Alliance Contracts and Public Sector Governance

Abstract

Alliances are novel procurement options providing governments with the opportunity to engage in collaborative arrangements with industry and sharing risks and rewards and at the same time eliminating disputes. Most alliances incorporate unanimous decision-making protocols, a commercial arrangement where there is no recourse to the courts for dispute resolution, and a remuneration system where the contractor and principal share cost overruns and underruns. This arrangement offers substantial benefits for the procurement of high-risk projects, but there are substantial disadvantages. The first Australian public sector alliance contract appeared as recently as 1998. Within a decade, the use of alliances grew to over a 100 projects worth over $25 billion. What has sparked such overwhelming interest in this relatively new procurement option, and are these procurement options effective? This empirically based study answers these questions by first exploring what typical alliance contracts look like, where they are used, and why they are used; and second, examining the governance arrangements of these alliances including the dimensions of accountability, integrity, stewardship and transparency. Alliances attempt to incorporate a robust governance structure with emphasis on open book financial reporting and the mandatory use of probity auditors and independent auditors. Despite these efforts, there are several failings in both the performance and compliance aspects of public sector governance. In particular, this study demonstrates that most alliances, despite their popularity, fail to demonstrate value for money for the public sector, and fail to comply with other public sector governance objectives including accountability, integrity, and transparency. This study also demonstrates that alliances focus on treating the symptoms of the failings of conventional contracts, namely poor contract documentation, inappropriate risk allocation and poor estimation of project cost. Consequently, the benefits of alliances are significantly overstated by alliance protagonists. The main benefit provided by alliances is the ability to attract industry involvement. The current undersupply of construction and engineering services is driving governments to soften risk allocation in contracts to ensure competitive bids are received to requests for tender. This study demonstrates that this is one of the key, but undocumented, reasons for governments’ use of alliances. This study also examines some of the criticisms raised by legal commentators on alliances. These include the absence of price competition, the potential for the creation of fiduciary obligations, the absence of recourse to the courts should an alliance project go awry, the risks of deadlocks occurring as a result of the alliance no disputes clause and the problems created with the alliance no liability provisions and project insurance. Many of these criticisms are overstated. This study demonstrates that the issues of fiduciary obligations, deadlocks and project insurance will not create any substantial risks to the public sector when embarking upon an alliance with industry. Nevertheless, the alliance no-disputes provisions place the public sector in an inappropriate situation should an alliance participant fail to perform adequately. The alliance contract is largely a ‘faith based’ contract as the public sector places considerable emphasis on contractor representations and promises, rather than enforceable guarantees. Though current alliances fail to comply with many of the governance objectives of the public sector, many of these failures are also found in conventional fixed price contracts. Nevertheless, fixed price contracts better demonstrate value for money and promote arms-length commercial relationships between governments and industry. The incorporation of price competition into some alliance models addresses these concerns. In concluding, this study demonstrates that alliances are appropriate for delivering outcomes in the public sector in some circumstances, particularly where project risks are extreme and competition is limited. Nevertheless, there is substantial scope for improving the governance arrangements of these procurement options. Accordingly, this study recommends improvements in how governments define and measure value for money, how governments treat risk in procurement, how governments consider market forces in procurement and how governments conduct tender evaluations.