competitive tendering of ppps – opportunities from a private … · 2015-01-30 · hire them and...

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


• 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


• 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


• 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


• 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


• 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


• Least experienced bidder: -Requires the least government support -Offers the lowest bid -Estimates the highest demand


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


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


• 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


• 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.


• 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


• 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)


• 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


• 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”


• 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


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


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

competitive tendering of ppps – opportunities from a private … · 2015-01-30 · hire them and...

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