chapter 4 procuring and implementing ppp transactions · expert advice has doomed many a ppp...

Chapter 4Procuring and Implementing PPP Transactions

Success before work? Only in the dictionary.– My son’s football T-shirt

Enthusiasm without knowledge is not good; impatience will get you into trouble.– Proverbs 19:2

This chapter describes the functions and procedures that Government will need to perform in order to implement PPP transactions within a PPP programme, and how those func-tions can be organized within PPP institutions.

In the context of a robust PPP framework Government involvement in PPP encompasses two key aspects:

– the institutional framework – the coordination of different Government functions to support the

development of PPP transactions.

Chapter 3 discusses the institutional framework – the institutional mechanisms that design, coordinate and implement the PPP program and Government role in project preparation. This chapter 4 describes how the Government can sup-port PPP transaction, procurement and implementation.

Before sending a project to market, the contracting agency needs to have reviewed it in detail, identifying any risks, confirming and reconfirming design requirements, and verifying value for money. Failure to implement the differ-ent stages of project preparation properly, with sufficient time, funding and expert advice has doomed many a PPP project and program; this preparation process should not be curtailed.

Chapter 4 – Procuring and Implementing PPP Transactions

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Public-Private Partnership Programs

The following are some of the most frequent causes of delays in tendering processes in the UK:1

– unforeseeable events (e.g. 11 September 2001 terrorist attacks in the US);

– private sector approvals processes; – improving design proposed by bidder; – public sector approvals processes; – planning permissions; – lack of resources, expertise or experience of public sector team, poor

process management; – changes to design made by public sector; and – revisiting affordability, value for money issues.

The last five of these causes (approvals, planning, process management, change management and ensuring value for money) can be mitigated by ad-ditional investment in contracting agency preparation of the project before going to tender.

The cost of such delays can be huge, in relation to repricing of bids (to adjust for inflation and other intervening events), impact on current service delivery (demotivated staff, unforeseen costs and the need to extend contracts or make other arrangements to provide service during the interim period), project team fatigue, the additional cost of advisors (who usually quote as-suming the agreed timetable, any adjustment to that time table increasing their costs) and unavailability of internal staff for other work.2 Better contracting agency preparation of projects can reduce dramatically the bid costs incurred by potential investors, which in turn can increase the number of bidders, in-crease competition and reduce project cost.

After the procurement process and financial close, the hard work begins. The contracting agency needs to assemble a strong team to ensure imple-mentation of the project, including monitoring of performance, oversight of interfaces and Government obligations and devotion to resolving conflict as it arises to avoid full-blown disputes.

1. National Audit Office (UK), “Improving the PFI Tendering Process”, (March 2007).2. Ibid. at 22.


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Key Messages for Policy Makers

√ Bepatient. PPP is not a quick fix; it takes time to develop and imple-ment properly. Generally, more effort spent in advance of procurement to prepare the project properly will save much more time and frustra-tion later. Think through contingencies in advance, and make sure you are happy with the project structure and specification before going to the market.

√ Preparewell. PPP requires up-front investment of staff and money to develop projects properly, in particular to pay for expensive external advisers. Project development costs the Government 3% or more of project construction cost. The benefit of this up-front investment is ob-tained over time, since PPP provides for management and funding for the whole life of the assets and therefore addresses project risks early.

√ PreparetheGovernmenttoplayitspartfromprojectdevelopmenttoexpiry. Even where a comprehensive PPP is envisaged, the Govern-ment will play an essential role in monitoring and regulating the project and the sector.

√ Bereadyforchallenges. In any long-term relationship, change happens. PPP is, above all, a partnership, and it needs to be designed with chal-lenges, changes and resolution in mind. Problems need to be elevated to appropriate levels of management before they become disputes or worse.

This chapter will review methods for the Government to support project pre-paration and implementation, following pre-feasibility and feasibility studies. Section 4.1 describes the procurement process for PPP projects, and section 4.2 describes the implementation and monitoring of PPP projects.

4.1 PRoCUREMEnT

Once the feasibility study is completed and key risks are identified, the Government can revisit its decision to structure the project as a PPP. Having the project approved as a PPP at this advanced stage of development ensures political buy-in of the process before the Government and potential bidders start investing further in project development.

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This confirmation of a PPP project needs to be supported by the different interested line ministries and Government agencies, coordinated in a manner similar to the original PPP decision. Government approval of projects may in-volve approval by the legislature (e.g. parliament). Such an approval ensures political buy-in and puts the investor on a stronger footing. However, it can also be slow, costly, political and creates risks of rejection at various stages for reasons not necessarily associated with the substance of the project.

As part of this approval process, the Government should specify the forms of support available to that project. This decision on Government sup-port needs to be made before the bidding process commences, to maximize competition by informing potential investors of all sources of value for the project.

Government support is discussed further in chapter 5.

4.1.1 Direct negotiations and Unsolicited Proposals

Private sector developers will often want to create a dominant position for an investment, through unsolicited bids or direct negotiations. Developers perceive direct negotiations as a less expensive approach to business develop-ment.

Public sector actors often idealize the speed and ease of direct negotia-tions, hoping that relationships and mutual interests will help overcome any challenges encountered. The promises of a quick solution of direct negotiation often fit better to the short horizons of election cycles and political agendas.

