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.

Bid protests: business as usual

DHS official: Bid protests no cause for alarm

Bid protests are far more common than they used to be. But federal procurement staffs should not become alarmed over them, said Rafael Borras, the Homeland Security Department’s undersecretary for management.

Borras said bid protests make up only a tiny fraction of total procurements and they should be viewed as a normal part of business.

Borras said bid protests help ensure agencies craft good procurement programs.

“It’s good for us. It keeps us sharp, and it keeps us honest,” Borras said at the Executive Leadership Conference in Williamsburg, Va., Monday.

Skinning the cat

Non-Protestable Task Order Procurement Decision Shuts Out Incumbent Contractor
 

Article By:

Christopher E. Hale

Sheppard, Mullin, Richter & Hampton LLP

A recent decision by the U.S. Court of Federal Claims (“COFC”) serves as a reminder on the limits a contractor faces in protesting task and delivery order awards. In MORI Associates, Inc. v. United States, No. 13-671C (2013), the COFC dismissed the pre-award bid protest by MORI, the incumbent contractor, for lack of jurisdiction because the protest challenged the Government’s decision to obtain services through a task order competition under an Indefinite Delivery/Indefinite Quantity (“IDIQ”) Government-Wide Acquisition Contract (“GWAC”) rather than through a General Services Administration (“GSA”) Schedule contract.

MORI was awarded a 5-year contract for help desk support, as well as other IT services, in 2002. A follow-on procurement was attempted by soliciting quotations from firms that held a GSA Federal Supply Schedule (“FSS”) IT Schedule 70 contract, which included MORI. MORI continued to perform help desk services pending a series of protests it brought at the Government Accountability Office (“GAO”) and at the COFC challenging the agency’s attempts to procure the services from other contractors.

After two cancellations of the solicitation, the agency elected to procure the services instead by way of a task order competition under the Chief Information Officer-Solutions and Partners 3 (“CIO-SP3”) GWAC, a 10 year IDIQ contract awarded to 54 contractors in May 2012. Most importantly, MORI had competed for but was unsuccessful in obtaining a CIO-SP3 contract and, therefore, could not submit a proposal for the task order solicitation, which the agency issued in August 2013.

MORI, believing the decision to use the CIO-SP3 vehicle to be both arbitrary and made in bad faith, protested the issuance of the task order solicitation at the GAO. The GAO granted the Government’s motion to dismiss the protest on the ground that it was barred by the Federal Acquisition Streamlining Act of 1994 (“FASA”), 41 U.S.C. § 4106(f), which in its current form states in part:

(f) Protests.—
(1) Protest not authorized.— A protest is not authorized in connection with the issuance or proposed issuance of a task or delivery order except for—
(A) a protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued; or
(B) a protest of an order valued in excess of $10,000,000.
(2) Jurisdiction over protests.— Notwithstanding section 3556 of title 31, the Comptroller General shall have exclusive jurisdiction of a protest authorized under paragraph (1)(B).

MORI then filed a complaint at the COFC. The COFC held that when a protest challenges the decision to obtain services by requesting proposals from IDIQ task order contract holders, the FASA prohibition on protests clearly applies. Therefore, the COFC granted the Government’s motion to dismiss the protest.

However, the COFC did note that procurement decisions made both before and after the selection of a task order vehicle could be subject to protest, notwithstanding the FASA prohibition. For example, the choice of particular brand name products has been found to be distinct from the use of a task order solicitation to obtain those products. Savantage Fin. Servs., Inc. v. United States, 81 Fed. Cl. 300, 305, 308 (2008). Procurement decisions made after the issuance of task orders that are not subject to the FASA prohibition include the assignment of new work to an existing task order through a modification, Global Computer Enters., Inc. v. United States, 88 Fed. Cl. 350, 410-15 (2009), or the use of an already-issued task order to obtain products and services through subcontracts,Distributed Solutions, Inc. v. United States, 104 Fed. Cl. 368, 371 n.5, 372, 380, 385 n.24 (2012).

