The sovereign funding gap caused by a low oil price environment, coupled with a global period of economic uncertainty, are two drivers leading governments, procuring authorities, state-owned enterprises and state-owned master developers (procurers) throughout the Middle East and North Africa to embrace private financing of infrastructure projects, including through a public-private partnership (PPP) model.
Private financing, whether under a build-own-operate (BOO), build-operate-transfer (BOT), or other acronym, is an effective method of infrastructure delivery, if implemented correctly.
PPP offers the ability to harness the private sectors infrastructure and financing expertise, which helps drive economies. Tapping into private forms of finance and expertise can keep critical infrastructure pipelines moving in difficult economic times.
We are now seeing many state and national governments enacting supporting legislation to deliver infrastructure projects, pipelines are being published and RFPs for advisers are under way, in Saudi Arabia, Dubai, Abu Dhabi, Kuwait, Egypt and parts of Northern and Sub-Sahara Africa.
A well-managed competitive tendering process helps to illustrate that the procurer has a commitment to openness and transparency. This serves to increase the level of interest in future partnering opportunities, but problems frequently arise.
Procurers should consider aligning their proposed PPP procurement process with any local procurement laws and regulations, or internal procurement rules. These tendering laws and rules are usually designed for more traditional procurement methods, not privately financed infrastructure projects, including PPPs. In some instances, procurers are enacting specific PPP to either override traditional tendering laws or to compliment these, in a way that provides certainty for the public and private sectors embarking on PPP projects.
Top 10 Tendering Tips
King & Spaldings tendering tips are not exhaustive, but they cover what we feel, based on experience, are critical steps to implement for the successful delivery of major infrastructure projects, especially under a PPP model.
Our tips are applicable across a wide range of sectors: for example energy, healthcare, education, housing, transport and IT.
1. Develop a comprehensive procurement plan
Undertaking a PPP process is not simply a matter of issuing an RFP to a series of qualified builders to build a facility. The process starts with an idea, which develops into a plan, with objectives. That plan is then tested and further developed to ensure the project is viable and delivers value for money to the procurer. Only at this stage is a tendering exercise undertaken.
The most important part of running a competitive PPP procurement is invariably the work undertaken prior to the tender process commencing. A well-thought out procurement plan reflects well on the procurer, ensures a high level of organisation throughout the process, and will be well received by bidders.
Generally, there are three stages in a PPP project: feasibility, procurement and delivery. Set out below is a process explaining each of these stages:
A procurers two initial considerations prior to starting should include:
a) Procurement team: Competitive procedures require commitments in terms of time and resources. A procurer should give serious consideration to the amount of man-hours it can commit to the process. An individual should be appointed to lead the client team throughout the entire process. Given the complexity of major infrastructure projects, procurers should engage external legal, technical and financial advisers early in the process.
b) Procurement timescale: Procurement processes are driven by time. An unrealistic or expedited timeframe runs the risk of leading to mistakes or the receipt of rushed and inaccurate bid submissions and retendering.
The output from the feasibility stage will be a 15-20 page preliminary procurement plan. This is a blueprint that can be referred to at any stage of the procurement process. The blueprint will address:
a) An overview of the project, including a description of the infrastructure and services required;
b) The objectives of the procurer and any commitments (for example core services vs non-core services);
c) Legal and commercial structuring and procurement options;
d) An overview of the recommended contractual arrangements;
e) An implementation step-plan, including timescales.
If a procurement plan is not developed, this is not fatal. It may, however, lead to delays to the process and increased costs later, in the form of additional advisory fees, higher bids costs and pricing and potentially bidder withdrawal.
2. Feasibility stage: conduct a project bankability test
Before tendering a major infrastructure project, the most effective method to test the projects bankability is to internally test whether the commercial solution being sought will attract investment.
The purpose is to ensure the procurers objectives can be met and that they align with the expectations of potential bidders. This can only be performed with experienced technical, financial and legal advisers who have successfully delivered major infrastructure projects in the given sector. Conducting a project bankability test will give reassurance to procurers that their proposed project will be attractive to the market and will attract bids.
3. Feasibility stage: develop a robust output specification
Major infrastructure projects requiring private finance and long-term operation and maintenance are very different from traditionally procured construction contracts. Major projects are focused on outcomes which best meet the needs of the procurer. These needs are generally articulated in the form of an output specification, unlike traditional methods of procurement which tend to have input-based specifications.
An output-based specification outlines an objective, rather than the granular requirements of input-based specifications, which might set out exact dimensions, specifications and prescribed materials.
Output-based specifications afford bidders as much flexibility as possible to propose innovative, cost-effective designs of infrastructure. This is approached on a whole-of-life basis, taking advantage of new technologies and techniques. A whole-of-life basis means bidders are required to manage and maintain the infrastructure over the life of the project (maybe 25 or more years). In traditional procurement, a bidder is a building contractor who would focus on its obligations during the construction period (for example 12 months) and select materials and finishes accordingly, as it is not responsible for the operation and maintenance aspects.