Box 4.1: Benchmarking

Where a project is not subject to competitive pressures, or that competi-tion is insufficiently robust, the Government should submit that project to benchmarking to verify that the price represents best value as compared to similar projects, in the sector and in similar countries. This can be a challenging process where equivalent projects are not readily available, or where relevant information is not available.

Unit prices for materials and services can help establish an aspect of the benchmark, but provides only a part of the puzzle. The public sector comparator (PSC) can also set boundaries on pricing though these are generally difficult to establish objectively.


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However, direct negotiations are generally longer, more expensive and more likely to fail.3 Directly negotiated arrangements are also more vulnerable to challenges by new Governments or opposition groups – without the validation of a transparent, competitive process, direct negotiations are more vulnerable to claims of bias, corruption, incompetence and inappropriate use of Govern-ment resources.

This said, such proposals can be a good source of innovative ideas for the Government, and can help Governments identify new project concepts. For this reason, mechanisms have been developed to encourage unsolicited bids, while also ensuring that competitive tendering is used, where possible, when selecting the best investor.4 These mechanisms involve a careful review of such unsolicited proposals to ensure they are complete, viable, strategic and desirable. The project is then put out to competitive tender, with the proponent of the unsolicited proposal receiving some benefit, for example:

– a bonus on the proponent’s scoring in the formal bid evaluation (i.e. additional points allocated to the proponent’s total score when its bid proposal is evaluated),

– a first right of refusal, enabling the proponent to match the best bid received (the “Swiss challenge”),

– the right to automatically participate in the final round of bidding, where there are multiple rounds of bidding (the “best and final offer” system), and

– compensation paid to the proponent by the Government, the winning bidder or both.

The first two of these solutions can significantly dampen competition, where potential competitors perceive the unsolicited bidder as having an unfair advantage. Countries like South Africa prefer competitive bidding (with no advantage to the unsolicited bidder) to maintain competitive pressure, while paying compensation to unsolicited proponents (if it is unsuccessful in the bid process) providing the private sector with incentives to propose and drive projects.

3. See inter alia: “Getting value for money from procurement,” National Audit Office (UK); In-adomi, Independent Power Projects in Developing Countries: Legal Investment Protection and Consequences for Development (2010).

4. Hodges and Dellacha, Unsolicited Infrastructure Proposals: How SomeCountries IntroduceCompetitionandTransparencyAnInternationalExperienceReview, 2007.

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Box 4.2: Unsolicited Bids in Colombia

The Ministry of Transport, DNP (the planning agency) and the MOF en-acted detailed regulations regarding the acceptance of unsolicited propos-als from the private sector.5 If accepted as a viable project, an unsolicited proposal must then go through a competitive public procurement.6

The proposer participates in this selection process like any other bidder. If the proposer’s bid is not selected, however, then the winning bidder must reimburse the proposer for certain of its expenses as approved by the responsible Government agency prior to the start of the tender process. In such case, the proposer also retains responsibility to the winning bidder for the quality of the relevant studies.

In other jurisdictions, the nervousness about unsolicited bids, associated al-legations of corruption and the difficulty to achieve real competition leads Governments to reject them outright. This results in the loss of the private innovation and proactivity found in many unsolicited bids. But, where the Government has demonstrated an inability to resist direct negotiations or where additional efforts are needed to reinforce transparent, competitive bid-ding, such extreme approaches may be merited.56

4.1.2 Procurement Process

Competitive procurement of PPP involves careful preparation, reviewing risks and their allocation, identifying market requirements and creating a competi-tive process for selection of the right private partner – a process that maximizes competition, but keeps costs down, fits with political imperatives, but with the benefit of international good practice, and reaches conclusion quickly, without going so fast that quality or competition is lost.

In its most basic form, the tender (or bid) process involves a party offering a project to the market and asking for bids from parties interested in perform-ing the project, or some part of the project. Tendering (or bid) procedures are meant to achieve efficiency, manage costs, maintain quality, encourage expediency and maximise value-for-money. PPP transactions take time to prepare, and need the attention of experts to ensure that risks and financing are managed properly and efficiently and taken to market in a form and manner

5. MOT Decree No. 4533 of 2008.6. See requirements of Laws 80 of 1993 and 1150 of 2007.


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designed to attract as many high quality bidders as possible and thereby keep costs down.

Box 4.3: Unsolicited Bids in the Philippines

The proposer sends proposal documents, together with relevant company information and the proposed project agreement to the implementing agency, for evaluation. If the implementing agency accepts the proposal, it is reviewed by the competition commission

If the unsolicited proposal is approved by the competition commission, the implementing agency can launch a Swiss challenge or mandatory price test. Challengers are given 60 business days to prepare competitive bids and the original proponent has 30 business days thereafter to match the most responsive bid or the best price proposal received.

The procurement process is document intensive, amounting to hundreds and even thousands of pages (though standardization of documentation can help mitigate this burden). Technical and legal documents will need to be drawn up, reviewed, debated, released, debated with bidders and finalized, all in a relatively short period. The more that is done early in the procurement process, the less negotiation that is required and the fewer the last minute compromises that need to be made (these last minute compromises often result in unfortunate errors or badly designed solutions for key project func-tions).

