Unsolicited proposals in infrastructure: a balancing act between incentives vs. competition

Photo: kupicoo/ iStock

A key challenge when developing a policy to manage unsolicited proposals (USPs) in infrastructure projects is to strike a balance between receiving submissions and creating competitive tension. In a previous blog, we warned that USPs should be used with caution as an exception to the public procurement method, and argued that a good policy to manage USPs can help ensure transparency and predictability, and protect the public interest.
 
Surely a government that decides to consider USPs and develops a policy to manage them will look forward to receiving compliant proposals. At the same time, the government should ensure the project represents a fair market price and delivers value for money. Yet what is the incentive for the private sector to submit an unsolicited bid if the government takes it and competitively procures it? How can a government make USPs appealing to the private sector while attracting enough competing bidders?

Is direct negotiation the solution? No. 

Many will think the answer is to directly negotiate the project, but as described in the Review of Experiences with Unsolicited Proposals, we found this leaves the government in a weak negotiating position, with no evidence that directly negotiated proposals lead to faster delivery and to better, innovative projects. Most governments examined in the Review competitively tender USP projects, since directly-negotiated projects often struggle with controversies over transparency and accountability that can delay implementation. In fact, competitive tenders of USPs should be the default option as the procurement approach most likely to achieve value for money and society.  And this applies to the private sector as well: a survey of U.S. companies found that 70% favored competitive tenders and acknowledged that it is in their best interest to follow transparent regulations and competitive procedure. The private sector is ready to compete.

It is therefore up to governments to find that sweet spot between providing incentives for the private sector to submit serious proposals on one side, and rewarding the USP proponent without distorting and discouraging competition on the other. The World Bank Group’s  Policy Guidelines for Managing Unsolicited Proposals in Infrastructure Projects offer recommendations and guidance for governments to develop a USP policy that maintains equal-bidding conditions during competitive tender.

It is fair to reimburse the studies? There is no such thing as a “free meal”

Under a competitive tender, it is recommended that the government develops its own studies and limits the involvement of the USP proponent to avoid giving strategic advantages that may distort competition. However, in circumstances where the USP proponent is asked to develop feasibility studies, it will expect compensation for the costs incurred. In countries such as Chile, Peru, and Italy, as well as in the U.S. state of Virginia, it is common for the government to repay the cost of the studies when the project is tendered or awarded, and it is good practice to wait until that moment. Reimbursement of such studies is a good way of once again finding a balance to ensure equal-bidding conditions: the USP proponent would otherwise be disadvantaged and burdened with expenses that other bidders have not incurred.

Also, as the government needs to have a clear idea of the costs and scope of the studies that will be developed by the private entity, it is recommended to sign a Project Development Agreement (PDA) to define the role of the USP proponent, responsibilities, and the reimbursement mechanism. For instance, Virginia only reimburses project development costs if it entered into a PDA with the USP proponent.

The question of incentives

At the tender stage, incentive mechanisms could be used to ensure competitive tension, and the Guidelines recommend choosing the options that least distort competition.

Automatic shortlisting allows the USP proponent to be automatically shortlisted to the final bidding stage. The bonus mechanism provides the USP proponent with a small bonus, usually expressed as percentage points during bid evaluation. The latter has been used by Chile, where the bonus has not discouraged external bidders from participating in and winning projects. In some places, such as in South Africa and Virginia, the government uses a no incentive approach, where the USP proponent receives no incentive during the tender. Quality USPs can still be encouraged with the reimbursement of costs incurred in the development of any feasibility studies. One approach does not preclude the other. The key is to provide a small (if any) advantage to the USP proponent without reducing market interest from competing bidders.  

There is another incentive: the right-to-match (also known as the Swiss Challenge) that gives the USP proponent the right to match a competing proposal to win the contract. This mechanism is highly discouraged by the Guidelines—competing bidders will have little incentive to spend resources developing a bid when they know it can be matched by the USP proponent. Our Review of Experiences found that countries that use the right-to-match, including Italy, the Philippines, or Colombia, struggle to attract competing bidders during the procurement process.

The rules of the game need to be clear, to attract competition

It is critical to remember that incentives are not a panacea and they must be placed in the context of a clear, well-structured policy framework to manage USPs.  Creating healthy competition also depends on good PPP procurement practice of a country, such as: a transparency and public disclosure policy to avoid perceptions of corruption and provide legitimacy to the process; introducing minimum submission requirements (such as technical and financial capabilities of the USP proponent or pre-feasibility studies) to filter out non-serious and low quality proposals; allowing sufficient time for competing bidders to develop their proposals and thus create market interest. A good, comprehensive policy will protect the public interest, ensuring fairness and competitiveness throughout the process.

It is up to the government to perform this balancing act and assess which incentive mechanism would be the best fit for its market and USP policy. Given the challenges associated with USPs, the government has the right to be demanding. A private entity that puts pressure on public authorities to immediately sign exclusivity agreements and bypass competition, that avoids disclosure of documents, and pretends to speed-up timelines, is probably only looking for opportunities for rent-seeking. In a situation where the perception of corruption is usually very high, is this the kind of long-term partner a government wants?

Ultimately, publicly-originated well-structured projects remain the best way to attract competition and ensure value-for-money.  For those public authorities that are willing to consider USPs, they need to put themselves in a good position to be able to attract serious private sector bidders. Committing to competitively tendering its projects within a transparent and clear policy framework with balanced incentive mechanisms is an efficient way to do so.

To learn more about the World Bank Group’s Policy Guidelines on USPs, you can start with the  Main Findings & Recommendations.