early returns to ignore the benefits of removing them.

And if the existing investors don't do it, the funds will be raided by burglars who do understand what's in the safe.

Losing control of the management of the funds is a major risk for shareholders of Macquarie Bank. In 2005 base and performance fees from the funds totalled $700 million, close to 20 per cent of total revenue and 86 per cent of net profit.

CommSec recently published a like-for-like comparison of the base fees of the Macquarie and non-Macquarie funds. The average base fee of the four big Macquarie funds (MIG, MAP, MCG and MIC) was 1.8 per cent; the average of the four other major infrastructure vehicles (Babcock & Brown, Alinta, Challenger and Transurban) was 1 per cent. The two extremes were MCG at 2.3 per cent and Transurban at the equivalent of 0.45 per cent (that's salaries, not fees). In addition to that, Macquarie charges performance fees that are typically 20 per cent of outperformance against various benchmarks.
As Jeff Mathews said, "Like Milken, Maquarie has revolutionized a source of financing which others now seek to emulate and exploit. And, like junk bonds, internet stocks, and all financial fads that start off from a logical premise, it wil get out of hand."
Model stripped bare
During the past seven years, Macquarie has reaped a $527 million fee bonanza from MAp, even though it now concedes that managing the airport fund cost just $11 million a year. Multiply 11 by seven and then look at the difference.

As a final insult, Macquarie wants MAp unitholders to hand over $345 million to sever the links, an amount that the independent directors think is a good deal and which has been ticked off by an independent expert KPMG.

During the past two months, Macquarie has shown utter contempt for the investors who poured their hard earned into MAp during the boom - and all those other infrastructure funds - as it desperately tries to cut the airport fund loose.

But what has been truly disturbing during the past few weeks is the cavalier approach to corporate governance shown by MAp, and in particular the woeful performance of MAp's so-called independent directors.

That money is likely to flow almost straight through to the bottom line, providing a substantial portion of the profit for the first half and the basis for executive bonuses.

The independent directors claim the Macquarie deal is the only viable option because, without its co-operation, a banking syndicate owed $4 billion may call in those loans or try to renegotiate them on higher rates because there has been a change of control.