The sovereign funding gap caused by a low oil price environment, coupled with a global period of economic uncertainty, are two drivers leading governments and state owned enterprises (SOEs) throughout the Middle East and North Africa, Turkey and South Asia to embrace private financing methods of infrastructure delivery, including through public private partnerships (PPPs).
Private financing, whether under a Build-Own-Operate (BOO), Build-Operate-Transfer (BOT), Rehabilitate-Operate-Transfer (ROT), or pure PPP model, are each potentially effective methods of procurement if implemented correctly.
These methods offer value for money, harness the private sector’s expertise in infrastructure delivery and finance, and create efficiencies and innovation to help drive economies. Infrastructure delivery, particularly social infrastructure and essential services infrastructure, are critical for the wellbeing of society and when public purse strings are tightened. Tapping into private forms of finance and expertise can keep these critical infrastructure pipelines moving.
We are now seeing many State and National Governments enacting supporting legislation to deliver infrastructure projects; guidelines are being published and RFPs for advisers are underway. All of these factors suggest that private finance including PPP will be here to support the various 2020 and 2030 infrastructure plans and objectives, particularly Saudi Arabia’s National Transformation Program 2020 (NTP).
The Benefits of Competitive Tendering
The NTP, which is ambitious, points to a greater involvement by the private sector in Saudi Arabia’s infrastructure, most likely through privatisations and PPPs. Some may be greenfield developments and others may be rehabilitation of partly built hospitals, schools and other infrastructure. In all cases, there will be a need to tender for the private sector’s involvement.
Government mandated competitive tendering exists due to the over-riding duty of all governments to manage the public purse effectively. A central component is that all public infrastructure procurements should be focused on obtaining the best value for money. This can generally be described as obtaining the best blend of commercial and technical quality for the least financial outlay over the period of the project.
A well-managed competitive tendering process helps to illustrate that the procuring authority has a commitment to openness and transparency. This serves to increase the level of interest in future partnering opportunities. Finally, in procuring a private partner, efficiency is the key and by using clear timeframes and competitive tension to its advantage, procuring authorities can deliver major infrastructure projects quickly and minimise the risk of delayed bilateral negotiations with entrenched providers.
A key consideration for all government entities and SOEs looking to embark on major infrastructure projects is aligning their proposed procurement process with existing laws and regulations for traditionally procured infrastructure. In most cases, governments are subject to specific tendering laws which require the competitive tendering of contracts for government initiated projects over certain financial thresholds. These tendering laws are predominately designed for traditional procurement, not privately financed infrastructure projects including PPPs. In some instances, Governments are enacting specific PPP and other laws to either override traditional tendering laws or to compliment these in a way that provides certainty for the public and private sectors. In any event, legal advice will need to be sought to confirm the procurement route.
Further, unlike the European Union’s procurement regime, there is no centralised system to advertise tender opportunities throughout the Middle East. This has led to a general trend of authorities approaching a familiar set of market participants when tendering projects, particularly in the power and water sectors. Of course, and as mentioned above, procurement rules at a country level may be relevant, such as Saudi Arabia’s Government Tenders and Procurement Law and the Implementing Regulations. Legal advice will need to be sought to confirm the application or otherwise of such laws and rules.
Top 10 Tendering Tips
We provide below some key considerations for procuring governments and SOEs when embarking on competitive tender processes for major infrastructure projects. Our “Top 10” tendering tips are not exhaustive, but cover what we feel, based on experience, are critical steps to implement for successful projects.
Our tips are designed to help procuring authorities and SOEs (Authorities) in the following sectors:
Transport – departments of transport, local roads authorities, airport authorities, port authorities, rail authorities.
Healthcare – departments of health, healthcare authorities, public hospital procuring authorities.
Education – departments of education, schools authorities, universities and technical colleges.
Civic – departments of justice, local/municipal authorities.
ICT - departments of communications and technology.
Culture - departments of cultural affairs.
Accommodation – housing authorities, workers’ residential developers.
Defence - department of defence, state-owned military enterprises.
Energy & Utilities – departments of energy/environment, waste management authorities, water authorities, power authorities, developers of real estate (for district cooling and other utilities).
In our next article, we provide tips to bidders in approaching RFPs for major infrastructure projects.
1. Develop A Comprehensive Procurement Plan
The most important part of running a competitive PPP procurement is invariably the work undertaken prior to the process commencing. A fully thought out and delivered procurement plan reflects well on the procurer as it ensures a high quality level of organisation throughout the process.
An Authority’s initial considerations should include:
procurement team: competitive procedures require commitments in terms of time and resources. An Authority needs to give serious consideration to the amount of man-hours it can commit to the procedure. Given the inherent complexity of major infrastructure projects, Authorities will need to engage external legal, technical and financial advisors early in the process;
procurement procedure: an Authority has a choice of several different procedural approaches, for example, an expression of interest followed by an open procedure whereby all interested bidders in the market are invited to tender or a restricted procedure which requires interested tenderers to pre-qualify before they are able to participate; and
procurement timescales: procurement processes are invariably 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 re-tendering.
