Two engineers figure out how to build a roof for a construction project in India
Over the past 20 years, I have been analyzing and advising on PPPs for infrastructure projects in India and overseas, especially in the South Asia region where PPPs have played a crucial role in bridging the infrastructure gap by complementing the lack of public funds and bid capacity. Having been part of many a successful PPP project, I dare say that to set up a PPP project for success, there are three important components that can help ensure a successful PPP bid.
First, it’s essential to have a well-defined bidding process that is transparent and results in finding the best value for money. This means the procurement process is legally tenable, equitable, and doable—ensuring the bidders will be evaluated fairly, have access to the same simple data, and leave little to the subjective discretion of evaluators. Clear and transparent bidding criteria ensure the PPP is competitively bid, innovative, and results in discovering the optimum value for money.
A good example of a structured bidding process is a “two-packet system" or “two-envelope bidding” where only those bidders who meet the technical parameters can participate in the financial bid. This allows the procuring agency to evaluate the technical credibility of the bidder including the technical proposal without reference to the price or cost. Following approval of the technical evaluation, the price proposals are opened in public and evaluated.
The process is not only beneficial for the procuring office, but equally or more useful to the private sector entity bidding for the project, as it levels the playing field and provides objectivity, with the bid getting accepted that is the most substantial at the optimum price, which may not be the lowest price.
It may be worthwhile to follow a “Quality cum Cost-Based Selection (QCBS)” to procure a preferred bidder, which is an alternative to simply awarding contracts to the lowest bidder. Practiced in many South Asian PPP procurements, a QCBS is well suited for roads and transport PPPs where it’s desirable that bidders possess a certain amount of technical skills and previous construction or operational experience.
To ensure the “Quality of Concessionaire,” i.e., the first part of a QCBS, the design of the evaluation matrix will have to be project specific and largely depend on the experience and imagination of the transaction advisor. While being restrictive to wean out the inexperienced, extra bullish, or fatigued companies, the technical evaluation must facilitate narrowing in on those who demonstrate competence and credibility in their project construction journey. One successful example of a transport hub led by a consortium resulted in success despite the huge impact of the Southeast Asian economic crisis of the late 90s.
Finally, the financial bid, i.e., price/cost, is an essential part of the QCBS evaluation. It has to be unambiguous, risk free, and finite. While the bidder should be able to state the price/cost/expected grant/offered premium, etc., at which they can deliver e. the project, it should always secure the public authority against any hidden risks that may be packaged along with an apparent exciting offer.
There have been cases where a financial bid was made lucrative by manipulating inadequacies of the financial bid criterion listed in the request for proposal (RFP). In one case I am familiar with, the financial bid was based on the net present value of the premium to be paid over a 30-year concession period and the project got awarded to a bidder promising higher returns at later years without suitably discounting for policy, traffic, and other risks—which effected the project soon after commercial operations started. This resulted in a substantial revenue loss for the public authority.
PPP concessions are long term and demand meticulous procurement so as to objectively exploit the strengths of the private sector and deliver infrastructure that is lasting and runs efficiently with little or no disputes. PPP procurement transaction advisors should adopt a project-specific approach that is thoughtful enough to design the right bidding process. Following these steps sets the PPP up to deliver the best results for all parties.
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff, or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
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