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Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art 4', 'art 5', 'art 6', 'art 7', 'art 8', 'art 9', 'art 1', 'art 3', 'art 4', 'art 5', 'art 6', 'art 7']

A Guide To Guidance: Sourcebook For Ppps | Public–Private Partnership | Procurement
A Guide To Guidance: Sourcebook For Ppps
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National Treasury PPP Practice Note No 1 of 2004
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European PPP Expertise Centre • European PPP Expertise Centre • European PPP Expertise Centre • European PPP Expertise Centre • European PPP Expertise Centre
Sourcebook for PPPs
Version 2, February 2011
Terms of Use of this Publication
The European PPP Expertise Centre (EPEC) is a collaboration amongst the European Investment Bank (EIB), the European Commission, Member States of the European Union, Candidate States and certain other States. For more information about EPEC and its membership, please visit http://www.eib.org/epec.
This publication has been prepared to contribute to and stimulate discussions on Public Private Partnerships as well as to foster the diffusion of best practices in this area.
The findings, analysis, interpretations and conclusions expressed in this publication do not necessarily reflect the views or policies of the EIB, the European Commission or any EPEC member. No EPEC member, including EIB and the European Commission, accepts any responsibility regarding the accuracy of the information contained in this publication or any liability for any consequences related to the use of this publication. Reliance on the information provided in this publication is therefore at the sole risk of the users.
EPEC authorises the users of this document to access, download, display, reproduce and print copies of its content. When doing so, EPEC would be grateful to users for quoting the source of the material.
EPEC provides links to third-party web sites. EPEC has no responsibility for these third-party web sites, which are governed by the terms of use, if any, of the applicable third-party content providers.
A Guide to Guidance: Contents
Readership of the Guide
Assessment of PPP option
Before launching the tender
PPP contract and financial close
Annex 1: Project finance
Annex 2: A note on legal frameworks for PPPs
Table 1. PPP project cycle and structure of the Guideand steps
Table 2. Accounting treatment of a PPP according to ESA95 rules
Table 3. A comparison of EU procurement procedures
Box 1: PPP advice during procurement
Box 2: Combining Cohesion and Structural Funds with PPPs
Box 3: Traffic revenue risk allocation
Box 4: Payment mechanism
Box 5: Insurance
Box 6: Sharing gains from refinancing
Chart 1. Detailed preparation
Chart 2. Organisation steps
Chart 3. Pre-tender steps
Chart 4. Procurement
Chart 5. Bidding steps
Chart 6. PPP contract and financial close steps
Chart 7. Project implementation
Chart 8. Contract management steps
Chart 9. Ex-post evaluation steps
A public private partnership (“PPP”) arrangement differs from conventional public procurement in several respects. In a PPP arrangement the public and private sectors collaborate to deliver public infrastructure projects – such as roads, railways, airports – which typically share the following features:
A long-term PPP contract between a public contracting authority (the “Authority”) and a private sector PPP company based on the procurement of services, not of assets;
The transfer of certain project risks to the private sector, notably in the areas of design, build, operations and finance;
A focus on the specification of project outputs rather than project inputs, taking account of the whole life cycle implications for the project;
The application of private financing (often project finance 1 ) to underpin the risks transferred to the private sector;
Payments to the private sector which reflect the services delivered. The PPP company may be paid either by users (e.g. toll motorway), by the Authority (e.g. availability payments, shadow tolls) or by a combination of both (e.g. low user charges together with operating public subsidies).
The rationale for using a PPP arrangement instead of conventional public procurement rests on the proposition that optimal risk sharing with the private partner delivers better Value for Money 2 for the public sector.
PPP arrangements are, however, more complex than conventional public procurement. They require detailed project preparation and planning, proper management of the procurement phase to incentivise competition among bidders. They also require careful contract design to set service standards, allocate risks and reach an acceptable balance between commercial risks and returns. These features require skills in the public sector which are not typically called for in conventional procurement.
This Guide to Guidance (the “Guide”) seeks to identify the best of breed guidance currently available from PPP guidelines worldwide and selected professional publications. By providing a sourcebook of good PPP practice, it is designed to assist public officials responsible in launching and implementing PPP projects and to facilitate their understanding of the key issues and procedures involved in the procurement of PPP arrangements.
