PPP - Paper 6 - the development and implementation of procurement process

INTRODUCTION:

In this paper, consideration is given to the development and implementation of a procurement process

THE TENDER PROCESS

Procurement Strategy

As an overview, the public sector will want to know what it or users will pay for using the facility, what risks will remain with the public sector and that the users will have a reliable service. Therefore, in developing the procurement strategy there are obvious advantages in involving the private sector. Such involvement will also enable the public sector to understand the needs of the private sector. The private sector wants to know what it is being obliged to do and the circumstances within which it is to carry out its obligations. It is not practicable to ask the private sector to assume all risk because, although most project companies are financed on a limited recourse finance basis (which also means limited resource), in fact the private sector will weigh up the return it will receive on its investment and size its investment accordingly. It is simply not possible for the private sector to take total risk and there needs to be, therefore, a sharing of risk. In addition, the private sector needs to know that it will receive a commercial return.

THE REQUEST FOR PRE-QUALIFICATION

Advantages of Pre-qualification

The advantage of a pre-qualification process is that it enables inappropriate prospective bidders to be eliminated at a very early stage. In addition, on very large projects the costs of bidding are very substantial. The private sector is extremely nervous about being in a position where large sums have been expended on developing the bid but the chances of winning the competition are small. Thus on large projects it is not unusual to see the number of pre-qualifiers reduced to three or five (or anywhere between that number). However it should be a given in relation to anyone who has pre-qualified that they achieve technical and commercial competence.

Request for Pre-Qualification

Candidates for an infrastructure project to be developed by the private sector should be asked in an invitation to prequalify.

In order to carry out a proper evaluation, the public sector will need to be informed as to the descriptions of the groups (or consortia) seeking pre-qualification together with a description of the relevant track record of each member of the group and any advisors. This would include details of relevant experience (particularly in relation to design build finance and operate projects, limited recourse projects and concession projects), experience in relation to the relevant operations (e.g. railway, power stations, gas pipelines etc.) and experience of successfully achieving financial close in other projects.

It would be helpful to the public sector if it had a description of the relationship between the members of each group including the group's pre-bid agreement, the approximate likely shareholding of each member of the group and details of how the internal relationship between members of the group may change during the design, construction and operational phases of the project.

In relation to the financial standing of each member of the group and the parent company of each member (where appropriate), the public sector should ask for latest audited accounts, a statement of overall turnover and in case of a conglomerate the turnover in relation to the particular aspect of the business to which the project relates and a statement of turnover on projects similar to the given project (e.g. the previous three financial years).

The public sector will also want to be satisfied about areas which would indicate any lapses in performance such as a statement as at the last reporting date, of any contingent liability or loss which was not otherwise reported which would require disclosure. In this respect it may be appropriate to refer to international accounting standards such as standard number 10. In addition, a statement of any pending or threatened litigation or other legal proceedings should be sought together with a statement of any contracts where there has been a failure to complete the contract or where there have been claims for damages or where damages have been deducted or recovered within a certain period (e.g. the last seven years) and where the value of such contract or amount of damages is greater than a stipulated amount.

The public sector will wish to know that prospective bidders have thought about the issues and should ask for an indication of the resources and expenditure set against a time-based programme which the group intends to devote to the analysis and design development during the tender stage of the project. An indication of the group's expected approach to the design, construction and maintenance of the project and to its operation including quality control and safety management will also be helpful, coupled with the group's approach to the operation and development of the business (to the extent that there is not a sole offtake arrangement) with particular attention to safety management, quality control and marketing.

With the increasing importance of "green issues" the public sector should ask for the group's environmental policy and the description of the management systems which would be applied to implement that policy.

Any consortium runs the risk of internal and external conflicts of interest. To ascertain low serious these might be the public sector should ask for:

(i) the proposed management structure of the Group and how the Group would manage its business;

(ii) the arrangements proposed to separate the interests of any contractors who are members of the group from those of the group as a whole as promoter of the overall business; and

(iii) identification of any conflicts of interest which might arise if the group were selected including any group or connected persons which had existing arrangements with any of the public sector entities in relation to the same business as the project should disclose that interest and indicate why, if it is the case, that it does not give rise to a conflict of interest or to an unfair advantage against other groups.

Prequalification Criteria

It is often helpful to candidates for pre-qualification that they are informed about the basis upon which the judgement as to whether to prequalify a bidder will be made. These should reflect the very elements which the public sector will be seeking such as technical, financial, commercial and management track record for projects of the nature of the project, proven understanding of the operations of the project, technical, financial, commercial and management potential to meet fully the host government's requirements for the project and willingness to proceed with a bid complying with the host government's requirements as set out in the pre-qualification document.

The public sector must be very clear, at the outset, about what qualities it wants pre-qualified bidders to have demonstrated. In identifying the most suitable pre-qualification criteria, regard must be had to the requirements of the project and of the host country itself. For example, the host country may restrict the ability of public sector officials to exercise subjective discretion, and in such cases it will be better to frame the pre-qualification criteria so that they can be applied as objectively as possible. To take another example, the project itself may be a very challenging one or one with a high risk of failure, and if the hurdles are set too high for prospective bidders at the pre-qualification stage this may deter private sector interest in the project altogether. The key issue to remember is that the pre-qualification process shapes the rest of the competition.

Finally, the pre-qualification process should clearly set out the time and date when returns are required, to whom they should be made and an indication of when notifications will be issued as to the successful pre-qualifiers and the likely programme for the competition. In most jurisdictions a clear indication should be given that there is no requirement upon government to pre-qualify anyone, so as to avoid litigation if the process is abandoned.

THE REQUEST FOR PROPOSALS

Contents of the Request for Proposals

The pre-qualification process having been completed, the public sector should structure the request for proposals so as to elicit responsive bids for the project from the pre-qualified bidders. Three key functions of the request for proposals can be identified. They are:

• to establish the threshold requirements (without which no bidder will succeed);

• to provide other information to bidders; and

• to set out what information will be required from bidders.

These are discussed in turn.

Threshold Requirements of Request for Proposals

Assuming that a pre-qualification process has been adopted as the first stage of the competition, then issues relating to competency of the bidders should have already been addressed. The request for proposals should identify certain threshold requirements (i.e. items which bidders must meet). These requirements will be reflected in the draft contracts, and they will be the points on which the public sector is not prepared to negotiate. Failure to accept these requirements will render a proposal non-conforming and the private sector should be advised that this may be grounds for excluding the bid. They might include:-

Is a specific commercial operation date required?

Is there a required vehicle capacity and maximum loading requirement?

Is there a minimum equity requirement for sponsors?

What currencies must bidder costings be shown in?

Information to Bidders

The request for proposals should:

+ identify Government responsibilities;

+ identify bidder responsibilities; and

+ identify others' responsibilities (e.g. local authorities and utilities).

Information from Bidders

The bids should reveal:

+ key details of the proposed facility;

+ renewal proposals;

+ proposed financial proposals including a financial model;

+ maintenance proposals; and

+ a disaster recovery plan.