Draft – for discussion purposes only – not NZTA policy

Public Transport Operating Model (PTOM)

Policy and guidance on dealing with group tenders (26 March 2013)

Purpose

  1. The purpose of this document is to provide a basis for discussion to help the NZ Transport Agency (NZTA) establish a policy position on how to treat group tenders.
  1. This document is intended to be read in conjunction with Consultation related to the implementation of PTOM. The consultation document has been released for stakeholder comment during April and May 2013. You can view it on our website at www.nzta.govt.nz/consultation/ptom/docs/consultation-related-to-the-implementation-of-PTOM.

Definition

  1. A group tender is a proposal that includes more than one unit Request for Proposal (RFP), and that is submitted on the initiative of the tenderer. It is not to be confused with an ‘alternative proposal’ as defined in the NZTA’s Procurement manual (2009)[1].
  1. It is proposed that group tenders be defined in the Procurement manual as ‘Group tender – a tender offer made by a supplier conditional on more than one contract in a group being awarded to that supplier. A group tender is not an alternative proposal as defined in this manual – see the definition of an alternative proposal in appendix H.’.
  1. The operator will offer something of value to the region if the conditional offer is accepted – usually a discounted price on one or more of the contracts in the group.

Summary

  1. If group tenders are allowed, a number of conditions must apply to ensure any potential short-term financial gain does not outweigh the longer-term aim of sustaining competitive and efficient markets. A further consideration is to ensure group tenders do not create excessive administration costs for tender evaluation, and complexity that could generate challenges to contract award.
  1. Each unit is a discrete entity. While units may be grouped for the purpose of a tender they will be separately contracted.
  1. This paper sets out the issues and parameters that need to be addressed by regions[2] in their RFPs to mitigate the risks and gain the benefits of group tenders.

Application of group tenders

  1. Group tenders and their treatment will only be relevant to regions where multiple units are tendered at the same time. Where an offer of a group tender is permitted the NZTA expects regions to address this in their procurement strategies for the NZTA’s consideration and endorsement, including a rationale for the policy settings chosen.

Under PTOM, all units are independent and exclusive ‘areas’ of service provision. They are either competitively tendered or negotiated directly with incumbent operators. Each tendered unit is subject to a formal tender process that culminates in successful contract award. Group tenders which encompass 2 or more units would need to be covered in a region’s RFP.

All RFPs will need to include as a minimum a statement that group tenders will or will not be permitted. If they are allowed, the RFP also needs to include the requirements for tenderers submitting group tenders and how these will be evaluated by the region (taking into consideration the contents of paragraph 18 below ‘Group tender policy elements’).

  1. Group tenders provide an opportunity for operators to be simultaneously awarded contracts for more than one unit, where providing services for more than one unit benefits the purchaser – usually involving a reduced price – through optimising resource use. This generally means that group tenders will encompass units that are adjacent or closely linked. On occasions, group tenders could be for units not geographically ‘linked’ but where an incumbent operator has established facilities or infrastructure associated with the units with the potential for greater resource use. Group tenders have the potential to generate sustainable value for money.
  1. The tender processes must be consistent, transparent and well-managed for all tenders received, including group tenders. Evaluation processes, particularly when including group tenders, can be complex. The potential exists for longer-term effects to outweigh the short-term financial benefits of group tenders. Market competition could be compromised, as unsuccessful operators may exit and not return for subsequent tender rounds[3].
  1. Two issues need to be considered when balancing the requirement and extent of group tendering when considering ongoing market competition and market spread across small and large operators:
  • It is likely that units will vary in size (as measured by the peak vehicle requirement) and this unit size variability should provide for the maximum opportunity for competition.
  • There is opportunity to structure or limit the extent of group tendering on a case-by-case basis so the long-term effects on market competition are taken into account and, to the greatest extent possible, do not reduce competition.
  1. It is important the market is clearly aware of the conditions associated with group tenders. This would be apparent from the region’s procurement strategy and RFP, which will be required to set out parameters regarding how group tenders can be structured (see paragraphs 9 and 10 above).
  1. Each unit will be contracted as a separate and independent unit under the general contract conditions, including the expiry date set out in the RFP for that unit, irrespective of whether it is awarded under the group tender rules or not.