More importantly, PPP is demand driven. Investors will be selective, focusing on those projects that are clear, well prepared and evidence strategic priority for and buy-in from the Government. Issuing clear, market standard documentation can go a long way to attracting more, high quality bidders. One of the means of reducing the risk in PPP projects, both to investors and to the state, is ensuring that PPP projects are prepared properly, with appropri-ate attention to fiscal risk management and that they tie in well with national and regional priorities. PPP programmes are becoming better integrated with overall planning identification systems as a result of heightened awareness of the dangers of an ad-hoc approach to selecting projects to be implemented as PPPs. The amount of risk acceptable to sponsors and lenders is stimulated by competition. A larger market for PPP can be achieved through the standardi-zation of project risk allocation and reduced transaction costs.

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Box 4.4: Bidder negotiations

In Algeria and Morocco, the procurement procedures do not permit the procuring authority to hold structured discussions simultaneously with rival bidders. By contrast, discussions with bidders are permitted in Israel and Egypt.

EuropeanInvestmentBank,StudyonPPPLegal&FinancialFrameworksin the Mediterranean Partner Countries, Volume 1, May 2011.

Formulating tendering procedures is a question of balance between control, flexibility and efficiency. The contracting agency will want to:

– protect its own negotiating position vis-à-vis the bidders and obtain the best price from the bidders

– maintain sufficient flexibility to adapt the procedure and the project in accordance with changing circumstances

– manage the entry costs for bidders, or possibly compensate bidders, in an effort to attract a number of serious, highly qualified bidders to improve competition and the likelihood of finding the right bidder at the best price.

Lack of expertise and resources on the part of the contracting agency can reduce the efficiency of tendering procedures. Often the contracting agency will not have significant experience in the type of procurement in question, whether the project is a one-off or if the nature of the procurement is different than that normally encountered by the contracting agency. It is essential that the Government assemble a solid project team, supported with experienced advisers, to structure, document and implement the procurement process. Lack of resources, manpower, money or time constrains the contracting agency’s ability to develop a project. The contracting agency may not be suf-ficiently familiar with the market to know market standards in prices, terms, technology and methodology. Expert advisers – financial, legal, technical and others – are expensive resources to access, but essential to manage market expectations, and thereby obtain best price and quality bids.


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√ Donot cut corners inprocurement. It may seem easier to enter into direct negotiations instead of using competitive procurement, but it isn’t. It takes longer and costs more money. Maximizing competition through good, transparent, competitive procurement is one of the most important functions of PPP.

√ Investinpreparation. PPP preparation takes time and money, both of which will be wasted if the preparation stage is curtailed or done on the cheap. Work done during preparation saves substantially more time and money later in the process.

√ Becleartobiddersaboutwhatyouwant. Indicate clearly what results, milestones and indicators you want the investor to achieve, in particular in the bid evaluation criteria and their weighting. Help bidders to give you what you want, don’t make them guess.

√ Beopentodiscussingyourexpectations,biddersmighthavesomeuse-ful suggestions. Take the time to discuss with bidders, and use the dia-logue to improve the project. But make sure that dialogue is transparent and fair, to avoid any perception of bias or corruption

√ Becautiouswhenselectingthewinningbid. If a bid seems too good to be true (financially, technically or otherwise), then it probably is. Look carefully at the detail, whether it is a fixed and complete bid; if anything looks unconvincing it may be wise to address it or even reject the bid outright.

This lack of experience may also limit the contracting agency’s ability to design the works and select the most advantageous commercial structure for the project. The contracting agency may not appreciate the most recent in-novations in design and construction, or may not have available financial and commercial advisers aware of the different structuring options available. The contracting agency may therefore want to use the tendering procedure to ob-tain proposals on these matters from the bidders as part of their bids. However, the more options the bidder is allowed to offer in its bid, the more complex is the process of analyzing and comparing bids received.The following describes the steps involved in a typical tendering process. Not all tendering procedures will follow this format, particularly where the nature of the project or the nature or number of bidders requires some divergence from common practice.

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Furthermore, specific countries or industries may apply some variation of this procedure. Some systems allow for a more open approach to bidding, allow-ing more flexibility in the process to improve dialogue between the bidders and the contracting agency and to adjust the project to fit with the results of the dialogue.

However, this flexibility also improves the opportunity for corrupt prac-tices, and therefore many countries require a more closed approach to bidding. Whatever the constraints imposed by such processes, the concepts discussed below will be relevant to most tendering situations.

4.1.3 Pre-qualification

The bidding process is generally lengthy and costly, for the bidders and for the contracting agency. In order to manage the cost and time outlay, the contract-ing agency may wish to pre-qualify those parties most likely to provide an attractive bid, and avoid the time and cost of managing bidders who do not have the fundamental qualifications or financial substance that would enable them to undertake the project. Pre-qualification also encourages good bidders, who will prefer a smaller field of equally qualified competitors.