This case is a reminder of the limitations contractors face when protesting solicitations or awards involving a task or delivery order for an IDIQ contract. Unless a protestor’s challenge is distinct from the decision to use the task order vehicle or challenges an increase in the scope, period, or maximum value of the contract, the COFC could lack jurisdiction to decide the protest. If the value of the order is less than $10,000,000, the GAO might also lack jurisdiction under the FASA prohibition, unless one of the other exceptions applies. These limitations combined could leave a disappointed contractor out in the cold.

Finding value in local preference

Ontario beefing up procurement rules to favour local construction bids

Since 2006, Ontario has received generally positive reviews for managing public-private partnerships with a focus on value for money, rather than other policy or political goals. In recent years, that approach led to controversial decisions to award projects to foreign bidders, including for Hamilton’s football stadium and Windsor’s $1.4-billion parkway.

Under pressure from the Ontario General Contractors Association and organized-labour allies, Mr. McGuinty brought “local knowledge” into the process at the end of 2012. Bidders are now required to provide “narratives” about experience meeting those standards, navigating permit processes with municipalities and working with the province’s labour force and suppliers. Those considerations are then cumulatively given 10-per-cent weight during requests for quotation (RFQs), the procurement stage that narrows competition down to a few finalists.

Ms. Wynne is now looking for ways to bolster the new criterion. Those could include making “local knowledge” a factor not just in RFQs but also in Requests for Proposals (RFPs), in which Infrastructure Ontario chooses from among the finalists. It is also possible that it could be made to count for more than 10 per cent in RFQs, RFPs or both.

The government also appears to be responding to criticism that “bundling” large quantities of work on the LRT and other projects into one procurement process prevents smaller Ontario companies from competing. Future projects could be broken up into multiple contracts, or winning bidders required to subcontract a minimum share of the work.

New EU procurement rules will ‘rebalance the markets towards social enterprises’

Outsourcing: public service motive vs profit motive?

The following article doesn't provide as many answers, or analysis, as questions and opinion, but the questions are good ones to ponder. It is important because over the last few decades there has been an historic shift from a predominant shift from procurement of things to procurement of services, and the best model for procurement of services is far from conclusive. Read the article at the link; I've only cut and pasted and rearranged parts here.

Why Private Contractors Are Lousy at Public Services

Excluding military personnel, the percentage of all employed people who are U.S. government employees has fallen from 4.3 percent in 1966 to 2 percent today (add in the military, and that would drop from more than 8 percent to about 3 percent). That’s not because the government is a smaller part of the economy. For every federal employee, there are [now] two people working on government contracts.

Private, competitive provision can be considerably more effective than monopoly public provision. In theory, competitive contracting should introduce private sector efficiencies to bloated, public-owned enterprises. Cross-country experience suggests that, on average, performance under private management is a little better than under public management; private provision is associated with bigger networks that lose less power and collect more bills. A look at outsourcing’s track record around the world backs what the [ObamaCare] website’s snafus suggest: Turning over the delivery of government services to private contractors can cause as many problems as when governments provide those services themselves.

The difference, however, is small compared with the efficiency gap between poor and rich countries. The choice can be ugly: Bureaucrats with limited incentive to deliver and sclerotic ability to reform on the one side; weak regulation of private companies that know more about winning a contract than delivering services on the other. Since private and public provision both have weaknesses, surely the worst model is to attempt some mutant hybrid of the two: Private sector providers operating under layers of labyrinthine government regulatory and procurement processes. That, in a nutshell, describes the U.S. health-care system.

Debarring contractors takes root in UK

No procurement regime will ever be fully effective if it does not ride herd on wayward contractors.

In the US, there is a quaint notion that contractors will be suspended or debarred from government contracting work if they get caught engaging in contract fraud or rendering unsatisfactory performance.

