Competitive Tendering of PPPs – Opportunities from a Private Practitioner’s Perspective
Michael Horn, Partner, Clyde & Co
Head of Project Development & Finance (Asia)
Today’s Most Important Message – Have a Procurement Plan
• PPPs are complex • A procurement plan is essential • Start with -Legal framework -Institutional arrangements • Design a procurement plan: a coordinated
programme and a set of policies
Legal Framework
• PPPs are long term and capital intensive • The concession grant is the primary asset • Without the concession, the project is a
“stranded asset” • Investors and lenders need a clear legal
framework authorizing the concession and government’s financial supports
• Legal certainty for decades
Legal Framework
• PPP bid development is expensive • $2.5 mil for $300 mil projects/$30 mil for $2
bil projects • Investors and lenders need to know
procurement is fair and efficient • Legal certainty that tenders are worth
pursuing • Kalibaru Port example
Legal Framework
Lessons: • Before you launch a PPP programme, put the
legal framework in place • Concession granting laws • Regulations on guarantees and other financial
support • Procurement rules
Institutional Responsibility
• A PPP programme needs a champion • Who is in charge? What authority do they
have? • Can they commit government financial
support? • Indonesia – MOF Risk Management Unit,
Bappenas, KPPIP, Public Works Ministry, Line Ministries, SMI, IIGF, IIF
Institutional Responsibility
Lesson: Before you launch a PPP programme, decide: -Responsibility: who runs the programme? -Authority: who approves projects?
The Project Pipeline
• A series of PPP projects that are part of a coordinated plan
• What project comes first, and why? • What projects come next, and why? • Attract investors – justify establishment and
bid costs • Coordinate sectors – power, roads, airports
need a country-wide plan
The Project Pipeline
• Avoid trying to do too much • To start, avoid complex, large projects • Beware of “wish list” risk • Limited number with high success probability • Start easy, then move on to complex • Start small, then move on to large • Singapore’s pipeline woes
The Project Pipeline
• Lesson: To attract investors, plan the project pipeline, not just the first deal
Planning Government Supports
• PPPs often need government support • Delivering essential public services, but capital
intensive • Economically and socially attractive, but not
commercially viable • Guaranties, but other supports as well • Availability charges, minimum revenue
guaranties, land grants, operating subsidies
Planning Government Supports
• Example – urban rail needs massive viability gap funding for capital costs, and operating subsidies (Seattle farebox ratio – 13%)
• Example: power generation in emerging markets looks to government off-taker and government guaranty
• Example: water projects need availability charges to avoid retail revenue risk
• Example: Airports need land grants and promises of road and rail connectivity
Planning Government Supports
• A government financial support plan should be multi-year and provide reasonable incentives
• Use generous supports to launch the PPP programme
• Reduce supports as success is proven and market appetite grows
• Korean example – MRG on 20+ roads
Planning Government Supports
• Risk that government is attracted to bidders who promise they do not need financial support
• Beware of “Winner’s Curse”: the winning bidder secures a bad deal because of incomplete information
• Risk of awarding the bid to the party whose offer is attractive, but unrealistic
Planning Government Supports
• Least experienced bidder: -Requires the least government support -Offers the lowest bid -Estimates the highest demand
Planning Government Supports
Lessons: • No or low support is not always best • Low price is not best price • High demand figures are very often wrong • These transactions cannot be financed or are
unstable over the life of the project • Some bidders are believed to plan for
restructuring – they know their bid is not viable
Planning Government Supports
Lessons: • Government guaranties and other financial
supports need to be planned as a multi-year policy
• Use supports generously to encourage early successes, and then reduce them
• Beware the unrealistically attractive bid
Planning Human Resources
• PPPs are complex • Real PPP experience is globally limited • Top quality advisors, hired early • Concentrate government capacity • Keep experienced people across multiple
transactions • Reach out for training • PIDG developer model
Planning Human Resources
• Lesson: PPP requires dedicated specialists. Hire them and train a government team that stays together
Planning Policy Framework and Procurement Methodology
• Essential to have policy framework in place
and procurement methodology authorized in regulations
• Indonesia’s experience in the 1990s • Vietnam’s PPP law problems • Myanmar’s procurement method
Procurement Methodology
• Decide the Procurement Model • Open – “As is”, no negotiation • Restricted – “As is”, no negotiation, but Pre-
qualification or other restrictions • Negotiated Procedures – Preferred Bidder
selected after tender, and negotiations continue after selection
• Competitive Dialogue – “Negotiauction” – Rounds of one-on-one discussions with multiple bidders, followed by “best and final” bid
Procurement Methodology
• Open and Restricted are not suited for complex projects like PPPs
• Negotiated Procedures are common and traditional
• Competitive Dialogue is new and can give government negotiating advantages, but can be challenging
Procurement Methodology
• Why use Competitive Dialogue? • It maintains competitive tension until best and
final bids • Bidders must compete with other bidders
throughout the process • Negotiated Procedures leaves the Preferred
Bidder with no competition. The Contracting Agency loses negotiating power.