Output-based specification should include:
- A clear description of the scope of service;
- A clear description of the specific service requirements; and
- Performance standards (sometimes called Key Performance Indicators or KPIs) for each service, which are then linked to a performance-monitoring regime.
4. Feasibility and procurement stages: conduct a market sounding exercise / expression of interest
Unless a procurer has no time to conduct a market sounding exercise, it should conduct an open day, or series of supplier meetings, market sounding questionnaires, meeting potential interested bidders. Later it can also issue a formal expression of interest (EoI) document.
An EoI is effectively a high-level teaser published by a procurer to generate prospective bidders to register their interest in participating in the given infrastructure project. It can be anywhere from three to 10 pages in length. No pricing is required from bidders at this stage; rather, this stage helps procurers determine if prospective bidders have the technical capacity to deliver the project, should they be invited to bid.
Broad publication of an EoI ensures procurers are aware of a greater portion of the market potential. This is especially relevant for those procurers with minimal experience in delivering major infrastructure projects. It is also relevant for private sector bidders who will be encouraged by infrastructure policy announcements in emerging markets.
Conducting a market sounding exercise and an EoI exercise and engaging with potentials participants will allow a procurer to sense check that the opportunity is attractive to bidders. It will also ensure there is sufficient interest in the project to justify the procurement process, which can be long and costly. It also allows bidders to start planning before a formal request for proposals is issued.
5. Procurement stage: shortlist bidders
A procurer will normally prequalify bidders based on technical experience after bidders have provided responses to an EoI. This is to avoid having 20 or more bidders, which is simply not manageable for procurers.
Best practice suggests that five (but perhaps up to seven for pathfinder projects or projects with unproven technology) shortlisted bidders are sufficient to maintain a competitive tendering environment while covering the risk of withdrawal by one or two shortlisted bidders. Many bidders will in fact be consortiums of multiple-parties including sponsors, lenders and facilities management (FM) / operations and maintenance (O&M) contractors and perhaps engineering, procurement and construction (EPC) contractors. Having too many shortlisted bidders may deter some bidders from bidding, as their chance of success may not justify the substantial bidding costs.
6. Procurement stage: conduct an RFP process and prepare tender versions of legal agreements in advance
The cornerstone of the procurement stage is the tender document itself. This is often called the request for proposal or RFP.
The RFP is an inherently complicated document and has specific differences to an RFP for a traditional construction procurement. Examples of these differences lie in the nature of output-based specifications, the payment mechanism, operational elements, financing requirements and end-of-term arrangements including termination payments. The nature, complexity and importance of the RFP document means a procurer needs to allow sufficient time to prepare the RFP with assistance from experienced legal, technical and financial advisers.
The RFP establishes how procurement will be conducted and the key milestones and rules with which all parties will be need to adhere. The procurer should ensure the RFP document accurately identifies its anticipated needs and minimum requirements to enable bidders to gain an informed appreciation of the project. Particular areas of importance are an outline of the project, the tendering schedule, a description of the payment mechanism, technical overview, submission requirements and evaluation methodology.
It is critical the procurers legal advisers draft tender versions of the project legal agreements and that these are included as appendices to the RFP. If time is limited, then Terms Sheets or Heads of Agreement should, as a minimum, be included in the RFP document. The latter approach is not recommended as it will add further time and expense, given full project legal agreements will be later issued to bidders as addenda to the RFP to ensure firm pricing is received.
Preparing tender versions of the project legal agreements allows bidders to fully assess the projects risk allocation and to take steps to manage and mitigate their liabilities and risks. If project legal agreements are not included in an RFP, then bidders may not bid at all, or may bid but may reserve their position on all development and operational risks. Additionally, bidders will usually submit pricing on the basis of a certain risk allocation between the parties. As such, when the legal agreements are later provided, bidders will seek to adjust their pricing if their assumptions as to these risks are not met.
7. Procurement stage: post-bid dialogue sessions
During the procurement stage, after the RFP is issued but before bids are received, it is not uncommon to allow an opportunity for the procurer to enter into dialogue with bidders. These workshop sessions allow bidders to discuss points of clarification, to discuss technical solutions and to sense-check aspects of their proposals. These sessions can provide critical feedback to the procurer and its advisers. Listening to bidders discuss their proposals and raise technical queries and options may lead to an improved solution for the procurer.
On complex infrastructure projects, particularly with tight lead times, these sessions can be time consuming and provide a logistical challenge for the procurer. Momentum can be preserved through effective planning, such as sending out an agenda identifying topics, individuals required, outputs required and periods of time for each bidder to present. The agenda could include:
- Commercial: This part of the session addresses issues such as the financial model, financing issues, and unitary payments/tariffs.
- Technical: This addresses issues such key performance indicators, quality standards and performance management, as well as queries on any technical issues in the RFP.
- Legal: This addresses issues such as project contractual structure, questions on risk allocation and bid compliance.
This approach has the added advantage of efficiently managing resources and not requiring all individuals within the client team to be present during all discussions.
It is important in these sessions to treat all bidders equally and to ensure the sessions are followed up with a formal addendum to all bidders with clarifying points.
