This chapter describes project preparation and implementation. Competitive procurement of PPPs involves careful preparation, reviewing risks and their allocation, identifying market requirements, and creating a competitive process for selection of the right private partner. In its most basic form, the tender (or bid) process involves a party offering a project to the market and asking for bids from parties interested in performing the project or some part of the project. Tendering procedures are meant to achieve efficiency, manage costs, maintain quality, encourage expediency, and maximize value for money. PPP transactions take time to prepare and need the attention of experts to ensure that risks and financing are managed properly and efficiently and that they are taken to market in a form and manner designed to attract as many high-quality bidders as possible and thereby keep costs down and improve delivery.
4.1 Inception/Prefeasibility/Preliminary Viability Study/Outline Business Case
A prefeasibility study (also known as an outline business case or preliminary viability study) tests the fundamentals of the project, based on a preliminary technical survey identifying key constraints and assessing the basic technical and financial project fundamentals such as site selection, concept design, and possible forms of implementation, revenue, and financing. A first-level financial model will be developed at this stage, to test the viability of the project and the potential appetite of investors. This is an important stage of project development, to avoid wasting preparation costs on projects that do not satisfy these basic criteria. As part of the prefeasibility study, the contracting authority makes a preliminary assessment of value for money,Footnote 1 which tests the value provided by PPP.
Do not cut corners in procurement. It may seem easier to enter into direct negotiations instead of using competitive procurement, but it isn’t. It takes longer and costs more money. Maximize competition (where possible) through good, transparent, competitive procurement.
Invest in preparation. PPP preparation takes time and money, if done well.
Be clear to bidders about what you want. Indicate clearly what results, milestones, and indicators you want the investor to achieve, in particular in the bid evaluation criteria and their weighting. Help bidders to give you what you want; don’t make them guess.
Be cautious when selecting the winning bid. If a bid seems too good to be true (financially, technically, or otherwise), then it probably is.
Once a preliminary decision to undertake the project through private investment has been made, a feasibility study is undertaken to identify key project issues and constraints.
4.2 Viability/Feasibility Study/Full Business Case
The decision on implementation of a project through PPP will follow a “viability” or “feasibility” study (also known as a “full business case”), which is a more detailed version of the prefeasibility study. The contracting authority performs a feasibility study to commence project structuring and key risk allocation decision making. It is at this stage that the fundamental design of the PPP solution is defined.
The feasibility study will build on the prefeasibility study, providing a more detailed analysis. It will include the following:
4.2.1 Demand Drivers
Contracting authority and sector strategic objectives – whether the project is in national or local plans; meets critical public needs; and has political support, including from key stakeholders, for example, user groups, consumer groups, local government, and so on
Capability of contracting authority and the project team to effectively manage the project, for example, to determine whether there is sufficient budget allocation for the project
4.2.2 Economic Valuation
Fiscal affordability and consumer/end-user affordability
Public/government/contracting authority benefits, for example, taxes, customs, duties and excise levies, employment generation, regional development, improvements in quality of life, attracting private investment (in particular, foreign direct investment), economic growth, and revenue share
Government costs, such as likely environmental impact, impact on the site and the community, and available mitigation measures
4.2.3 Financial Analysis
Revenue estimates, source of revenues (e.g., tariff collection), demand forecasts, tariff profile, credit risk of offtaker, willingness to pay, and elasticity of revenues with demand/tariffs charged
Cost estimates for construction, operation, and financing, including inflation risk, interest rate risk, foreign exchange risk, and refinancing risk (e.g., where debt/tenor is insufficient)
Public money support approved and sufficient (amount and terms)
Base financial model (showing return on equity, return on investment, net present value, financial internal rate of return, and debt service cover ratio, with assumptions on debt: equity, debt currencies, debt tenor inflation rate, discount rate, depreciation, interest rate, foreign exchange rate and tax risk, and summary of results), including sensitivity analyses for cost increases and revenue reductions.Footnote 2
4.2.4 Technical Analysis
Full demand assessment, with elasticity of demand against toll levels and sensitivities for possible changes in circumstances
Selection of process and technology, process description, engineering, layout and basic if not more detailed design, technical options, construction methods, project construction schedule, costs, time, likelihood of failure, and interface with other technologies
Performance/output specifications and whether the project meets the needs and requirements of the government
Schedule of approvals, processes, regulatory matters, licensing, and permitting regime – risk of renewal, withdrawal, change in standards – in particular, environmental (including Equator PrinciplesFootnote 3) and social requirements, potential blockages, and critical path issues
Access to land and process for acquisition/compensation/resettlement, with assessment of subsurface risk, archaeological remains, man-made obstacles, zoning and planning, utility supplies, nature of existing facilities, and interconnection with other facilities
4.2.5 Legal Assessment
Key legal compliance challenges, including approvals, procurement, regulations, environmental laws, and the creation of security rights
Legal authority to apply PPP approach and enter into project agreements (vires assessment)Footnote 4
Key terms for all contracts and documents, including tender documents, project contracts, and project information brief
Access to justice, including enforceability of arbitral awards, and ability of private parties to challenge government actions in court
4.2.6 Comprehensive Risk Matrix
For all project risks, identify the party that would be negatively affected in the event of the risk materializing, how much they would be affected, the likelihood of the risk, how those risks could be managed or mitigated, the cost of mitigation, who is incentivized to mitigate, and how the risks should be allocated.