Box 4.5: Pre-qualification Criteria for an Airport Concession

Each sector and project has its own specificities. Airports, for example, represent a complex set of commercial arrangements linked to a monopoly service. Pre-qualification criteria for an airport PPP may include:

– level of owned total assets in excess of a set amount – recent experience managing the construction and operation of an

airport of similar size and complexity in a similar market – recent experience raising similar amounts of debt and equity – exclusion of air carriers, or of companies owned by air carriers,

or of operators of airports located close to the site (e.g. within 800 km) (which would create a natural conflict of interest)

Clearly these criteria will need to be adjusted based on market realities.

The pre-qualification criteria tend to focus on the financial substance of firms to ascertain whether they can fulfil the relevant financial obligations, a history of attracting the required financing, and specific experience with implementing PPP projects of a similar nature and ideally in the country or one with similar economic, political and/or geographic characteristics. The contracting agency


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may choose to limit the number of bidders that can be pre-qualified, for exam-ple to a list of six, to avoid having too many bidders.

4.1.4 Bid

The pre-qualified bidders are then invited to enter into the bidding process. The contracting agency provides the bidders with tender documents (includ-ing project documents and technical specifications) and access to relevant data. The type of data provided, and the nature of the technical specifications, will depend very much on the technical solution selected by the contracting agency and the extent to which the bidder is to be responsible for design of the works. The contracting agency may wish to look to the bidder to provide value engineering and technical innovations, but must then be ready to compare bids on that basis.

Box 4.6: Columbian highways and Least Present Value Auctions

The first generation of Colombia’s highway concessions, with investment of just over US$1 billion in 13 projects, in the mid-1990s had severe prob-lems. The first round of concessions was plagued by diminished competi-tion (seven out of 13 projects were awarded through direct negotiations), contract renegotiations, delays, large payments for traffic guarantees and cost overruns in land acquisition.

The second round of concessions included only two projects, one can-celled for breach of contract, while the second was late and financially weak.

In its third round of concessions, Colombia used the “Least-Present-Value-of-Revenue” auction, wherein it announced the discount rate and the toll that the concessionaire will be allowed to charge. As demand increases so do tolls in order to maintain traffic flow conditions. Firms bid on the pre-sent value of toll revenue, and the lowest bid wins the concession contract. The concessionaire collects tolls until the present value of tolls equals the winning bid; then the road is transferred to the state. This round was far more successful, providing commercial priorities and attracting a number of bidders though it is still too early to assess.

Generally speaking, more resources invested in project preparation results in higher quality information for the bidders which in turn encourages more competition and higher quality and more innovative bids.

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The bidders then perform their due diligence, to assess the viability of the project and identify the technical solution and financial proposal that will make up their bid. The contracting agency will invite comments from bidders, in pursuit of the best value for money and a bankable project, through possibly multiple iterations of comments. The process of obtaining and understanding bidder concerns may involve exchanges of written comments, bidder confer-ences, lender meetings, different media for sharing questions and answers (e.g. web based, teleconferences and videoconferences) and discussions amongst advisers.

Once this dialogue is complete, bids are submitted. These bids may or may not be “underwritten” (where lenders undertake to provide financing). The extent to which lenders can make firm commitments will depend on the amount of time provided to them to perform their due diligence, the amount and quality of information available, and the nature of the competition. Ask-ing lenders to do due diligence in advance of bidding is expensive, since each bidder will have a different team of lenders and their advisers. It is usually more efficient to reduce the number of bidders to two or three before com-mencing such dialogue with lenders (See Box below).

Box 4.7: BAFo

The contracting agency may choose to include additional stages of com-petition, for example reducing the competition to two bidders who will then be asked to further refine their bids and submit a best and final offer (BAFO), further to which the contracting agency chooses the preferred bidder. This process allows the contracting agency to use the available competitive pressure to further motivate bidders, and possibly obtain firm financing commitments.

Bids received will be evaluated against specified criteria. The criteria need to be described thoroughly in the bidding documents to help bidders understand the contracting agency’s needs, and to improve the quality of bids received. The criteria applied to evaluate submitted bids usually include:

– technical, e.g. • quality of proposed contractor and sub-contractors • technology proposed and its reliability • construction program robust and responsive to the timeframe

required


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• plan for sourcing materials, including managing potential prob-lems such as customs constraints, transportation constraints, alternate sourcing, etc.

Box 4.8: Sample Bid Evaluation Criteria for an Airport PPP

A technical solution compliant with the airport masterplan and with specifications provided. This could respond to a fixed technical solution imposed by Government, or a new solution based on output specifica-tions. The solution may also have an artistic component of aesthetic value.

A legal solution compliant with bid documents. The Government may allow bidders to proposed amendments to the PPP agreement. If amend-ments are proposed, bidders will lose points if the amendments place more risk on or increase the cost for Government.

A financial proposal indicating the extent of Government funding, invest-ment, or guarantee needed or the share of project revenues, possibly after a minimum threshold is reached or only after a specified point in time. For cost-sharing arrangements, the one asking for the lowest subsidy will earn more points.

A financing plan showing how and from whom the bidder intends to mo-bilize debt, equity and other financial instruments to fund the project and how much due diligence has been completed – all supported by letters of intent or commitment from those different financial investors and lenders. Alternatively, Government may require an underwritten bid (where lend-ers commit unreservedly to provide financing), although this will require careful market analysis as underwritten bids are difficult and expensive for bidders.