8. Procurement stage: clear evaluation methodology
The evaluation methodology refers to the criteria used in an RFP process to evaluate the tender that is the most advantageous to the procurer.
The two main areas of evaluation are usually commercial and technical. Within each of these areas, there will often be sub-criteria relating to particular requirements of the RFP. Sub-criteria are typically allotted percentage weightings to reflect their importance. The tenderer submitting the bid that scores the highest marks after being assessed against the evaluation methodology will usually be appointed the preferred bidder for the project.
An example of technical evaluation criteria for a hospital PPP project might include:
1. Bidders experience of healthcare projects completed inside and outside the host country;
2. Robustness of bidders technical method statement and design philosophy; and
3. Robustness of bidders proposed implementation schedule.
Sample commercial evaluation criteria for a hospital PPP project might include:
1. Quantum of the unitary charge for performing the services;
2. Bidders proposals in relation to certain non-core services;
3. Robustness of bidders financing methodology; and
4. Bidders comments on the legal agreements.
Each bidder is given a score of 0-100 for each criteria, with 0 if there is no submission, up to 100 for an excellent response that meets all criteria with no qualifications.
Specific formulas are then used to calculate the weighting and to determine the bidder with the most advantageous proposal according to the procurers objectives.
The evaluation process should be subjected to testing prior to the launch of the RFP. This can be undertaken by passing mock bidder scores through the evaluation model to identify any potential problems with the process.
The bid report, which is prepared by the legal, technical and financial advisers, will contain summaries of each bid and the rankings, which is then used to assist the procurer in its selection process.
One final point to keep in mind for evaluation of bids is to ensure that when issuing the RFP, the procurer limits the areas for comparison between bids, so it can compare apples and apples. For example, if there are various elements of a tariff, the procurer might ask bidders to price one of those elements and to assume the other elements. This often occurs in utility PPPs. One of the traps in tendering is that procurers allow too much scope for differences in bids, which can lead to a delay while it tries to makes sense of the various bids.
Finally, allowing bidders to submit alternate commercial/technical proposals is one way to allow innovation from the private sector, but such alternate proposals should always be accompanied by a compliant proposal.
9. Procurement stage: limit scope for negotiations
Experienced legal advisers will ring-fence negotiation points prior to the preferred bidder letter award. This process is usually crafted within the RFP conditions of tendering. It is not uncommon for a preferred bidder to seek to open up points of risk once the competitive environment has concluded, so it is critical to ensure all outstanding legal, commercial and technical points are clearly understood and where possible, that steps are taken to fend off challenges after the preferred bidder is selected.
Authorities can do this by:
- Avoiding revisiting agreed issues or introducing new ones: The procurer should enforce a strict rule prohibiting the preferred bidder from admitting any new issues into negotiations (i.e. issues not raised previously in the bids) and the parties should not reopen issues already agreed upon;
- Involving lenders during the negotiation/dialogue stage: It is not uncommon for the preferred bidder to seek changes to the project legal agreements, which are attributable to the demands of the bidders lenders, particularly if the lenders have not been sufficiently involved in the bid process. The scope for such lender-mandated changes can be limited by requiring bidders to ensure that their lenders have reviewed the RFP and the key project legal agreements and that the bidders comments take into account any requirements of the lenders;
- Agree a timetable for the negotiation: Establishing a timetable for negotiations will limit the scope for delaying tactics and ensure the overall timetable for the project is upheld;
- Reserving the right to negotiate with alternative bidder(s): The prospect of a reserve bidder waiting in the wings in the event that negotiations with the preferred bidder fail, or indeed keeping two preferred bidders, often helps to retain a sense of competitive tension during contract negotiations. However, this can come at a cost;
- Issuing a preferred bidder letter: This is a letter signed by the preferred bidder that documents all of the above points, particularly those outstanding issues to negotiate and each partys corresponding views. A form of this should be included in the RFP.
Following the above steps will help a procurer manage and control the closing out process from the preferred bidder stage through to contract signing and financial close.
10. Delivery stage: capacity-building of procurer staff
Major infrastructure projects will be new to some procurers, who may have traditionally procured their infrastructure assets through traditional means. Some individuals within procurers and indeed within centralized project management offices, may be embarking on their first pathfinder major infrastructure project. It is therefore important that the procurers external advisers guide their clients through each project step and thereafter help to build internal capacity for future projects.
Through maintaining records of steps and problems that arise and crucially, how such problems are resolved, will facilitate capacity-building and help procurers run future processes more efficiently. Workshops, issues papers and lessons learned papers are all tools that are routinely used by experienced advisers to help their procurer clients build internal capacity.
The above are some of the key considerations King & Spalding believes will help procurers successfully deliver their major infrastructure projects. Their tips are not exhaustive, and proper legal advice should be sought in all cases.
Tim Burbury is a partner in the Abu Dhabi office of King & Spalding. He has advised on many PPPs internationally and is currently advising on several PPPs in the Middle East.
Co-author Timm Smith is an associate in the Abu Dhabi office of King & Spalding, practicing in major projects including PPPs.