Tuesday, 18 February 2014

Design, Build, Finance, Maintain, Operate

Looking at the state of Polish public infrastructure, one can often witness the result of short term thinking when it comes to procurement. "Buy the cheapest to avoid accusations of bribery" has been the mantra of procuring parties over the past decade. The cheapest advisors, the cheapest architects, the cheapest consulting engineers, the cheapest general contractors - these usually lead to massive bills for years to come as poor planning and shoddy workmanship result in continual repairs.

The notion that infrastructure should be built well to last decades has not yet been grasped. Spend a bit more getting it right from the very start, and avoid expensive mistakes further down the line. And planning high standards of energy efficiency from the start saves fortunes in utility bills over the decades.

Two recent lessons - the stretch of the A2 motorway construction awarded to Chinese contractor Covec in advance of the Euro 2012 football finals, and the runway at "Warsaw" Modlin Airport should give Poland's public procurement specialists some case studies in why cheapest is more expensive in the long run. Modlin airport was out of action for ten months last year.

Any plan to build infrastructure - be it roads, airports, water treatment plants, law courts, prisons, schools etc - should be costed over the lifetime of the project, and operating and maintenance costs put into the budget model. To often, this is not of interest to the ministries or the local authorities, operating on a one-election time horizon.

Best practice when procuring public infrastructure centres around obtaining best value for taxpayers' money over the long term. This is a lesson not only for procuring parties, but also for that alphabet soup of supervisory and regulatory authorities who control them - NIK (the supreme audit office), UZP (the office of public procurement), and CBA (the central anti-corruption bureau). Not forgetting RIO, KIO, GUS and UOKiK. The watchdogs need to know what's in the public interest (good design, solid workmanship, built-in energy efficiency) and what's not (no cost left uncut at the outset - and then an expensive mess to be cleared up later).

This sounds basic, and yet it's a long hard slog to persuade the decision makers to ditch 'lowest cost' for 'best whole-life value for taxpayers' money'. Part of the journey towards improved public institutions must centre around increasing the professionalism of those people who procure Poland's infrastructure. Only then will taxpayers trust that their money is being wisely spent. Enhanced civic trust is crucial to living in a happy country.

UPDATE 19.02.2014
To my shock, a report by my old employer, the CBI, is saying exactly the same thing... about British public procurement! Good Lord! In comparison, the UK is a shining exemplar! As the boss of any UK company out here in Poland how he/she compares bidding for tenders here with the process in the UK... Anyway, here's the link to the CBI report...  Key finding... "67% [of survey respondents] say lowest cost is still driving most contracting decisions, with only 2% saying contracts are decided on whole-life costs... "

This time last year:
Wait to spend or save lives now? An infrastructure quandry

This time five years ago:
It's not rich countries that build roads, its roads that build rich countries

This time six years ago:
Snow that was doomed to melt


Anonymous said...

How about the new University bridge in Bydgoszcz, which opened in 2013 and is already in need of repaving? The city has no recourse with the builder, as a bureaucrat signed off on the work without guarantee.

Further, the bridge was built without a walkway for pedestrians or bikes. How is this possible????

AndrzejK said...

In reality nothing will change until such time as governments are forced to produce full accounts including valuing assets and long term liabilities (such as PPP commitments to rent utilities.

Problem is of course that most countries would end up with liabilities higher than the value of assets. Although they would no doubt cheat and account now for expected future tax income.

student SGH said...

Michael, blame the lawmakers, who authored the procurement law under which price is the only criterion in selecting the most attractive bid, not the decision-makers who just follow the guidelines they are obliged to abide by.

Once I read a nifty proposal (or just a quick fix) - someone has posited when opening the envelopes with bids, the cheapest and the most expensive bid would be rejected right away. If the second cheapest one was chosen, the problem of underpricing could have possibly been solved.

The idea of lifetime costing is wise, but how would you measure it? To make it quantifiable, you would need to pass the cost of running the infrastructure to the contractor - i.e. the government would not only have to pay a fixed price for building, but then also for maintenance. Would the private sector go for such deal?

Even if such scheme was pursued, the state would need to reckon with the default risk of its counterparties. Covec is an excellent example of such company. In order to conquer the European market, they attempted to bite more than they could chew and went bust.

Michael Dembinski said...

@ Anon:
Many thanks - this is exactly the sort of bałagan I mean.

@ Andrzej K:
The UK does this - there's an HM Treasury spreadsheet with every PFI project on it, and the unitary charge (monthly payment) listed on it, month by month, until the project's end (up to the 2060s). And you can see whether it's on or off balance sheet according to GAAP, IFRS or ESA95.

Of course liabilities can be higher than value of assets, because the former include the maintenance and operating costs over the project's lifetime, as well as the costs of financing it.

Michael Dembinski said...

@ Student SGH:

"The idea of lifetime costing is wise, but how would you measure it? To make it quantifiable, you would need to pass the cost of running the infrastructure to the contractor - i.e. the government would not only have to pay a fixed price for building, but then also for maintenance. Would the private sector go for such deal?"

The answer is yes, this is the norm in long-term PPP contracts, where the special-purpose vehicle ('spółka celowa') may well include a facilities management company that knows all about the cost of changing lightbulbs over 30 years, factors in utility price risk, HR costs, etc.

The object should be designed with thought to minimising maintenance and running costs.

Rejecting lowest and highest bids superficially makes sense; the danger is you can potentially lose some well-constructed tenders.

Whole-life cost is KEY. (Worth reading the CBI report linked from my update to this post)

AndrzejK said...

Unless I am much mistaken the EU suggests the following model for evaluation:

The median price of offers is calculated. Any offer less than 20% or more than 20% of median is disregarded. The remaining offers are awarded points for price and these are added to the non price elements of offer.

And of course any offers which do not meet technical standards are completely disregarded.