The output from the above is a procurement plan, which is approximately 15-20 pages in length. This is a blueprint by which all stakeholders can refer at any stage of the process to guide them through the entire tendering process. The blueprint will address:
An overview of the project including a description of the infrastructure and services required;
The objectives of the Authority and any commitments (e.g. core services v. non-core services);
Structuring & procurement options for the project;
An overview of the recommended contractual arrangements for the project; and
An implementation step-plan for the project.
The costs of not developing a comprehensive procurement plan include potential delays to the timescales, increased costs and a higher potential for bidder withdrawals.
2. Conduct a ‘Project Bankability’ Test
Prior to tendering a major infrastructure project, the most effective method to test the project’s “bankability” is to internally test whether the commercial solution being sought will attract investment.
The purpose is to ensure the Authority’s 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 advisors who have successfully delivered major infrastructure projects in the given sector. Conducting a project bankability test will give reassurance to Authorities that their proposed project will be attractive to the market and will attract bids.
3. Conduct a Market Sounding Exercise / Expression of Interest (EOI)
Unless an Authority has no time to conduct a market sounding exercise, the Authority should conduct an open day, or series of supplier meetings, market-sounding questionnaires, meeting potential interested bidders or, preferably, it should issue a formal EOI document to the market.
An EOI is effectively a high-level “teaser” published by an Authority to encourage prospective bidders to register their interest in participating in the given infrastructure project. It can be anywhere from 3 pages to 10 pages in length.
Broad publication ensures that Authorities are aware of a greater portion of the market potential. This is especially relevant for those Authorities with minimal experience in delivering major infrastructure projects. It is also relevant for private sector bidders who have been encouraged by recent infrastructure policy announcements such as the NTP and who are seeking to establish themselves within an emerging infrastructure market.
Conducting an EOI and engaging early with the market will allow the Authority to sense check that the opportunity is attractive to bidders and that there is sufficient interest in the project to justify the procurement process. It also allows bidders to start planning before a formal request for proposals is issued.
4. Shortlist Bidders
An Authority will normally pre-qualify bidders based on technical experience, after bidders have provided responses to the EOI document. This is to avoid having 20 or more bidders. Recent examples of solar projects in Dubai and Abu Dhabi have seen a very large number of bidders who have expressed their interest. This is simply not manageable for Authorities.
Best practice suggests that five to seven short-listed bidders are sufficient to maintain a competitive tendering environment whilst covering the risk of withdrawal by one or two short-listed bidders. Many bidders will in fact be consortia of multiple-parties including sponsors, lenders and FM/O&M Contractors and perhaps 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.
5. Conduct an RFP Process and Prepare Tender Versions of Legal Agreements in Advance
The cornerstone of the procurement is the tender document itself. This is often called the “request for proposal” (RFP), “request for tender” (RFT) or “invitation to tender” (ITT). For the purposes of this article, the term RFP is used.
An RFP for a privately financed infrastructure project is an inherently complicated document and has specific differences from a traditional construction procurement. Examples of these differences lie in 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 that an Authority needs to allow sufficient time to prepare it, with assistance from experienced legal, technical and financial advisers.
The RFP establishes how a procurement will be conducted, the key milestones and the rules with which all parties will need to adhere. The Authority should ensure that 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 likely payment mechanism, technical overview, submission requirements and evaluation methodology.
It is critical that the Authority’s legal advisers draft tender versions of the project legal agreements and that these are included as appendices to the RFP. If time constraints will not permit this, then Term Sheets or Heads of Agreement should, as a minimum, be included in the RFP document. This approach is not recommended as it will add further time and expense, given full project legal agreements will be later issued as addenda to the RFP.
Preparing tender versions of the project legal agreements allows bidders to assess the project’s risk allocation and to manage liabilities and risk. If legal agreements are not included, bidders may not bid, or may bid but reserve their position on all risks and seek to adjust their pricing once the legal agreements are tabled through addenda.
6. Develop a Robust Output Specification
Major infrastructure projects requiring private finance are very different from traditionally procured construction contracts. Major projects are focused on outcomes which best meet the needs of the Authority. These needs are generally articulated in the form of an “output specification”. Unlike traditional methods of procurement which tend to have input-based specifications, the underlying philosophy of the major infrastructure projects, including under a PPP model, is to focus on output-based specifications.
An output-based specification outlines an objective. Taking a 1000 pupil school as an example, the requirement would be stated along the lines of: “The private sector shall build a school to accommodate 1000 pupils which meets the Department of Education’s class room design and maximum pupil standards.” In other words, the outcome is stated, but not the method of achieving the outcome. In contrast, in traditional procurement, an input-based specification would be more granular and might specify the requirement for 50 classrooms with exact dimensions, specifications and prescribed materials to accommodate the 1000 pupils.
