Bucharest Water Project - A Successful "Pliego" Tender

The Bucharest Water Project was a groundbreaking municipal water and sewerage infrastructure concession for the provision of water and sewerage services to the 2.2 million inhabitants of Bucharest with investment requirements over the life of the concession of up to USD 1 billion.

Water projects are notoriously difficult to undertake with politics, revenue risk or a host of other risk issues scuppering most projects: yet, in Romania, this is one of the first municipal utility privatisations. So how was it achieved?

Whilst there are numerous factors contributing to the success of the project, not least the political will of the Municipality of Bucharest, this article focuses on the tender process, an important ingredient in that success.

Key Drivers

There were at least two key elements that are essential to a successful tender:

Transparency - with so many projects in developing markets lost in the quagmire of untransparent processes, the principle feature of any successful tender has to be a transparent process based on a level playing field for all bidders: this could only be achieved if all bidders were bidding on the same documentation with identical risk allocations and had similar information made available to them;

Negotiating Strength - it is widely acknowledged that once a preferred bidder for a project has been chosen the balance of power in negotiations shifts significantly from the public sector to the preferred bidder. Whilst arguments based on reputation, future projects from the granting authority, keeping another second placed bidder as the potential replacement all help to mitigate that risk, they cannot overcome the fundamental loss or negotiating strength that goes with nomination of the preferred bidder.

Whilst the "pliego" approach is a relatively rare phenomenon in Western Europe, it has proved a useful tool in developing economies in guaranteeing the sanctity of the above two principles. The authors would also argue that whilst in certain circumstances it can be seen to increase the time and cost of the initial bidding process, in more conventional bidding processes much effort is taken in "finalising" the incomplete contractual documentation with the winning bidder at a time where the public authority have a significant negotiating disadvantage and such "finalisation" can be very time consuming and costly.

What is the "Pliego" approach?

The essence of the pliego approach is that once the pre-qualification process has taken place, the contractual documentation is developed in much detail and circulated to all pre-qualified bidders for their comments. At least two rounds of comments should take place and to the extent that the comments have merit and result in a more equitable sharing of the project risks, they should be accommodated in subsequent iterations of the project documents. This process culminates in the requirement that at the time of the final bid by all the bidders, they should be asked to submit signed versions of the project documents with their bid. Therefore, the intention is that no negotiation of the project documents would take place once the winning bidder had been selected.

This contrasts markedly with a more traditional procurement process where only heads of terms or relatively standard project documents would be circulated. Based on bids submitted, one or two preferred bidders would be selected and then negotiations would take place with those bidders, usually based on different sets of project documentation and alternative risk allocation agreed with those bidders. Whilst it can be argued that in certain circumstances such a process may provide better value of money for the public authority, it may impinge on the transparency of the process and can undermine the negotiating strength of the authority once a preferred bidder has been chosen particularly to the extent that financiers will only generally be prepared to commit significant time and resources at this stage.

How was the Bucharest tender structured?

Pre-qualification Assessment

As with virtually all international tenders in the Bucharest water project it was considered desirable to hold a pre-qualification process to narrow down the number of bidders to those with the relevant expertise and financial strength to undertake the project. Rather than limit the number of pre-qualified bidders, a threshold test for financial viability and technical ability to undertake the concession was imposed. Once bidders had passed the financial and technical hurdle test they were all thereafter considered equally qualified from a technical and financial perspective. This therefore avoided the need for further technical evaluation and the possibility that such evaluation would by necessity be somewhat subjective. The hurdle test used for pre-qualification is particularly appropriate in the water sector as due to the nature of the service there are only a limited number of major players who are likely to be interested in the concession and capable of meeting the operating requirements. Six consortia led by the main international water sponsors were pre-qualified, Vivendi, Lyonnaise des Eaux, International Water Limited, Azurix, Thames Water and Anglian Water.

Performance Requirements

The concession contract set out detailed performance criteria to be met by the concessionaire including quality, quantity, coverage, leakage, unaccounted for water, etc. and was an output driven contract very much along the UK private finance initiative ("PFI") model. By setting the standards to be achieved rather than focusing on quantity of investment or types of technology to be provided, the project was substantially less intrusive from a monitoring and regulatory aspect and allowed the concession company substantial latitude in how it achieved its objectives. Whilst there is always a temptation to seek to set certain input requirements such as investment levels, international and UK PFI experience has shown that much better value for money can generally be achieved with this more flexible approach.

Bidding Criteria

In the water sector, there are generally four variables that can be used as evaluation criteria: the tariffs proposed by the winning bidder, the concession fee paid to the public authority, the levels of investment to be provided by the winning bidder or the performance requirements. In common with many other water concessions and having regard to the need to bring maximum benefits to the consumer, the tender criteria in the Bucharest water project were based upon the tariffs proposed by the winning bidder. Whichever consortia proposed the lowest tariffs over the life of the concession would be declared the winner.

Bidding Rounds

Bidders were invited to comment on a number of iterations of the project documents and the Municipality took account of their comments. This enabled the legitimate concerns of the bidders to be recognised and addressed at an early stage and through evolution of the concession contract through several iterations, the drafting could be devised to substantially accommodate the needs of all parties. One of the conditions of the bid was that appropriate letters of support were provided by financial institutions and, in particular, both the EBRD and IFC provided general letters of support for the documentation.

Evaluation

As mentioned above, by focusing evaluation on a single transparent number, the net present value of the tariffs proposed over the life of the concession, the evaluation was extremely transparent. The evaluation took place in front of all the bidders at a public evaluation ceremony attended by the media. Bidders submitted the signed bidding documentation in one envelope and their financial bids set out in accordance with the bidding framework in the invitation to bid in another envelope. The evaluation process commenced in the morning on the day of submission with the opening in turn of the envelopes containing the signed project documents which were then scrutinised by the evaluation committee at the public evaluation meeting to ensure that all the documentation had been appropriately signed and stamped in accordance with the requirements of the invitation to bid.

Once this process had been satisfactorily undertaken and bids declared to be compliant with regard to the signature of the documentation, the financial envelopes were then opened in turn. Again, they were opened in public and immediately read out to the audience. The tariff proposals from each bidder were then fed into a computer and shone on to a large screen in front of the audience. This enabled the bids to be immediately and transparently compared.

An Excellent Result

The winning bidder was Vivendi Water which proposed a tariff increasing by approximately 14% from the current levels in year one and following a number of years at that level decreased for the remaining 25 year life of the concession. This was an excellent outcome for the Municipality as in view of the amount of investment estimated to be needed and the lack of information regarding the system which may have led bidders to price the tariffs more highly, the tariffs seem extremely competitive. Indeed, the tariff proposed by Vivendi was well below the tariff proposed by the second placed bidder, International Water Ltd and approximately 75% lower than that put forward by the third placed bidder, Lyonnaise des Eaux.

A tender process should be judged by the result and the Municipality have secured a top class international water operator to provide water and sewerage services for the next 25 years to an international standard at what appears to be a minimal increase in cost - a wonderful result for the citizens of Bucharest. Time will tell how successful the tender has been but at this moment in time the signs are extremely encouraging.

For further information on this topic, please contact Richard Temple at [email protected] or on (+44) (0)20 7367 3000.