 It is quaint because that penalty is most often applied to small contractors, and way too often ignored when it comes to the "too big to flail" naughty big boys of government contractors.

If they will not be suspended or debarred, there must be some other penalty applied to deter wayward performance to prevent government contracting from being a mockery of procurement principles.

Boss of Serco resigns in desperate bid to help group secure lucrative government work in the future

The security firm has been rocked by fraud allegations over a number of its contracts with the Ministry of Justice. A probe into its entire portfolio of government work is due to finish next month. Ministers said they would not give any fresh contracts to Serco until the review was completed.

Serco chief's exit shows companies need to think before they boast

Nobody should doubt Hyman's intention to run a decent company. The question is whether, when you've got 120,000 employees, any services business can hope to avoid regular catastrophes.
At Serco, of course, there have been more than a few recently. Allegations of overcharging on a tagging contract and dodgy record-keeping when escorting prisoners are the biggest issues. But there was also a damning official report on the state of Serco-operated Thameside prison. And "substandard" was the public accounts committee verdict on the company's operation of out-of-hours GP services in Cornwall.

Rolling out the (pork?) barrel

As a long time PC user, I forever wonder when the Windows operating system will finally be rolled out. Not to entirely blame the software writers, of course, because the platforms and end-uses are constantly changing but built on that first DOS code. The world of IT is not even planned obsolescence: it is intrinsic obsolescence. 

Yet, our expectations as users are based in now out-dated notions that we can make one production run of a uniform product from assembly line to market to consumer, like flooding the market with Hula-Hoops in time for the 1961 Christmas season sales.  

IT is just not that simple. Beta is now often marketed, but not market ready. As we find out with the roll out of the Affordable Care Act online market scheme.

The problem with IT in general, with my PC as much as with large institutions and new age weaponry, is that we rely on it too much. Given the cost and the proprietary nature of most of the software and hardware, IT "solutions" become mission critical to whatever the mission is.  IT "solutions", as we mostly know them now, hold a monopoly tollbooth on processes that just a generation or two ago were more decentralized, across many desks.

The whole internet, on which most IT solutions are reliant, is designed to spread out the flow, storage and delivery of information, across all platforms and all delivery systems.  But, once that information hits one of those IT monopoly tollbooths, it stops.  

As we look to the limitations of rolling out mass IT solutions, we might consider if our acquisition plans should be modified, to allow more open sourcing cross-platform arrangements that can be farmed out to more competitors, so that if there is a failure at any given point in the web of information delivery, the whole web process does not fail, and we do not pay a monopolist's price at the information tollbooth.

The risk of the mission, and the cost of the monopoly, seem to be unquestioned givens in IT solution acquisitions. Why?

Those are just random thoughts as I read about the political tut-tutting and point scoring surrounding the ACA "Obamacare" online roll-out, such as the following linked articles (please read the article at the link; I have only included bits without context).

Good enough for government work**? The contractors building Obamacare

as head-scratching continues about how a famously web-savvy administration could have flubbed its Internet homework so badly, an examination by the Sunlight Foundation shows the administration turned the task of building its futuristic new health care technology planning and programming over to legacy contractors with deep political pockets. Health and Human Services Department will not release a list of the estimated dozen or more companies tasked with building the site. But Sunlight reviewed contract award information from USASpending.gov and FedBizOpps.gov, and found 47 organizations that won contracts from Health and Human Services or the Treasury Department to manage, support or service the implementation of the Affordable Care Act. Among them were top contractors like Northrop Grumman, Deloitte LLP, SAIC Inc. General Dynamics and Booz Allen Hamilton. All five of those companies provided information technology services to either the Centers for Medicare and Medicaid Services or the Internal Revenue Service, the two agencies tasked with building back components of the health insurance exchanges.