1 See Annex 1 for an overview of the principles of project finance.
2 Paragraph 1.2 discusses the concept of Value for Money.
The need for well-structured PPPs has never been greater. EU Member States and the European Commission have placed emphasis on the need to accelerate investments in infrastructure, by mobilising public and private sector finance through PPP arrangements as part of a strategy to address the economic downturn. 3
This Guide can be used in a number of ways. For example:
As an introduction to the information to be requested from PPP advisers;
Because it has been designed as a good practice sourcebook, the value of the Guide ultimately depends on the value of the information sources provided in it. These sources are indicated in the Guidance at the end of the Guide. They contain the title of the publication, its author(s), date of publication and a brief paragraph explaining the topics covered in the publication.
All sources of guidance have a reference number to guide the reader to further information about the issue discussed in the text. This is done by using the symbol “ Guidance” next to the relevant reference number.
Most sources relate to existing PPP guidelines or public policy material which can be accessed via the internet. In those cases, the references include the internet link address. For publications, such as printed books or other published material that cannot be accessed via the internet, the source description includes the ISBN details.
In a rapidly changing environment, such as that characterised by infrastructure PPPs worldwide, new practices develop quickly making existing ones obsolete. In preparing the Guide, an effort has been made to review and recommend the most up to date PPP guidelines and documentation currently available.
The Guide is written in English. Most of the PPP guidance currently available comes from countries such as Australia or the United Kingdom, for example – which have an extensive PPP experience – or from international organisations, such as the World Bank, whose institutional mandate includes the gathering of best practice worldwide. In the case of the latter, although the language of the guidance is English, the content
3 See Commission Communication: COM(2009) 615 of 19 November 2009, Mobilising private and public investment for recovery and long term structural change: developing Public Private Partnerships http://www.eib.org/epec/resources/commission-communication-on-ppp-en.pdf
draws on experience from non-English speaking countries and therefore such sources are applicable to a wider audience.
The Guide also includes references to available PPP guidance material in non-English speaking European countries such as France, Germany, and Greece. This Guide, however, only references the original language guidance source.
The legal framework in place in a specific country needs to be taken when designing a PPP arrangement. Annex 2 of the Guide discusses basic principles of PPP legal frameworks.
This Guide does not replace, to any extent or measure, the need for an Authority to take professional advice from its legal, technical, financial, environmental and other advisers. The Guide should, however, assist users in having a more productive dialogue with their advisers.
The Guide is primarily intended for public sector officials from EU Member States who are in charge of PPP projects and have knowledge and experience in conventional public procurement but who are not familiar with PPP arrangements. Users may find themselves at different stages of decision-making in the PPP project cycle. To illustrate this point, consider the following scenarios:
Scenario 1 – A project proposal has been identified and initial pre- feasibility studies completed. The Authority is considering whether to follow a PPP route and needs to compare PPP against other available procurement strategies to be able to select a preferred procurement option. The Guide suggests a number of sources of information to help the Authorities to do the necessary analysis to evaluate if PPP is the preferred procurement option.
Scenario 2 – An Authority is committed to develop a project with a PPP arrangement but the public officials in charge of defining the project strategy have not been previously involved, or have little experience, with PPP procurement methods. They need to understand, among other things, what to expect in terms of how to seek expert advice, the steps required in the PPP project cycle, and how to engage with the private sector. The Guide provides a road map of all the steps that need to be taken in the procurement phase of the PPP project cycle.
Scenario 3 - A PPP project is already under implementation and the PPP company proposes changes to the PPP contract, which may impact its financial balance and the Value for Money rationale of the existing PPP arrangement. The public sector officials in charge need to understand the impact of the proposed changes and what information to request from their advisers to be able to negotiate with the PPP company with a view to preserve Value for Money in the contract. The Guide covers the key issues that the Authority needs to consider when renegotiating a PPP contract.
As shown in Table 1 below, the structure of the Guide follows the four key phases of the PPP project cycle.