Procurement Methodology
• Why use Negotiated Procedures? • Because the alternative – Competitive Dialogue –
is too difficult • It is challenging to conducted multiple
negotiations with 3-5 bidders • It is time consuming • Bidders incur more bid expenses • Bidders worry about confidentiality • Bidders hold back their best for last
Procurement Methodology
• Competitive dialogue is dominant in Europe • 70% of the procuring authorities use it • How many rounds? When to eliminate? • Optimal number is 3 (in case one drops out)
Procurement Methodology
• Competitive Dialogue – Contracting Agency “knows its needs but not how to satisfy them”
• The dialogue with bidders clarifies the options and encourages creativity in bidding
• If Negotiated Procedures are used, then the Contracting Agency needs to spend more effort before bid launch to clarify what it wants
Procurement Methodology
• PPP procurement defines output specifications, not design specifications
• What the project will do, not what it looks like • “20 minutes to the airport”, not “use trains
manufactured by Hitachi” • “Handle 20 million air passengers a year”, not
“two terminals, each at least 250,000 square meters”
• Certainly not “elevated rail viaducts with seismic load bearing capacity of X”
Procurement Methodology
• Output specification is a fundamentally different mindset
• Government’s familiar with traditional procurement can find this adjustment difficult
• Experienced PPP advisors often spend substantial time advising on this
Procurement Methodology
Lessons: • Competitive Dialogue is complicated • It is not suited for launch of a PPP programme • It is best introduced after the government’s
PPP team has experience and has closed several successful PPPs
Procurement Methodology
Lessons: • Negotiated Procedures require the
Contracting Agencies know in advance what they want
• Output specifications are the primary focus, not detailed engineering plans
Financing Issues
• Bidders want to “grab” the concession and worry about financing later
• Contracting Agencies want financing to part of the bid package
• Does this mean all bids should be supported by a committed financing package?
• No – they cannot be, and perhaps should not be
Financing Issues
• Even in Europe, lenders will not commit to underwritten financing until after the concession agreement is signed
• Often lenders will not even conduct due diligence investigations even though Preferred Bidder is appointed
• In emerging markets, lenders are even less likely to commit financing at the bid stage
Financing Issues
• Before 2008, financing commitments were commonly required in the European PPP market
• Inefficient – 3 bids = 3 financings, only one of which would be used
• From 2008, evaporating bank capacity and rising lending conservatism mean this is no longer possible
• Now Preferred Bidder Debt Funding Competitions are used
Financing Issues
• Risk is that concessions are awarded but cannot be financed
• Trans-Java toll road network is a good example – “squatters”
• Solution is market sounding and professional advice
• Careful assessment of lending market capacity and requirements before tender
Financing Issues
• Risk that concession agreement must be modified after signed to accommodate lender requirements
• At this stage the Contracting Agency has lost leverage because there is no longer any competition- only one Preferred Bidder
• EU Best Practice Guidelines – bring lenders into the dialogue early to agree in principle on key terms
Financing Issues
Lessons: • Anticipate lender requirements and conduct
market sounding • Advisors are key to the success of this • Involve lenders in the dialogue to get them to
commit in principle to key terms • Maintain flexibility – the concession
agreement may need to be amended to accommodate the financing