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Cost benefit?

The UK government is understood to be considering providing some costs to losing bidders on major projects. It would seem a sensible move
Cost benefit?

One of the biggest difficulties facing the UK infrastructure market at present is the potential lack of willing bidders sitting ready to take on the larger projects that the country still needs.

Indeed, many may argue that this problem is only matched – and therefore masked – by the lack of dealflow coming from the government.

The market finds itself in something of a chicken and egg conundrum. On the one hand, the government is not forthcoming with a strong programme of investment opportunities that the private sector can gear up for and develop the resources to bid for a pipeline of schemes. On the other, there is now genuine concern in some quarters of the public sector about the level of interest that may emerge when projects are put out to the market.

The fact of the matter is that there will not be a return to the big pipeline of the past, but there are still some projects out there to be delivered. Some will point to the likes of Silvertown Tunnel, where there was no lack of interest from bidders.

But equally, on a project of a certain size and complexity, there remains uncertainty over who might bid for it. This is especially true in the health sector, where critics can quickly point to the Midland Metropolitan Hospital PF2, which ended up with just one bidder: Carillion. It is understood that finding a replacement on that deal has not been straightforward, with a number of potential candidates unenthusiastic about taking over a contract that some felt did not have an attractive risk-return profile.

So the news that there are now people across government that are slowly moving towards the idea of reimbursing losing bidders a portion of their bid costs seems like a sensible response.  After all, it is a trick that has worked well in Ireland, where the idea was introduced to reassure investors after the economic crisis had struck down a series of deals and caused a crisis of confidence in the country. It has also long been a staple of the Canadian market, which continues to roll out projects and get a healthy level of competition on deals.

However, bid costs are not the only stumbling block. At the end of the day, companies will only bid for projects if they believe that the margins and the risk-return profile of a deal make financial sense. The lesson from Carillion – and Jarvis before it – remains that if a deal looks too good to be true for the public sector, it probably is. There has also been some acknowledgement of this in the recent MPs’ report into Carillion, which suggested that the government’s focus on cost savings and choosing the cheapest bid may not always be the best approach.

Let’s hope that this common sense approach is acknowledged more widely across government. Together with the potential for bid cost reimbursements, there remains the possibility that the UK could take the learning of other countries and reinvest it into a more effective model that investors are attracted to – even without the need to develop a huge pipeline of deals.

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