The feasibility study is intended to demonstrate value for money (VfM), a measure of the net value that a government receives from a PPP project. The assessment of VfM helps the government decide whether a project should be implemented as a PPP and how much support the government should provide to that project. Assessing VfM is as much an art as a science, given the various and changing concepts of “value” that the government will want to access through PPP. VfM’s very definition can be adjusted to respond to changes in government priorities and requirements over time.
Box 4.1. Optimism Bias or Bad Incentives – How Planning Goes Wrong
Planning and forecasting need to reflect benefit to the government (as a proxy for the broader society) through cost-benefit or value-for-money assessments. But such assessments tend to involve incentives for those performing them to emphasize benefits and deemphasize costs, whether consciously or not.Footnote 5 There is a similar bias toward building something new rather than refurbishing what exists and maintaining it properly. Maintaining a road properly is three to seven times less expensive than maintaining it poorly and rebuilding later. But the sociopolitical incentive is to build something big and new that can carry the name or be identified with a politician or political party. Khan and Levinson (2011) highlight the failure in the U.S. national highway system to maintain roads properly due in part to the tendency for federal monies to be allocated to new building projects rather than maintenance or refurbishment.Footnote 6
Proper planning and monitoring can help. The Private Infrastructure Investment Management Center in South Korea routinely rejects 46 percent of proposed projects (compared with 3 percent before its creation) at a savings of 35 percent to the government on poorly planned or selected projects. Similarly, Chile’s national Public Investment System rejects 25 to 35 percent of projects proposed.Footnote 7
The process of assessing value for money is iterative. From the earliest project selection processes, government should use value for money as its standard. This assessment will gain in detail and sophistication throughout the project cycle, as more information is gathered from prefeasibility studies, feasibility studies, procurement, and implementation.
Various approaches and models endeavor to quantify VfM, in particular through public sector comparators, cost-benefit analysis, and shadow models (where a financial model is developed from the bidder’s perspective to test likely bidder concerns). Best practice uses such quantitative analysis as important data but will give specific consideration to a qualitative analysis to respond to all relevant parameters rather than seek measurable accuracy in assessment.
As in most such exercises, a balance needs to be found between the time and expense of the “perfect” feasibility study and a feasibility study that addresses enough to meet market, contracting authority, and government approval requirements.
Failure to implement properly the different stages of project preparation, with sufficient time, funding, and expert advice, has doomed many PPP projects and programs; this preparation process should not be curtailed. As in most such exercises, a balance needs to be found between the time and expense of the “perfect” feasibility study and a feasibility study that addresses enough to meet market, contracting authority, and government approval requirements.
Select good projects.
Select robust, viable projects for PPP; these are more likely to be financed on a competitive basis and are therefore more likely to provide value for money. Projects suffering from bad design, dubious demand, or weak fundamentals (even if politically popular) are more likely to fail and may weaken the entire PPP program in the process.
If a project needs government support, get approvals early to avoid wasting time and money on projects that do not meet viability and value-for-money criteria. It can be awkward to reject support for a project later after preparation.
A good, transparent selection process (for commercial rather than political reasons) can reassure investors and increase competition. Projects selected for political reasons or priorities will create a perception of increased political risk among investors.
Interested parties – such as potential investors, funders, or contractors – may offer to develop, or may produce of their own accord, “feasibility studies.” Governments need to be cautious. Even with the best of intentions, such studies will be biased toward the interests and context of the proponent. Governments will need their own independent study to ensure that feasibility is properly tested, key choices are well founded, and the government has critical information needed to negotiate with eventual investors and funders.
Having the project approved as a PPP following from a completed and approved feasibility study ensures political buy-in of the process before the government and potential bidders start investing further in project development. Following the feasibility study and associated approvals, the contracting authority is ready to commence the tender process.