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. This is because bidders are required to manage and maintain the infrastructure over the life of the project (maybe 25 years). In traditional procurement, however, the building contractor focuses only on its obligations during the construction period (e.g., 12 months).
As a minimum, Authorities should ensure that the output-based specification contains:
a clear description of the scope of service;
a clear description of the specific service requirements; and
performance standards (or Key Performance Indicators or KPIs) for each service, which are then linked to a performance monitoring regime.
7. Post Bid Dialogue Sessions
During the bid phase, it is not uncommon to allow an opportunity for the Authority to enter into dialogue with all bidders. These sessions allow bidders to discuss points of clarification, to sense-check aspects of their proposals and refine their proposals.
On complex infrastructure projects, particularly with tight lead times, these sessions can be time consuming and provide a logistical challenge for the Authority. Momentum can be preserved by effectively planning these sessions. This can be done by sending out an agenda identifying topics, individuals required, outputs required and periods of time for each bidder to present. Suggestions might include:
commercial: this part of the session addresses issues such as the financial model, financing issues, and unitary payments/tariffs.
technical: this part of the session addresses issues such key performance indicators, quality standards and performance management, as well as queries on any technical issues in the RFP.
legal: this part of the session addresses issues such as 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 that the sessions are followed up with a formal addendum to all bidders with clarifying points.
8. 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 Authority.
The two main areas of evaluation are usually (1) commercial; and (2) 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 which 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:
Robustness of Bidder’s technical method statement;
Quality of the design for all service users/design philosophy; and
Robustness of Bidder’s proposed implementation schedule.
Sample commercial evaluation criteria for a hospital PPP project might include:
Quantum of the Unitary Charge for performing the services;
Bidder’s proposals in relation to certain non-core services (e.g. Pharmacies);
Robustness of Bidder’s financing methodology; and
Bidder’s comments on the Project Legal Agreements.
Each category will be given a score of 0 - 100 based on certain criteria. For example:
0 = fails to submit required documentation or submission;
20 = fails to meet criteria;
40 = below expectations;
60 = generally acceptable response, meets minimum criteria with few exceptions;
80 = good and acceptable response, meets minimum criteria with few exceptions;
100 = excellent response, meets minimum criteria with no qualifying exceptions.
Specific formulae are then used to calculate the weighting and to determine the bidder with the most advantageous proposal according to the Authority’s 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 key point to keep in mind when issuing an RFP for major infrastructure projects is to limit the areas for comparison of bids, so as to ensure the Authority is comparing “apples to apples.” For example, if there are various elements of a tariff, the Authority might ask bidders to price one of those elements and to assume the other elements. One of the potential pitfalls in tendering is that the Authority might allow too much scope of differences in pricing and other commercial aspects of the RFP, which can lead to a delay while the Authority tries to makes sense of the various different bids. Allowing alternate proposals is another way to allow innovation from the private sector, but such alternate proposals must be accompanied by a compliant proposal.
9. Limit Scope for Negotiations
Experienced legal advisors will ring fence negotiation points prior to the preferred bidder stage. This flexibility is crafted within the RFP document. It is not uncommon for the preferred bidder to seek to open up points of risk once the competitive environment has concluded, so it is critical to ensure all outstanding points are clearly understood going into the preferred bidder stage and steps are taken to fend off these challenges.
Authorities can do this by:
avoid revisiting agreed issues or introducing new ones: the authority 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 re-open issues already agreed upon.
involve 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 bidder’s 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 legal agreements and that the bidder’s 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, often helps to retain a sense of competitive tension during contract negotiations.
issuing a preferred bidder letter: this is a letter signed by the preferred bidder which documents all of the above, particularly those outstanding issues to negotiate and each party’s corresponding views.
requiring a tender bond: bidders in procurements are typically required to provide a tender bond as part of their bid. This can be called upon in circumstances such as the bidder withdrawing its bid. A time-limited tender bond which can be enforced in the event that negotiations with the preferred bidder fail or become unreasonably protracted is another approach to ensure the bidder is incentivised to negotiate reasonably.
Following the above steps will help an Authority to manage and control the closing out process from the preferred bidder stage through to contract signing and financial close.
10. Lessons Learnt for Capacity Building of Authority Staff
Major infrastructure projects will be new to some Authorities who have traditionally procured their infrastructure assets through public funds. In this regard, individuals within Authorities and indeed within centralized project management offices, may be embarking on their first ‘pathfinder’ major infrastructure project. It its therefore important that the Authority’s experienced advisers guide their clients through each project step and thereafter help to build internal capacity for future infrastructure projects.
Maintaining records of steps and problems that arise and crucially, how such problems are resolved, will facilitate capacity building and help Authorities 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 Authority clients build internal capacity.
The above are some of the key considerations we believe will help Authorities successfully complete tender processes for major infrastructure projects. These are not exhaustive, and proper legal advice should be sought on all aspects of the tendering process.