Because the government provides brief, partial descriptions of contracts in USASpending.gov, it is not possible to say which of the contractors with information technology contracts or project management contacts were involved in building the 36 federally run health insurance marketplaces, a responsibility tasked to the Centers for Medicare and Medicaid Services, known by the acronym CMS, or those assigned to develop the federal data hub, which would allow applicants to have their income and family size immediately verified by the Internal Revenue Service. Sunlight's survey does not include awards to contractors that built the 14 state exchanges. For example, Xerox Corp. won a $72 million contract to help build Nevada’s exchange and one for $68 million to do the same in Florida. Not only is Xerox building the online marketplaces for some states, it's also offering insurers the means to “fully take advantage of the nearly 30 million new members that will be shopping for health care on these exchanges.”

Obamacare glitches: Gov't contract for troubled site has swelled; GOP targets Sebelius

The government contract for the company that built the glitch-prone website for Obamacare has ballooned to three times its original cost, and some Republicans are demanding the resignation of the cabinet secretary who oversees it. USA Today, citing technology experts, reported that the site was built using 10-year-old technology and may require constant fixes for the next six months and eventually an overhaul of the whole system. But Gail Wilensky, a former director of Medicare and Medicaid who is now a health care analyst, said that CGI was forced to deal with last-minute design changes ordered by the government, hampering CGI’s ability to test the site. Last June, a GAO report foreshadowed those problems, warning that the website might not be ready to go live, in part because of all the last-minute design changes.

Red Flags? Company behind ObamaCare site has checkered past

While the company behind the dysfunctional HealthCare.gov was virtually unknown to the American public until this month, critics say the Obama administration should have known this multibillion-dollar firm had a checkered history with other government contracts. In projects stretching from Canada to Hawaii, parent company CGI Group and its subsidiaries ran into complaints about its performance.

Meet CGI Federal, the company behind the botched launch of HealthCare.gov

Over the past few weeks, if you've been paying attention at all to the unfolding disaster of people trying and failing to sign up for Obamacare online, one name keeps coming up: CGI Federal, the IT contractor that has orchestrated most of the Healthcare.gov Web site. By most accounts, it's been a complete train wreck, for reasons both technical and bureaucratic. Here's what you need to know about the company at the center of it all.

CGI Federal is a wholly owned subsidiary of the Canadian firm CGI Group. Growing through scores of acquisitions, and providing outsourced IT services to massive companies such as Bell Canada and Quebec's provincial pension plan, CGI's business model depends on embedding itself deeply within an institution. CGI Federal is a relative newbie on the U.S. government IT contracting scene. It bought the U.S. contractor American Management Systems in 2004, but only started ramping up business after 2008, and accelerated in 2010 with the $1.1 billion acquisition of U.S.-based military IT contractor Stanley Inc. That sent its contracting work through the roof.

Back in 2009, the White House's Recovery Board retained CGI Federal to adapt a well-functioning system it had built for the U.S. Environmental Protection Agency into FederalReporting.gov, another very complex, public-facing and high-volume site that would handle all contracts granted under federal stimulus legislation. This one got built in six weeks, for much less money, and won accolades for its flexibility and reliability.

How did CGI land the Healthcare.gov contract? CGI Federal's winning bid stretches back to 2007, when it was one of 16 companies to get certified on a $4 billion "indefinite delivery, indefinite quantity" contract for upgrading Medicare and Medicaid's systems. Government-Wide Acquisition Contracts — GWACs, as they're affectionately known — allow agencies to issue task orders to pre-vetted companies without going through the full procurement process, but also tend to lock out companies that didn't get on the bandwagon originally. According to USASpending.gov, CGI Federal got a total of $678 million for various services under the contract — including the $93.7 million Healthcare.gov job, which CGI Federal won over three other companies in late 2011.

CGI is only the 29th largest federal IT contractor, with about $950 million in contracts in 2012, compared to number one Lockheed Martin's $14.9 billion. They also don't make high-profile weapons systems, but rather the guts of government Web sites that rarely bear their names.

That said, they've learned quickly, and see the U.S. federal government as their area of biggest growth.