4.3 Direct Negotiations and Unsolicited Proposals
Governments often receive proposals directly from private investors. These proposals can be a good source of innovative ideas for the government and can help governments identify new project concepts. However, unsolicited proposals are difficult to manage and can be a source of significant mischief. Serious technical capacity is needed to manage them well.
Direct negotiations generally take longer, are more expensive, and are more likely to fail than projects procured through competitive processes.Footnote 8 Directly negotiated arrangements are also more vulnerable to challenges by new governments or opposition groups; without the validation of a transparent, competitive process, direct negotiations are more vulnerable to claims of bias, corruption, incompetence, and inappropriate use of government resources.
Prepare the government to play its part from project development to expiry. Even where the investor proposes the project, produces the feasibility study and is to provide a comprehensive service solution, the government will play an (even more) essential role in reviewing, approving, monitoring, and regulating the project and the sector.
Be ready for challenges. In any long-term relationship, change happens. PPP is, above all, a partnership, and it needs to be designed with challenges, changes, and resolution in mind. Problems need to be elevated to appropriate levels of management before they become disputes or worse.
Consider all stakeholders. PPP will have a direct influence on some stakeholders (in particular, employees, management, and the local populace) and may raise political or philosophical concerns among many more. While absolute consensus will never be reached, the government needs to consult widely, understand fundamental concerns, and address them.
Where permitted, the circumstances allowing the award of the project without competitive procurement should be limited, for example, by applying the following criteria:
○ Where the project is of short duration and a small value, such that the added efficiency of a competitive process is outweighed by the cost of the process
○ Where the project is critical to national defense or national security, and the competitive process would require disclosure of sensitive security information that cannot be managed safely
○ Where there is only one possible source of the services (due to the skill set of the provider or exclusive intellectual property rights)
○ Where there have been repeated efforts to implement a competitive process, but with no success, yet there is one party willing to undertake the project on the same terms that failed to attract competition
Whenever a project is proposed to be awarded without competitive procurement, the mechanism to apply for such a waiver should be managed by an appropriately high-level authority. The decision process should be made public and transparent, to allow other stakeholders to comment if they have issues, and there should be a mechanism for those disgruntled stakeholders to appeal against the decision. These mechanisms help protect the decision and the project from vulnerability to legal and political challenge.
Where competition is not possible or practicable, legislation often provides for market testing (see Box 4.2) to ensure that the pricing and terms agreed upon for a directly negotiated project meet market standards (consistent with what the government would have achieved through competition). A robust, independent feasibility study is invaluable in such circumstances.
Where a project is not subject to competitive pressures, or that competition is insufficiently robust, the government should submit that project to benchmarking to verify that the price represents best value as compared to similar projects, in the sector and in similar countries. This can be a challenging process where equivalent projects are not readily available or where relevant information is not available.
Some countries reject unsolicited proposals outright, providing no benefit or compensation to those offering such proposals. In particular, in countries without the resources and sophistication to manage unsolicited proposals, this offers a robust method to avoid the complications and dangers of unsolicited proposals; but it also deprives the government of the advantages.
Unsolicited proposals are often attractive to contracting authorities as the proponent offers to prepare a feasibility study for the project at no or low cost in exchange for the award of the project. However, the contracting authority cannot rely on the feasibility study. Even if the study is provided in the detail and with the rigor that the contracting authority would apply to its own study, the proponent is naturally biased to show the project is viable and should use the technology and methodology familiar to the proponent. The study will need to be reviewed and verified by independent advisers before the contracting authority can rely on it.
Mechanisms have been developed to encourage unsolicited proposals, while also ensuring that competitive tendering is used, where possible, when selecting the best investor.Footnote 9 These mechanisms involve a careful review of such unsolicited proposals to ensure that they are complete, viable, strategic, and desirable. The project is then put out to competitive tender, with the proponent of the unsolicited proposal receiving some benefit, for example:
Automatic prequalification of the proponent
A bonus on the proponent’s scoring in the formal bid evaluation (i.e., additional points allocated to the proponent’s total score when its bid proposal is evaluated)
A first right of refusal, enabling the proponent to match the best bid received (also known as the “Swiss challenge”), in some cases only where the proponent’s bid score is within a defined margin of the best bid
The right to automatically participate in the final round of bidding, where there are multiple rounds of bidding (the “best and final offer” system)
Compensation paid to the proponent by the government, the winning bidder, or both.
The Ministry of Transport, the National Department of Planning (DNP), and the MoF enacted detailed regulations regarding the acceptance of unsolicited proposals from the private sector.Footnote 10 If accepted as a viable project, an unsolicited proposal must then go through a competitive, open procurement.Footnote 11 The proponent participates in this selection process like any other bidder. If the proponent’s bid is not selected, however, then the winning bidder must reimburse the proponent for certain of its expenses, as approved by the responsible government agency prior to the start of the tender process. In such cases, the proponent is responsible to the winning bidder for the quality of the relevant studies.