Ricover, Cuttaree and Delmon, Airport Development through Public Pri-vate Partnerships: Guide for decision makers (World Bank, 2013).

– environmental, social and economic risks mitigation – operational regime, quality of services to be delivered, lifecycle costs

and maintenance regime – the extent to which the bidder agrees to the proposed contractual terms

and other documentation proposed by the Government

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– financial, e.g. • the level of tariffs to be charged to consumers and the contracting

agency • robustness of the bidder’s financial model • the present value of the support required from the Government • the level of revenue sharing • the soundness of the financing plan of the bidder, indicating where

the project company will access debt and equity and what part of the lenders’ and investors’ due diligence process is complete and to what extent the lenders commit to financing the project.

Evaluation of each criterion may be pass/fail or scored. The contracting agen-cy needs to be in a position to establish weighting and scoring mechanisms for the relevant criteria in the manner most appropriate for the project and describe this in detail in the bid documents, so that bidders can deliver what is desired of them. Weighting between these different bid criteria will help bid-ders understand the contracting agency’s principal goals in the procurement process.

It may be difficult to identify criteria that will allow a true comparison between bids, for example technical solutions may be vastly different one from the other or the commercial arrangements requested by a bidder (for example the type of risk allocation they seek) may vary significantly. On the other hand, innovation is one of the principal benefits of PPP, and the contract-ing agency may want to allow variant bids (see Box) to maximize innovative solutions.

Box 4.9: Variant Bids

Variant bids are submitted in addition to compliant bids. They do not com-ply specifically with the requirements set out in the tender documentation, but involve a technical innovation or some other change in approach (to the extent permitted by the contracting agency) which will reduce costs or improve efficiency such as, for example, a different technology or tariff structure, which the bidder believes better satisfies the contracting agency’s needs.

4.1.5 Preferred Bidder

Once bids are received, the contracting agency will evaluate those bids and select preferred bidder(s). The contracting agency will negotiate with the preferred bidder any open issues (to the extent permitted by law), finalize the


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commercial and financial arrangements, award the project and usually sign the concession agreement and other key contracts subject to the conditions precedent discussed below. Multiple preferred bidders may be selected for additional rounds of competition, for example through best and final offer (BAFO – see Box 4.7) or competitive dialogue (see Box 4.10, below). Ad-ditional rounds need to be carefully managed, to maintain transparency, avoid any perception of favouritism or corruption, and limit the added cost and delay such a process implies.7

Box 4.10: Competitive Dialogue

The European Union uses a “competitive dialog procedure” which allows Governments to enter into a dialogue with pre-qualified bidders before finalizing the tender documentation. It allows structured discussions with each of the pre-qualified bidders and helps identify key issues and amend-ments needed for the project.7

4.1.6 Single Bids

Even in the most sophisticated markets, creating investor appetite can be a challenge. Some 30% of PPP projects in the UK only receive 2 bids (and these figures are from the days before the financial crisis!).8 The real possibility of a single bidder should inform the procurement process; the procurement process should put the contracting agency into a strong negotiating position if there is only one bidder, limiting the opportunity of that bidder to hold the contracting agency hostage. The contracting agency needs to be prepared to start the bidding process over if it is not happy with the bidder’s proposal. Politically mandated time frames for procurement can be a useful tool to ac-celerate the process, but can become a fatal weakness if a single bidder can use the Government’s time restrictions to its advantage.

Where a single bid scenario is encountered, benchmarking of the bid may be a useful mechanism to help the Government understand if it is getting good value, and to help reassure other stakeholders that the lack of competition is not a fatal flaw in the process (see Box 4.1).

7. European PPP Expertise Centre, The Guide to Guidance: How to Prepare, Procure and Deliver PPP Projects (European Investment Bank 2012). http://www.eib.org/epec/resources/guide-to-guidance-en.pdf

8. National Audit Office (UK), “Improving the PFI Tendering Process”, (March 2007).

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4.1.7 Unsolicited Proposals

Governments often receive proposals directly from private investors. These proposals can be a good source of innovative ideas for the Government, and can help Governments identify new project concepts. However, unsolicited proposals are difficult to manage and can be a source of significant mischief. They involve a perception of anti-competitive behaviour, and even fraud and corruption, unless they benefit from the validation of transparent, competitive tendering. For this reason, some countries reject unsolicited bids outright, pro-viding no benefit or compensation to those offering such proposals. In particu-lar in countries without the resources and sophistication to manage unsolicited bids, this offers a robust method to avoid the complications and dangers of unsolicited bids; but also deprives the Government of the advantages.

Where competition is not possible or practicable, legislation often pro-vides for market testing to ensure that the pricing and terms agreed for an unsolicited bid meet market standards (are consistent with what the Govern-ment would have achieved through competition). But wherever possible, unsolicited bids should be subjected to competitive bidding, in pursuit of the best deal for the contracting agency and to cleanse the perception of corrupt practices through the fire of transparency.

Where proponents of unsolicited bids are to be given benefits, mecha-nisms have been developed to encourage unsolicited bids, while also requir-ing that competitive tendering is used when selecting the best investor.9 The unsolicited bidder will generally be viewed as having an unfair advantage, so any preference given to the unsolicited bidder (such as a right of first refusal or bonus during bid evaluation) is likely to further stifle competition.