CGI Federal landed the Healthcare.gov contract. Here’s how it fights for the ones it loses.

For CGI, the business of handling the low-income housing program started back in 1999, when the Department of Housing and Urban Development -- under pressure to downsize its in-house operations -- started outsourcing the job to public housing authorities around the country. The housing authorities would subcontract with IT providers like CGI Federal, which mopped up more than 25 percent of the $200-300 million or so in fees that came from HUD every year. CGI, the biggest of all the subcontractors, provides the infrastructure and support to route housing subsidies to landlords and monitor for compliance with HUD rules.

The relationship between contractor and subcontractor is very close. At the Assisted Housing Services Corporation of Ohio, California Affordable Housing Initiatives, and North Tampa Housing Development Corporation, many staff actually list themselves on LinkedIn as CGI employees. The Ohio group's state director, for example, identifies himself as a "Manager of Consulting Services in CGI Federal's Healthcare Compliance Group, focused on business process outsourcing for the Department of Housing and Urban Development." The California group's state director calls himself the same thing, adding that he has "quickly adapted staffing strategies to changing industry conditions in order to maintain and improve competitive position," and has experience "analyzing and interpreting Federal policy and managing the impacts on operations." The Columbus Metropolitan Housing Authority executive named as the Ohio group's contract administrator was a CGI director of consulting services until 2011. So while the "instrumentality" set up by the housing authority is a separate legal actor, it effectively functions as a joint venture with CGI.

In 2007 and 2009, however, HUD's inspector general found that contract administrators had been allowed to overbill the program by tens of millions of dollars. In 2011, HUD decided to rebid the contracts, setting a lower standard for the profit margin that recipients would be allowed to take and a cap on the number of units any one contractor could administer. When the new contracts were awarded -- with a savings of about $100 million, or one third over the previous set, -- many of CGI's partners lost out.

Instead of letting the awards stand, the losers complained en masse to the Government Accountability Office, prompting HUD to back off those awards and offer another solicitation. This time around, HUD got rid of the cap on the number of units a subcontractor could administer, but precluded out-of-state entities from landing a Section 8 contracts if there was a qualified local bidder, which cut into CGI's business model -- GAO ruled that the new process was a no-no. HUD decided to ignore the GAO. So the housing authority-affiliated entities appealed again, this time to the Federal Court of Claims. In April, HUD won. But the companies kicked it up yet another notch, to the Federal Court of Appeals, where arguments were held last week.

(Side note: Lydia DePillis, who authored the two prior articles, has become my favored jounalist du jour, with well researched, easily presented and understood writing in this complex and, well, boring, body of work.)

How federal cronies built -- and botched -- Healthcare.gov

It also doesn't help that many of the organizations involved are now distancing themselves from the whole project, which seems wise given the scale of this disaster. Compare that attitude with the pride many of them exhibited before Healthcare.gov went online, which was being trumpeted as a marvel of cutting-edge Web engineering. Now it's shaping up to be more an example of the efficacy of political connectedness.

CGI Federal: The Company Behind HealthCare.gov and the Insuing Blame Game

Contractors Assign Blame, but Admit No Faults of Their Own, in Health Site

Insight: As Obamacare tech woes mounted, contractor payments soared

The work on Healthcare.gov grew out of a contract for open-ended technology services first issued in 2007 with a place-holder value of $1,000. There were 31 bidders. An extension, awarded in September 2011 specifically to build Healthcare.gov, drew four bidders, the documents show, including CGI Federal.

That 2011 extension is called a "delivery order" rather than a contract because it fell under the original 2007 agreement for CGI Federal to provide IT services to the Centers for Medicare & Medicaid Services, the lead Obamacare agency. CGI Federal reported at the time of the extension that it had received $55.7 million for the first year's work to build Healthcare.gov.

