Contracts for Public Private Partnership (PPP) Options

Patricia Baquero

[email protected]

The National Conference Center, Lansdowne, VA March 25-28, 2008

IEF, May 2005

Contents



PPP options - General review



Basic principles for successful procurement



Commonly used methods for award of PPP contracts - characteristics, pros and cons



Prequalification or postqualification?



Single or multiple award stages?



World Bank procurement policies & procedures for different PPP options



Use of consultants/transaction advisors

2

IEF, May 2005

Public-Private Partnerships (PPP)

Include full range of arrangements for construction, upgrading, maintenance, and operation of infrastructure

PUBLIC SECTOR

• Public provision • Service contract • Management contract • Lease/Affermage • Concessions • Divestiture

PRIVATE SECTOR

3

Summary of responsibilities and risks under different PPP options

Responsibilities & risks

Ownership of assets Investment planning & regulation Capital financing Working capital Execution of works Operation & maintenance Management authority Commercial (demand) risk Basis of compensation

Service contracts

State or mixed Parent agency or separate public authority Public Public Private as specified Private as specified Public Public Less than 5 yr.

Management contracts

State or mixed Public Private Private Mainly public 3-5 years 4

Lease / Affermage

State or mixed Parent agency or separate public authority Public Public Parent agency or separate public authority Public Private State, negotiated with contractor Private Private Public Private Private Private Results 5-10 years

Concessions (incl. BOT)

State or mixed Private Private Private Private Results 10-30 years

Divestiture

Private None or state agency Private Private Private Private Private Private Privately determined Indefinite

IEF, May 2005 

Basic principles for successful PPP procurement

Best value for public money

  Economy – lowest cost possible on a whole-of-life basis considering commensurate benefits Efficiency – simple & swift process with positive results & without protracted delays    

Fairness

  Adequate promotion of opportunities among potential service providers Impartial, objective, consistent & reliable level playing field

Transparency

 Accessible, open & unambiguous procedures

Ethics

 Practitioners and service providers conduct business with integrity & ethics & mutual trust & respect

Accountability

 Practitioners enforce & obey rules & are accountable for actions involving public moneys 5

Commonly used methods for award of PPP contracts

  Competitive bidding

*

   International (ICB) Limited International (LCB) National (NCB) Direct contracting

**

unsolicited proposals) (includes renegotiation and

 Competitive negotiations ***

*

Acceptable by WB

**

Acceptable by WB exceptionally under set conditions

***

Acceptable by WB ONLY for consultant services IEF, May 2005 6

IEF, May 2005

Competitive bidding

–

Characteristics

     May involve prequalification of potential bidders Ample advertisement of opportunities at appropriate level    ICB – in media of world-wide coverage LCB – restricted to limited number of identified qualified bidders NCB – locally only when opportunity not likely to attract foreign competition or when ICB’s administrative/financial burden outweights its advantages Distribution of bidding documents including:  Clear procedures for offers submission   Clear procedures for bid evaluation & contractor selection Draft contract Public opening of bids Award to qualified bidder submitting responsive, “lowest evaluated bid” (offering lowest overall cost to the govt.) , determined upon application of objective criteria (generally cost or cost-related) 7

IEF, May 2005

Competitive bidding

–

Applicability

 Could be used for all PPP options  Normally mandated by national rules for privatization & concession of existing infrastructure services & in some cases, for concession of new projects involving monopoly franchise 8

   

Competitive bidding

–

Pros and Cons

PROS

Stimulates interest among broader range of potential service providers/operators/investors Market mechanism for selecting best proposal results in lower costs Ensures transparency in contract award (reduced claims/protests) Easiest to design when    Services fairly standard Technical parameters definable with reasonable accuracy Limited room for innovation & creativity     

CONS

Does not allow for objective evaluation of proposals’ quality aspects Complying with required stages & time frames may delay award Not suitable for non-standard services or inaccurate technical parameters Does not encourage bidders’ innovative & creative solutions (except in case of two-stage bidding) Requires sufficiently high performance securities to discourage unreasonably low tenders 9

IEF, May 2005

Direct contracting - Characteristics

 Contracting of single source without competition    Efforts should be made to determine   Price fairness & reasonableness ( e.g., benchmarks, prior tendered prices for similar services, detailed cost analysis, etc .) Benefits of not carrying out a competitive process Parties’ bilateral negotiations prior to contract signing involve price, requirements, and contract terms and conditions Renegotiation (negotiation with incumbent contractor of issues outside scope of original contract) & award without competition based on unsolicited proposal are forms of direct contracting 10

IEF, May 2005

Direct contracting - Applicability

   May be appropriate & acceptable under most national and MBD rules when     There is only one possible bidder capable of providing the required service ( e.g., due to proprietary rights, patented technology, or unique know-how ) & there is no reasonable alternative or substitute Competitively awarded existing contract needs to be extended for additional services of similar nature There is urgent and compelling need for uninterrupted service provision Justified by national defense or security reasons Suitable at pilot level in countries w/o proven legal & regulatory PPP framework to gain experience & build record with investors Used for management contracts, concessions, BOT, BOO, or privatization 11