Factors to consider

  1. Group tenders should be allowed unless a region believes there are good grounds not to. A number of factors need to be considered to ensure the right balance is achieved between best value for money and sustaining competitive and efficient markets. Either way, regions will need to discuss group tenders in their procurement strategies. All RFPs involving the tendering of more than one unit will need to contain as a minimum a statement that group tenders will or will not be permitted, and where they are permitted how they will be evaluated.

Tender evaluation

  1. Tender evaluation will be carried out in accordance with the evaluation methodology set out in the region’s RFP. It is expected the price quality methodology of evaluation will apply. Where a group tender has been submitted in accordance with the region’s policy on group tenders, that group tender will be:
  • subject to the evaluation criteria set out in the RFP
  • subject to further evaluation in accordance with the region’s group tender policy.
  1. These additional considerations, which will form part of the region’s group tender policy, may include but will not be limited to:
  1. Impact on the market. There are a number of factors to consider. While the establishment of market opportunity potential has largely been set by the number and size of the units created by the region, the way in which the market is tendered will either maximise or compromise that potential. The application of group tenders will have a material impact on this process.
  1. Incumbent operators have a natural advantage as they have established operational infrastructure. While group tenders policy must not discriminate against incumbent operators it must also ensure that, to the greatest extent possible, any advantage is minimised. This includes, for example, ensuring that there are sufficient units offered for tender which can be grouped to form a combination of units that is of sufficient size to justify establishment costs and provide an economic return on investment.
  1. New entrants. PTOM requires open market competition; a market environment that does not unduly favour one operator over the other and ideally provides opportunities for operators of all sizes. Group tender policy must not preclude smaller new entrants from competing for new business on the basis that group tenders favour and/or unduly advantage larger new entrants. Where a region has defined smaller units, these must not be ‘conveniently’ grouped with larger units to attain a economic critical mass at the expense of medium/small operators who could provide the same level of service for a competitive price.
  1. Long-term dominance. Providing for group tenders has a potential for short-term financial gain, but also the potential to enable one or two operators to grow to such a size the market becomes non-competitive. These operators could have ‘control’ over large groups of adjacent units to the extent that it is not possible for other operators to compete for any of the units in a tendering environment. The following policy considerations are designed to encourage a sustainable, competitive and efficient market and to manage the cost of preparing tenders and of administration related to tender evaluation

Group tender policy elements

  1. Regions allowing group tenders should include clauses related to the following aspects of group tenders in their RFPs. Where numbers are shown, these are indicative only. Regions will be expected to provide the rationale for such policy settings in their procurement strategies for consideration and endorsement by the NZTA:
  1. A clause or clauses providing for the maximum number of RFPs for individual units to be included in any group tender – either a number or a percentage of the total number of RFPs issued in a specific tender round. The purpose of this clause would be to sustain an efficient and competitive market by ensuring that all units being tendered are not captured within a single group tender. (Indicative value – 4, or 50% of the total number of RFPs issued.)
  1. A clause or clauses providing for the maximum size of a group tender in terms of peak vehicle requirement. The purpose of this clause would be to enable grouping of units into a size that will attract new entrants without limiting competition.
  1. A clause or clauses providing for the maximum number of times that any tenderer can include a single RFP in a group tender. The purpose of this clause would be to limit the number of combinations and permutations of individual RFPs contained within each group tender. If large numbers of permutations and combinations are submitted. the administration costs associated with the evaluation of tenders increases, along with the possibility of error, with no significant opportunity for value for money gains, unless suitable spreadsheets and algorithms are developed. (Indicative value – not more than twice.)
  1. A clause or clauses providing for the maximum number of group tenders allowed by any tenderer. The purpose of this clause is the same as for policy element c above .(Indicative value – not more than 3.)
  1. A clause stating the purchaser reserves the right to put aside any group tender.