CGI's original 2007 contract was of a type called Indefinite Delivery/Indefinite Quantity, federal records show. ID/IQ contracts allow the government "to write a laundry list of things they can order from the contractor," said Sarah Gleich, an attorney and government procurement expert at Gibson, Dunn & Crutcher. "They'll write incredibly broad descriptions of the work, like 'telecom services,' so you can't tell what they're ordering."

The advantage of an ID/IQ contract, said experts, is that it can be expanded almost indefinitely, without the government having to solicit new bids for additional work. Because "there are very strict regulations on sole-source contracts," an Indefinite Delivery/Indefinite Quantity agreement makes it easier for the government to avoid running afoul of those requirements, said Sajeev Malaveetil, a director at the Berkeley Research Group, a procurement consultant.

IT work is particularly suited to imprecise, open-ended contracts. "Agencies know that at some point they'll need IT services or system implementation," Malaveetil said. "ID/IQ contracts can often be for five or 10 years: the agency just keeps issuing delivery task orders, which fall under the base language of the contract."

CGI spokeswoman Linda Odorisio, there were three one-year options, bringing the total potential value of the contract to $93.7 million. By August 2012, spending on the contract was already close to that limit. This year, the bills skyrocketed. The government spent $27.7 million more in April, an additional $58 million in May and, in its latest outlay, $18.2 million in mid-September. According to the government records, that brought the total spending for CGI's work on Healthcare.gov to $196 million. Adding in potential options, the contract is now valued at $292 million.

"Why this went from a ceiling of $93.7 million to $292 million is hard to fathom," said Scott Amey, general counsel at the Project on Government Oversight, a Washington, D.C.-based watchdog group that analyzes government contracting. "Something changed. It suggests they ran into problems and knew last spring that they couldn't do it for $93.7 million. They just blew through the original ceiling. Where was the contract oversight?"

Obamacare website woes: another sign of out-of-control private contractors

Government outsourcing to private contractors has exploded in the past few decades. Taxpayers funnel hundreds of billions of dollars a year into the chosen companies' pockets, about $80bn of which goes to tech companies.

While the stereotype is that government workers are incompetent, time-wasters drooling over their Texas Instruments keyboards as they amass outsized pensions, studies show that keeping government services in house saves money. In fact, contractor billing rates average an astonishing 83% more than what it would cost to do the work in-house. Hiring workers directly also keeps jobs here in the US, while contractors, especially in the IT space, can ship taxpayer-funded work overseas.

The revelation here is that an overdependence on outsourcing isn't just risky in terms of national security, extortionate at wartime, or harmful because it expands the ranks of low-wage workers; it's also messing with our ability to carry out basic government functions at a reasonable cost.

If we're not going to insource work – presumably because anti-government types successfully peddle the useless bureaucrat stereotype – we should at least have a better process for picking contractors that benefit from taxpayer largesse to carry out public projects. It may be hard to believe in light of the Healthcare.gov experience, but there are examples of successful government outsourcing arrangements in IT. One key to their success, a Government Accountability Office study pointed out, is consistent communication with, and monitoring of, contractors. Penalties for cost overruns, failing to deliver by agreed-upon deadlines and other forms of mismanagement would help, too.

**  Good enough for government work?

James F. Nagle writes in his book, History of Government Contracting, that this pejorative term did not mean what you think it means.

In the early days of the US government, the federal government became dissatisfied with the products they were buying and decided to build them itself, and adopted and implemented strict  standards.  As Professor Nagle put it (p 114 of second edition):

"The rigorous inspection standards gave way to a saying still in use today but with vastly different meaning.  The saying was "close enough for government work."  Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards."

Another government contracting feature of the day noted by Prof. Nagle (on the same page) was,

"an implicit understanding with all arms contractors that they had to share their inventions with the national armories on a royalty-free basis if they wished to continue receiving government contracts. This procedure, exemplifying the public service orientation of the Ordnance Department, allowed novel metal and woodworking techniques [i.e., "information technology"] that had originated in private armories to become part of the public domain."