Contracts for Public-Private Partnership (PPP) Options

The National Conference Center, Lansdowne, VAThe National Conference Center, Lansdowne, VAMarch 25-28, 2008March 25-28, 2008

Patricia BaqueroPatricia Baquero pbaquero@worldbanpbaquero@worldbank.orgk.org

IEF, May 2005 2

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

IEF, May 2005 3

Public-Private Partnerships (PPP)

PUBLIC SECTORPUBLIC SECTOR

PRIVATE SECTORPRIVATE SECTOR

• Public provision

• Service contract

• Management contract

• Lease/Affermage

• Concessions

• Divestiture

• Public provision

• Service contract

• Management contract

• Lease/Affermage

• Concessions

• Divestiture

Role

of m

arke

t in

centiv

es

Low

Hig

h

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

IEF, May 2005 4

Summary of responsibilities and risks under different PPP options

Responsibilities & risks

Service contracts

Management contracts

Lease / Affermage

Concessions (incl. BOT)

Divestiture

Ownership of assets

State or mixed State or mixed State or mixed State or mixed Private

Investment planning & regulation

Parent agency or separate

public authority

Parent agency or separate

public authority

Parent agency or separate

public authority

State, negotiated with

contractor

None or state agency

Capital financing Public Public Public Private Private

Working capital Public Public Private Private Private

Execution of works

Private as specified

Public Public Private Private

Operation & maintenance

Private as specified

Private Private Private Private

Management authority

Public Private Private Private Private

Commercial (demand) risk

Public Mainly public Private Private Private

Basis of compensation

Services rendered

Services rendered &

resultsResults Results

Privately determined

Duration Less than 5 yr.

3-5 years 5-10 years 10-30 years Indefinite

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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

IEF, May 2005 6

Commonly used methods for award of PPP contracts

Competitive bidding* International (ICB)

Limited International (LCB)

National (NCB)

Direct contracting** (includes renegotiation and unsolicited proposals)

Competitive negotiations***

* Acceptable by WB

** Acceptable by WB exceptionally under set conditions*** Acceptable by WB ONLY for consultant services

IEF, May 2005 7

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)

IEF, May 2005 8

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

IEF, May 2005 9

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

Favored by MDBs

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

IEF, May 2005 10

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

IEF, May 2005 11

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

IEF, May 2005 12

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 13

Unsolicited proposals – Characteristics and applicability 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 (though two-stage bidding could be used instead if project has already been identified by authorities)

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)

IEF, May 2005 14

Handling of unsolicited proposals

Initial proposal requested &

assessed

Usual procedures when national rules allow for unsolicited proposals

Formal proposal invited & examined

YES

Proposal no longer

considered

NO

* Extra evaluation credit or proposal preparation cost reimbursement

Authority engages in competitive selection granting incentives* to original proponent

YES

Authority may be authorized to

negotiate directly with original proponent

NO

Authority invites all offerors to competitive negotiations

NO

Authority engages in competitive selection granting incentives* to original proponent

YESIs project in the public

interest?

Is project possible w/o

involving proprietary

rights?Alternative proposals received?

YESMany

alternative proposals received?

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

NO

Authority publishes description of

proposal’s essential output elements & invites comparable

proposals**

IEF, May 2005 15

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

IEF, May 2005 16

Competitive negotiations – Pros and Cons

CONS 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

PROS 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

IEF, May 2005 17

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

IEF, May 2005 18

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

IEF, May 2005 19

Two-Stage Bidding process

Invitation to 1st Stage Bidding

Evaluation of Technical Proposals

Clarification/Feedback Meeting

with Qualified Bidders

Invitation to 2nd Stage Bidding

Technical/Financial Evaluation and

Award

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

Bidders invited to submit 2nd stage bids including final technical proposals and priced bids

Employer evaluates 2nd stage bids per evaluation criteria

Award to qualified bidder with responsive, lowest evaluated 2nd stage bid

IEF, May 2005 20

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

IEF, May 2005 21

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

IEF, May 2005 22

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 Appropriate limits on contractor’s risk

IEF, May 2005 23

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 24

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

IEF, May 2005 25

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

Thank you!

Any questions?

The National Conference Center, Lansdowne, VAThe National Conference Center, Lansdowne, VAMarch 25-28, 2008March 25-28, 2008

Patricia BaqueroPatricia Baquero pbaquero@worldbanpbaquero@worldbank.orgk.org