The unsolicited proponent is often viewed as having an unfair advantage, so any preference given (such as a right of first refusal or bonus during bid evaluation) may stifle competition.Footnote 12 A more robust approach is to use competitive tendering, but without any advantage to the unsolicited proponent. Instead, a fee is paid to the proponent if he does not win the bid, as compensation for the value added by his efforts to develop the project (see the example of Colombia in Box 4.3). The fee should be sized to reflect actual benefit of the proposal to the government.
4.4 Prequalification
The bidding process is generally lengthy and costly, for the bidders and for the contracting authority. In order to manage the cost and time outlay, the contracting authority may wish to prequalify those parties most likely to provide an attractive bid and avoid the time and cost of managing bidders who do not have the fundamental qualifications or financial substance that would enable them to undertake the project. Prequalification also encourages good bidders, who will prefer a smaller field of equally qualified competitors. Low-quality bidders are more likely to lowball a bid, and their presence among short-listed bidders may scare off high-quality bidders.
Each sector and project has its own specificities. For example, prequalification criteria may include the following:
Level of owned total assets in excess of a set amount
Recent experience managing the construction and operation of a project of similar size and complexity in a similar market
Recent experience raising similar amounts of debt and equity
Exclusion of air carriers, companies owned by air carriers, or operators of airports located close to the site (e.g., within 800 kilometers), to avoid any conflict of interest
The criteria will reflect sector and market context.
4.5 Bid
The contracting authority provides the prequalified bidders with tender documents (including project documents and technical specifications) and access to relevant data. Bids received will be evaluated against specified criteria. The criteria need to be described thoroughly in the bidding documents to help bidders understand the contracting authority’s needs and improve the quality of bids received.
Bid evaluation criteria may include the following:
A technical solution compliant with the government master plan and with specifications provided
A legal solution compliant with bid documents
A financial proposal indicating the extent of government funding, investment, or guarantee needed or the share of project revenues
A financing plan showing how and from whom the bidder intends to mobilize debt, equity, and other financial instruments to fund the project, how much due diligence has been completed, and the extent of commitments provided by lenders in the bid package
4.6 Single Bids
Even in the most sophisticated markets, creating investor appetite can be a challenge. Even before the financial crisis, some 30 percent of PPP projects in the U.K. only received two bids.Footnote 13 The procurement process should put the contracting authority into a strong negotiating position if there is only one bidder, limiting the opportunity of that bidder to hold the contracting authority hostage. The contracting authority needs to be prepared to start the bidding process over if it is not happy with the bidder’s proposal. Where a single bid scenario is encountered, benchmarking of the bid may be a useful mechanism to help the government understand if it is getting good value and to help reassure other stakeholders that the lack of competition is not a fatal flaw in the process.
4.7 Preferred Bidder
Once bids are received, the contracting authority will evaluate compliant bids and select the preferred bidder. The contracting authority will negotiate with the preferred bidder any open issues (to the extent permitted by the bid documents or by law), finalize the commercial and financial arrangements, award the project, sign the concession agreement and other key contracts (subject to the conditions precedent discussed later in this section), and reach financial close. More than one preferred bidder may be selected for additional rounds of competition, for example, through best and final offer (BAFO – see Box 4.6) or competitive dialogue (see Box 4.7). Additional rounds need to be carefully managed, to maintain transparency, avoid any perception of favoritism or corruption, and limit the added cost and delay such a process implies.
The contracting authority may choose to include additional stages of competition, for example, reducing the competition to two bidders who will then be asked to further refine their bids and submit a best and final offer (BAFO), after which the contracting authority chooses the preferred bidder. This process allows the contracting authority to use the available competitive pressure to further motivate bidders and possibly obtain firm financing commitments.
Lenders will not be finally committed to the project until financial close is achieved. Before financial close, lenders will want to confirm that the risk allocation for the project is “bankable,” a general term referring to the level of comfort that a lender will require from a project given the context of the project (see section 5.2).Footnote 14 The lenders will then agree with the project company and the government a list of conditions precedent (CPs) that must be satisfied before the lending arrangements become final and before first drawdown can be made.
The European Union uses a “competitive dialogue procedure” that allows governments to enter into a dialogue with prequalified bidders before finalizing the tender documentation. It allows structured discussions with each of the prequalified bidders and helps identify key issues and amendments needed for the project.Footnote 15