A more robust approach is to use competitive tendering, but without any advantage to the unsolicited bidder. Instead a fee is paid to the unsolicited bidder if he does not win the bid, as compensation for the value added by his efforts to develop the project.

Unsolicited bids should not provide a mechanism for private parties to claim some priority or right over projects the Government was already plan-ning to implement, by acting faster than the contracting agency. The definition of unsolicited bid will need to be crafted carefully, to avoid abuse and perverse incentives.

9. Hodges and Dellacha, Unsolicited Infrastructure Proposals: How SomeCountries IntroduceCompetitionandTransparencyAnInternationalExperienceReview, 2007.


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4.1.8 Sole Sourcing

The circumstances allowing the award of the project without competitive pro-curement should be limited. The cases where this might be acceptable, include – where the project is of short duration and a small value – the project is critical to national defence or national security – there is only one possible source of the services (due to the skill set of

the provider, intellectual property or otherwise) – where there has been repeated efforts to implement a competitive pro-

cess, but with no success, yet there is one party willing to undertake the project on the same terms that failed to attract competition

Whenever a project is proposed to be awarded without competitive procure-ment, the mechanism to apply for such a waiver should be managed by an ap-propriately high level authority. The decision process should be made public and transparent; to allow other stakeholders to comment if they have issues, and there should be a mechanism for those disgruntled stakeholders to appeal against the decision.


√ Projectfinanceiscomplex, get the right advice, be ready to pay for it, if properly managed it can save you time and money.

√ While protecting the contracting agency’s interests, listen to lenderconcerns. Focus on the lenders’ key needs and perceived risks, but don’t let them drive the agenda. Take the time and effort to make life a little easier for the lenders. It is likely to make your life easier in the long run. Don’t forget that the lenders play an important role in testing a project before financial close to find any weaknesses and in ensuring proper implementation after financial close.

4.1.9 Financial Close

Lenders may be introduced into the bidding process before or after bids are submitted. No matter when they are involved, lenders will not be finally com-mitted to the project until financial close is achieved. The project company will generally not be bound to the project in any meaningful way until financial close, which often will be a condition precedent to (must be satisfied before) effectiveness of the concession agreement and other key contracts.

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Before financial close, lenders will want to confirm that the risk allocation for the project is “bankable”, a general term referring to the level of comfort that a lender will require from a project given the context of the project (sec-tor, location, size, etc.).10 The lenders will then establish a list of conditions precedent (CPs) that must be satisfied before the lending arrangements become final, and before first drawdown can be made. Those CPs must be fulfilled or waived before financial close can occur.

Box 4.11: Debt-Equity Gearing

Some Governments establish constraints on the level of debt that can be accessed by the project company. A higher debt:equity ratio (higher “gear-ing”), meaning that the project company obtains a higher proportion of debt capital, generally results in a lower tariff and therefore cheaper ser-vices for Government and consumers. This is generally viewed as a good thing; however a very low ratio of equity can also make the project more vulnerable to changes in circumstances or crisis (the cushion of equity allows for more flexibility when challenges are encountered).

4.2 MAnAGEMEnT/MonIToRInG oF IMPLEMEnTATIon

Financial close is not the end of the process for the Government; it is only the beginning. Managing the PPP agreement starts at the inception phase of the PPP project cycle, designing appropriate solutions and managing input from different advisers. It continues through the selection of the investors and then during implementation of the project. After the exuberance of financial close, the real work begins. This is a critical point, and one often ignored by policymakers, to their detriment.

The project team needs to adjust to its new functions. The team needs to retain its knowledge of project contracts and processes, to make sure the contracting agency fulfils its obligations and to monitor the project company’s activities and impose any penalties. It is likely to need more technical support for this regulatory function, with periodic financial and legal support to en-force the contract.

Each of the issues discussed below needs to be considered by the Govern-ment before starting procurement, to ensure they are in place, established by contract and/or by law and properly resourced from the very beginning of project implementation.

10. See Annex A6.


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Box 4.12: The Importance of Implementation

“… boosting asset utilization, optimizing maintenance planning, and ex-panding the use of demand management measures can generate savings of up to $400 billion a year [globally].” “Maintenance planning … [should] … consider costs over the complete life of an asset and find the optimal balance between long-term renewal and short-term maintenance. By one estimate, if African nations had spent $12 billion more on road repair in the 1990s, they could have saved $45 billion in subsequent reconstruction costs.”

McKinsey Global Institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013), page 7.

4.2.1 The Project Team

During implementation, the project team must adjust to a rhythm and access to technical capacity needed to ensure that the contracting agency and project company comply with their obligations in the manner and time required. The regime established needs to conform to local practices, without compromis-ing the monitoring and control functions needed to ensure that the Govern-ment complies with its obligations that any non-compliance by the project company is caught early and any conflicts are addressed before they become disputes.

Communication is key, providing a forum for the parties to communicate with each other, allowing the project team to communicate quickly where it perceives a threat to the project, and any problems or defaults are communi-cated quickly so that solutions can be identified and implemented as quickly as possible. These different functions will help in dispute resolution and avoidance. Issues need to be identified, discussed and addressed as quickly as possible in order to reduce tension and avoid disagreements becoming conflict and finally disputes.