Benchmarking

  1. The way in which group tenders will be treated for benchmarking purposes is addressed in a separate paper on benchmarking (www.nzta.govt.nz/consultation/ptom/docs/proposed-policy-and-guidance-on-benchmarking). This issue does not impact on the policies associated with group tenders.

ATTACHMENT 1 – Extract from the Court of Appeal Judgment (Ritchies Transport Holdings v Otago Regional Council) and discussion of the 2008 Ministry of education school bus tenders

Extract from the Court of Appeal Judgment (Ritchies Transport Holdings v Otago Regional Council)

The court determined that:

Combining tenders in large contracts would have the effect of excluding small operators from competing. It is apparent that the encouragement of competition from smaller operators has been deliberately preferred to the provision of services at lower overall costs by taking advantage of any available economies of scale.

It was submitted to us that since operators of all sizes were able to tender for individual routes the acceptance of combined tenders should not be seen as excluding competition thereafter. That may be true in the short term but we are not satisfied that in the longer term such a practice would not prejudice the enhancement of competition. To tender for the provision of passenger transport services requires capital resources which if not used will not be retained. The combining of contracts to the advantage of the big operators eventually would drive out the potential competition from smaller operators, and when that disappears so too will the incentive for the big operators to operate efficiently.

2008 Ministry of Education school bus tenders

Complaints and allegations of unfairness and illegality from the bus industry resulted in an independent inquiry undertaken by the Auditor-General into the 2008 tender round. Of particular concern to the industry was the way the outcome was affected by the Ministry of Education’s treatment of cluster bids (group tenders).

The inquiry examined:

  • how the Ministry prepared its overall procurement strategy and RFP for the 2008 bus tender process
  • the extent to which the RFP reflected the ministry’s earlier consultation with stakeholders, where appropriate, and the clarity with which any important changes to the RFP were communicated to stakeholders
  • the extent to which the RFP rules were applied correctly and consistently by ministry staff, contractors and the Tender Evaluation Committee
  • the extent to which the ministry responded promptly and effectively when concerns were expressed about aspects of the 2008 bus tender process.

The inquiry concluded that overall, the ministry’s procurement approach was sound, but a number of areas for improvement were identified for any subsequent bus tender processes, particularly around strengthening that quality assurance arrangements. The errors and inconsistencies found did not undermine the overall outcome of the 2008 bus tender process.

It was noted that price was an important determining factor in the 2008 bus tender process. The influence of price in the 2008 bus tender process did not concern the Auditor-General, given the ministry’s stated value-for-money objectives. There was also no suggestion that safety was compromised because of this emphasis on price. While the inquiry was held independently, there is still a high level of emotion attached to the 2008 tender rounds, given that many small, often rural ‘mum and dad’ operators did not do well and have subsequently ceased trading.[4]

Note that the inquiry did not comment on the allegations that contracts were amended after they had been signed.

1

[1] In the public transport context, examples of alternative proposals could include alternative timetables, route configuration, or other variations to the service, vehicle or delivery specification in the RFT. The RFT would need to state whether such alternative proposals would be allowed or not. If not, reasons will need to be documented (as stated in rule 10.16 of the Procurement manual).

[2] Regions in this context are approved organisations, including regional councils, Auckland Transport, unitary authorities and local authorities with responsibility for public transport.

[3] In the Court of Appeal judgment (Ritchies Transport Holdings v Otago Regional Council), the ORC had permitted group tenders and, after evaluation, awarded contracts pursuant to those group tenders. An extract of the relevant part of the judgment is included at the end of this document. The judgment found that the awarding of large contracts will drive smaller operators out and eventually reduce efficiency and competition. Further light is shed on this type of issue by the outcome of the Ministry of Education’s 2008 school bus tender round, discussed in attachment 1.

[4] The full report of the 2008 national bus transport tender process can be found at www.oag.govt.nz/2009/bus-tender/docs/school-bus-tender.pdf.