    

Direct contracting

–

Pros and Cons

PROS

Only suitable economic & efficient method under certain set circumstances Saves time and costs associated with preliminary studies & competitive process Provides more space for technical innovation from private sector Provides maximum flexibility to public authorities Private sector more willing to invest in proposal preparation due to better chance of success     

CONS

Inexperienced public authority at risk of unequal negotiation Lack of transparency may lead to accusations of corruption by the community & media Private firms bear risk of capturing efficiency gains May require periodic bidding to help ensure longer-term economic efficiency Not favored by MDBs for general use IEF, May 2005 12

IEF, May 2005   

Unsolicited proposals

–

and applicability Characteristics

Presented by private entities/JVs for development of infrastructure projects in any sector for which no selection procedures have been publicly opened Most common unsolicited proposals   Claiming to involve the use of new concepts or technologies to address public authority’s infrastructure needs bidding could be used instead if project has already been identified by authorities) (though two-stage Claiming to address an infrastructure need not already identified by public authority (insufficient justification for direct contracting) Not allowed under many national and MDB rules, especially if projects require significant public financial commitments (e.g., guarantees, subsidies, or equity participation) 13

Handling of unsolicited proposals

Initial proposal requested & assessed Is project in the public interest?

NO

Proposal no longer considered Usual procedures when national rules allow for unsolicited proposals

* Extra evaluation credit or proposal preparation cost

YES

Formal proposal invited & examined Is project possible w/o involving proprietary rights?

YES

Authority engages in competitive selection granting incentives* to original proponent

NO

**

Variation: “Swiss challenge” – competitor offering lower-priced proposal gets award if not matched by original proponent

14 Authority publishes description of proposal’s essential output elements & invites comparable proposals** Alternative proposals received?

NO

Authority may be authorized to negotiate directly with original proponent

YES

Authority engages in competitive selection granting incentives* to original proponent

YES

Many alternative proposals received?

NO

Authority invites all offerors to competitive negotiations

IEF, May 2005 

Competitive negotiations

–

Characteristics and applicability

Authorities may combine elements of competitive bidding with direct negotiation to promote transparency while preserving proposals’ innovative or proprietary aspects   Most common procedures:    Step 1: Authority uses competitive process to solicit proposals (RFP) in response to broad output specifications to narrow number of potential proponents Step 2: Authority negotiates directly with preferred proponent (& with fallback proponents if negotiations with preferred one fails ) to work out detailed terms & conditions Alternative Step 2: Authority negotiates simultaneously with technically responsive proponents to enhance competitive aspects of negotiated transactions Competitive negotiations suitable for projects in which:  There is scope for innovation and/or different approaches  Financing on basis of standardized contract documents difficult to secure 15

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Competitive negotiations

–

Cons

PROS

Pros and

CONS

Proponents may be more creative & tailor projects to particular needs of public authority facility during negotiation stage Allow for comparative evaluation of quality attributes of proposals (e.g., work methods, investment plan, staffing plan, etc.) Remove potential incentives created by price-based competitive bidding for bidders offering unrealistic offers     Require a formal process with safeguards to ensure transparency and efficiency Evaluation of different approaches requires technical & financial expertise not always available at govt. level (external experts needed) Subjective merit-point evaluation system susceptible of corruption, manipulation & protests, delaying award Not favored by MDBs except for employment of consultant services IEF, May 2005 16

IEF, May 2005

Prequalification or Postqualification?

     Rationale for Prequalification (PQ)  High cost of bid preparation for PPP projects may discourage competition  Only bidders with adequate capabilities & resources to perform particular contract satisfactorily need to engage in proposal preparation Usual PQ criteria (to be applied on a pass-fail basis)   Experience in similar works/services (how many?) Past performance in similar contracts (how well?)   Capabilities with respect to key personnel, equipment, etc.

Financial position to face project’s investment/cash flow demands concurrently with any other financial commitments PQ criteria should be stringent but sized to fit required services PQ not to be used to restrict bidders to a preset number Postqualification of prospective contractor required in cases where PQ may not be possible or desirable, such as  Smaller projects attracting few interested/qualified bidders  Time constraints 17

IEF, May 2005

Single or multiple award stages?

 If due to PPP project simplicity, technical & performance requirements can be clearly defined ➨ Single Stage Bidding  If due to PPP project complexity, determining complete technical & performance requirements in advance may be undesirable or impractical ➨ Two-Stage Bidding  Single-stage Bidding  Tenders include offered (or requested) price and documents demonstrating technical proposal’s responsiveness to bid requirements 18

Two-Stage Bidding process

Invitation to 1 st Bidding Stage Evaluation of Technical Proposals

   

Clarification/Feedback Meeting with Qualified Bidders

  Employer issues bidding docs. including objectives sought and performance specifications Bidders asked to submit technical-only proposals Employer evaluates technical proposals’ responsiveness to objectives/performance specs.