4.2.2 The Implementation Process

Project implementation can be split into the development phase and the de-livery phase. For ease of discussion, the following assumes a project with distinct construction and operation phases.

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Box 4.13: Squeezing the Stone

The UK has identified potential efficiencies and savings during imple-mentation, in particular

1. Renegotiating the scope of contracts, through – removing services no longer required and reducing over-specified

performance levels – changing the profile of planned maintenance – cancelling contracts for which there is no longer a requirement.

2. Improving risk allocation by – taking back energy consumption risk – reducing requirements for hand-back condition to reasonable

levels – sharing in insurance premium reductions.

3. Improving efficiency by – increasing occupancy levels of buildings – improving energy efficiency through improved technology – using government purchasing power to lower utility and consuma-

bles costs and merging contracts with the same provider into one to reduce management costs and introduce economies of scale.

4. Cutting waste by – preventing out of hours overtime work – mothballing unused facilities, and finding alternative uses for

underutilised assets – reducing inflation mechanisms which do not reflect actual cost

increases

5. Avoiding additional costs through – better contract management to remove unnecessary in-service

changes – simplifying procedures and charges for variations.

Infrastructure UK, “A new approach to public private partnerships”(December 2012)


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After procurement, the Government must manage the development phase, during which design, capital investment, testing and completion of construc-tion occur. This implementation team will:

– approve construction arrangements, design, detailed design, construc-tion completion (for each phase, and for final completion) readiness for operation of the works and commencement of operations

– arranging asset, land and staff transfers – coordinate Government obligations – review and monitoring variations requested – verifying provision and receipt of project documentation, including

design drawings, equipment specifications, completion certificates, operating certificates and warranties

The development phase ends once key capital expenditure has been completed and approved. It is followed by the delivery phase, during which the Govern-ment:

– establishes its internal protocols to manage the project, monitor pro-ject company compliance with its obligations and ensure contracting agency compliance with its obligations

– conducts regular project review meetings, and ensures provision and receipt of project information, including drawings, financials and periodic progress reports

– monitors Government obligations and liabilities, ensuring that Gov-ernment complies with its obligations and budgets for its liabilities as they arise

– encourages early anticipation, identification and resolution of conflict.

4.2.3 operations Manual

The operations manual will provide guidance on every aspect of this process, including standard form documentation, model process schedules and other practical assistance for project implementation. The Government can use the advisers it appoints to help procure the project to help it prepare the operations manual.

4.2.4 Monitoring Performance

The Government may be assisted in its monitoring/management function by third parties. For example, an independent specialist may be appointed under the contract to act as the monitor of compliance with contract obligations by

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the parties (sometimes confusingly referred to as a “regulator”).11 Equally, the sector regulator (e.g. the water sector regulator) will be monitoring the project company’s performance in any event, and may agree to monitor generally the parties’ compliance with their obligations under law, which may well coincide with their obligations under the relevant contracts. The difficulty with this ap-proach is the need for the regulator to operate in accordance with its mandate, with the usual discretion given to regulators. Often, this discretion cannot be limited (or “fettered”) and therefore the regulator must comply with his legal mandate first and the contractual role as a secondary function. The parties will need to manage the risk that the duties enforced by the sector regulator are not inconsistent with the parties’ obligations under the contracts. The regulator’s requirements are likely to change over time, and the contracting agency is likely to bear the risk of any such changes.


√ Put inplace the rightcontractingagency team. The project will not manage itself, failure to assign a sufficiently senior and expert team to manage project implementation (i.e. after financial close), with neces-sary funding, can turn the best prepared project into a failure.

√ Prepareforthefuture. Decide up front what happens later in the pro-ject, deferred decisions only become more expensive and contentious. Decisions to make changes need to be made in advance, such decisions later in the process, during implementation, can be expensive and time-consuming.

√ Beflexibleandprepareforconflictresolution. No contract can contem-plate every eventuality, so plan to resolve challenges collaboratively – i.e. a PPP should be managed like a partnership.

4.2.5 Refinancing

After completion of construction, once construction risk in the project has been significantly reduced, the project company will generally look to refi-nance project debt at a lower cost and on better terms, given the lower risk premium. In developed financial markets, the capital markets are often used as a refinancing tool after completion of the project, since bondholders prefer

11. Tremolet, Shukla and Venton, Contracting Out Utility Regulatory Functions (World Bank 2004).


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not to bear project completion risk, but are often able to provide fixed rate debt at a longer tenor and lower margin than commercial banks. In developing markets, refinancing PPP debt can provide a good opportunity for local pen-sion funds and insurance funds, which have long-term capital available but are too risk averse to finance new projects – established PPP transactions with a long-term, stable revenue stream may provide an ideal investment opportunity for such funds.

This refinancing process can significantly increase equity return, with the excess debt margin released and the resultant leverage effect. While wanting to incentivize the project company to pursue improved financial engineering, in particular through refinancing, the contracting agency will want to share in the project company’s refinancing gains (for example in the form of a 50–50 split), and may or may not want the right to insist on refinancing when desir-able. The contracting agency’s project management team will need to have the resources and skills available to manage refinancing issues.

Refinancing may be essential, e.g. when the project can only access short-to-medium term debt (say 5–7 years) and project revenues are insufficient to repay the debt during this period, the project company may arrange to repay much of the debt principal in a bullet payment at the end of the debt term. This bullet payment will need to be financed. The risk of the inability to refinance the bullet payment will need to be managed, for example with stand-by debt or equity or other contingent support from the shareholders, the Government or a third party like a bank, multilateral or bilateral lending agency.

There is an opportunity for the Government to become more proactive in refinancing, for example using bank financing during the construction period, with a mandatory refinancing once the completed works have demonstrated their performance, probably on the debt capital markets. Government involve-ment would facilitate this process, absorbing some or all of the risk of avail-ability of refinancing. Or, offering medium term PPP concessions (7–10 years) which match better the available debt tenors.

4.2.6 Selling down Equity

Many of the key sponsors are not normally long-term equity infrastructure investors, for example the construction companies who are often the key in-vestors in road PPP, or the equity funds that look for investments with short – medium term (3–7 year) exit opportunities. Investors will therefore look for the right to sell down their equity positions as soon as possible. The contract-ing agency will want the shareholders to remain invested until key project risks have been addressed, in particular construction risks. Sometime after completion of construction (usually 1–3 years) investors are generally per-mitted to sell-down part of their equity. Strategic shareholders are those who

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provide critical skills/inputs to the project company. The contracting agency will want to ensure the strategic investor retains sufficient financial interests in the success of the project, to align their interests, for a period long enough to ensure that design and construction meet requirements.

Box 4.14: UK Sharing of Equity Returns

As at writing, the UK Government plans to require investors to share super-profits earned by equity holders on PFI projects. The mechanism for sharing, and relevant levels, of acceptable returns have not been defined.

4.2.7 Dispute Resolution and Renegotiations

PPP projects have the characteristics propitious to recurrent renegotiations; they represent long term, complex commercial and financial arrangements, in heavily regulated sectors, subject to significant political sensitivities, vulner-able to changes in circumstances and often grounded in uncertainty (e.g. the condition of existing assets, lack of information on business data and ground conditions). Some 75% of transport PPP contracts and 87% of water and sani-tation PPP contracts are renegotiated at some point.12

Renegotiation is often perceived as failure, as a fundamental flaw in the project, or in PPP generally. This perception arises in particular from poorly managed or implemented renegotiation processes, which:

– can result in reductions in revenue flows and service standards (those most likely to be affected by such reductions in services and increases in costs are the poorest households);

– often lack transparency and are particularly vulnerable to corrupt practices; and

– can create a public and Governmental backlash against private sector involvement in other projects or other sectors.

There is no doubt that renegotiation is a difficult and dangerous process, but it is typical for long term arrangements (be they PPP contracts, commercial partnerships or marriages) to face change or conflict and need adjustment to address new information and circumstances. Renegotiation is a natural part of most projects and can be an opportunity to adjust the terms of a project to address the needs of the project (and the public) and actual circumstances

12. Straub, Laffont, and Guasch, Infrastructure Concessions in Latin America: Government-led Renegotiations, 2005. See http://PPP.worldbank.org.


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encountered by the parties, to the benefit of the parties and the intended ben-eficiaries of the project. It allows the parties to respond to unanticipated events and changes. To the extent it would be more beneficial for the PPP contract to be terminated, the renegotiation process can help facilitate the transition process, and help reduce the cost of termination and the stress involved. PPP projects must therefore be designed to address change and conflict quickly and effectively, and to facilitate renegotiation in a balanced, transparent manner in accordance with the spirit of the project.13

4.2.8 Expiry, Termination and handover

After delivery, whether the project is terminated early, or expires in accord-ance with expectations, the Government will need to manage the exit phase, for example the Government team will need to:

– evaluate exit options – review PPP agreement termination/expiry conditions to advise the

Government how to proceed in the event of a default or toward the end of the project

13. Delmon and Phillips, “Renegotiation of Private Participation in Infrastructure and the World Bank” (World Bank, 2007).

Key Lessons for Policy Makers

√ Renegotiationcanbeanopportunity, and can improve the PPP arrange-ments and protect the poor, if it is contemplated in advance, transparent and well managed when needed.

√ Beproactive. Establish mechanisms intended to catch disputes as early as possible. Early in the process, options are varied, relative cost is low, and the likelihood of immediate value-added resolution is higher.

√ Facilitationcanhelp. Softer processes are designed to use and develop relationships as the basis for finding mutually satisfactory solutions and can work better than more formal processes.

√ Getgoodadvice. Do not try to manage renegotiations with internal staff alone, no matter how good they are. Get the best, external advice. It will cost money, but will save money in the long run.

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– manage termination/hand-over, including to provide the Government with a clear understanding of rights, obligations and options

– identify relevant assets and other things that need to be transferred and assess their value

– procure a replacement project company or identify a public sector solution

– monitor the transfer of assets, staff and the business generally to the Government or an appointed entity.

The project implementation team will need access to appropriate expert advice and support to ensure that termination and hand-over are well managed. This is a complex issue that merits the cost of careful, expert attention.

chapter 4 procuring and implementing ppp transactions · expert advice has doomed many a ppp...

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