Employer verifies continued bidders qualification Bidders may be invited to discuss content of tech. proposals and tech./commercial changes required Employer prepares minutes of required changes and may amend bidding documents based on discussions

Invitation to 2 nd Bidding Stage



Technical/Financial Evaluation and Award

  Bidders invited to submit 2 nd stage bids including final technical proposals and priced bids Employer evaluates 2 nd criteria stage bids per evaluation Award to qualified bidder with responsive, lowest evaluated 2 nd stage bid 19 IEF, May 2005

IEF, May 2005   

WB procurement policies & procedures for service contracts

WB finances fees and incentives (when applicable) Selection procedures per Procurement Guidelines (similar to those applicable to goods and works) WB’s Sample Bidding Document for non-consultant services      Encourages expressing technical requirements in terms of results Requires submission of performance security Contemplates lump-sum payments according to payment schedule & linked to outputs delivery Provides for optional performance incentive compensation, liquidated damages & lack of performance penalty Prescribes award to qualified bidder with lowest evaluated, responsive bid 20

IEF, May 2005  

WB procurement policies & procedures for management contracts (1/2)

WB finances fixed base fee and performance-based payments & sometimes rehabilitation, improvement or emergency work and operations investment funds managed by the contractor

Sample doc. for Output- and Performance-Based Road Contracts (OPRC)

   Most payments based on measured outputs reflecting specified service levels Allows for inclusion of rehabilitation, improvement & emergency works Includes annex with sample technical specifications 21

 IEF, May 2005

WB procurement policies & procedures for management contracts (2/2)

New PQ & Sample documents & Technical Note for Management Contracts

 TN provides guidance for using other 2 docs., choosing appropriate selection method & understanding characteristics & modalities of management contracts    PQ document based on that for Procurement of Works Bidding document includes alternative selection approaches to chose from depending on nature of services 

Option A –

Single-Stage Bidding process, with 3 possible selection methods:   Lowest Evaluated Cost ( governed by Procurement Guidelines ) Suitable for management services focused to O&M, with or w/o investment fund mgmt. QCBS & Fixed Budget Selection ( governed by Consultants Guidelines ) - Suitable for management services leaning toward technical assistance 

Option B – Two-Stage Bidding process

Model contract based on GCCs for Works enables:     Clear definition of expected services, including responsibilities for know-how transfer, training & (where relevant) managing capital works & finance Clear delegation of management authority Clear and appropriate contractor’s remuneration distinguishing between service obligations & performance targets Improved mechanism for preserving the relationship in the face of changes and disputes 

WB procurement policies & procedures for concessions

  WB finances public owner-committed contributions ( e.g, equity, assets ) & subsidies (OBA) Policies apply to BOO/BOT/BOOT, concessions & similar arrangements  Concessionaire’s selection method linked to way it will have to procure Bank financed goods, works, & services:    If selected through Bank-acceptable ICB procedures   Concessionaire free to procure G, W & S required for facility or for producing promised outputs, using own procedures Loan Agreement to specify type of expenditures to which Bank financing will apply If not selected through Bank-acceptable ICB procedures  G, W, & S required for facility or for producing promised outputs & to be financed by WB to be procured through Bank-prescribed ICB procedures (unless OPCS Nov. 7, 2005 OM apply) ICB procedures acceptable to the Bank   Not necessarily Bank-prescribed ICB procedures but assessment required to ensure they meet procurement principles NCB appropriate in special cases when conditions for NCB are present  No WB standard/sample bidding documents available for lease or concession contracts IEF, May 2005 23

IEF, May 2005    

Key aspects of contract design for concession-type contracts

Risks (e.g., commercial, political, exchange rate, etc.) to be allocated to party which can best manage each Potential bidders to be consulted in areas of uncertainty on private sector’s appetite for assuming different risk levels Technical specifications   Input-based specification may reduce costs to bidders but transfers more risk to the government Performance- or output-based specification gives bidders a scope for innovation in design and risk taking but require definition of performance indicators & experienced team to supervise concessionaire’s performance Important points to include in final concession contract  Definition of services to be provided, concession area & contract duration        Rights and obligations of the parties Meaningful & uncontestable performance indicators Regulations to be applied & definition of regulator’s powers Penalty for noncompliance with concession agreement Tariff regime, adjustment mechanisms, & process for resetting tariffs Process for concession termination/renewal/rebidding Dispute resolution mechanisms & applicable law 24

IEF, May 2005   

Use of consultants/transaction advisors

WB finances employment of consultants/transaction advisors Role of Consultants   Provide government with technical assistance & advice on procurement and economic, regulatory, legal, financial & technical issues Can support several government activities     Road Shows Conferences Data Rooms Review of potential bidders’ suggestions to improve selection process   Types of Consultant Contracts A firm or consortium of firms under a single contract to deal with all issues Separate specialized advisors under individual contracts 25

Thank you!

Any questions?

Patricia Baquero

[email protected]

The National Conference Center, Lansdowne, VA March 25-28, 2008