Table 1. PPP project cycle and structure of the Guide: phases, stages and steps
- Assessment of PPP option
- Eurostat treatment
- Plan and timetable
- Before launching the tender
- Detailed PPP design
- Procurement method
- Bid evaluation criteria
- Draft PPP contract
- Bidding process
- Notice and prequalification
- Interaction with bidders
- Final PPP contract
- PPP contract and financial close
- Monitoring service outputs
- Adjustments in the contract
- Changes to the contract
Each chapter of the Guide deals with a phase of the PPP project cycle and is broken down into two stages. For each stage, the Guide identifies the key steps which the Authority and its advisers need to take before moving to the next stage. The discussion of the key steps includes the rationale for the step, the key tasks involved and references to Guidance sources to understand those tasks further.
Specific issues, for example traffic risks and payment mechanisms, or combining EU grants with private finance, are developed in more detail with text boxes because of their fundamental role in the design of the PPP arrangements;
Checklists are included at the end of each stage to remind the reader of the key tasks that have to be fulfilled before moving to the next stage;
Two annexes complete the Guide. Annex 1 covers the basics of project finance which are relevant to PPP projects in general. Annex 2 is a note on the legal frameworks for PPPs.
This Chapter 1 provides a brief summary of the main issues of the project identification phase, which takes place before the preparation and procurement phases. The project identification phase is important because it determines whether the selected project can (and whether it should) be delivered as a PPP instead of using conventional public procurement.
The ultimate objective of a project selection process is to ensure that it represents Value for Money. Value for Money refers to the best available outcome for society taking account of all benefits, costs, and risks over the whole life of the project. Guidance 2 A necessary condition for a project to represent Value for Money, irrespective of the procurement option chosen to deliver it, is that the benefits to be derived from the project outweigh the costs. This is normally tested by undertaking a cost-benefit analysis of the project and its requirements.
A distinctive feature of PPP projects is that their requirements are defined in terms of outputs rather than inputs. Conventional project procurement has usually focused on inputs. In this regard, PPPs involve fundamental changes in the way projects are prepared and in the information that the Authority needs to provide to private sector sponsors. While the typical set of feasibility studies used in the public procurement of projects focus on inputs, PPP projects demand a clear set of output requirements and service quality standards which are reflected in the PPP contract (see 2.2.5 Prepare draft PPP contract). As a result of the output nature of PPPs, the bulk of the technical design 4 activities for a project will be carried out by the private
partner. Guidance 3
In the project selection step, the Authority and its advisers will review alternative project definitions in the context of a PPP policy, sometimes following guidelines that the public sector will use to assess all PPP projects. These guidelines normally specify who approves what and when throughout the process of project selection, preparation and procurement.
Once a project specification is selected, the Authority and its advisers will undertake feasibility analyses and project preparation, including supply or demand analysis, cost analysis and a preliminary environmental assessment of the potential impacts of the project.
In order to consider the PPP procurement option, the Authority and its advisers need to answer a set of key questions:
4 The term “design” is used in several ways throughout the Guide. To avoid confusion, the expression “technical design” refers to the plans or sketches used for the construction of a project.
Is the project affordable? Will users or the government 5 , or both, pay for the project? How will they pay? (e.g. user charges, operating subsidies, public sector or EU grants)
What are the key sources of risk in the proposed project? What is the optimal risk allocation and risk management strategy?
What are the financing sources for the proposed project? Will the project be bankable (i.e. capable of raising debt finance)? Will it attract investors? Will it comply with the requisites for EU or national public funding?
Even if the project is affordable and bankable, does the project represent Value for Money?
For many countries, the issue of the balance sheet treatment of the project (i.e. will it score as a public sector investment for the purposes of national debt and deficit under the Excessive Deficit Procedure of the Maastricht Treaty) is also important.
1.2 Assessment of PPP option
Stage 1.2 identifies a list of issues and considerations for the attention of the Authority and its advisers when considering the PPP option. It does not however offer a comprehensive catalogue of recommendations, as the assessment of the PPP choice will be dependent on the specific situation of each country, notably in terms of legal and institutional context.
Affordability relates to the capacity to pay for building, operating and maintaining the project, be it the capacity to pay of the users of the services or that of the government that has identified the need for the asset to be built.
An affordability assessment requires a careful analysis of the expected operating and maintenance costs of the project, together with the levels of cash flow required to repay the loans and provide a return to investors of the PPP company. The financial and technical advisers will develop a financial model to assess alternatives in terms of a range of capital, operating and maintenance cost estimates, appropriate cost escalation indexes, assumed financing structure and preliminary PPP contract terms. At the pre-feasibility stage, the financial model is developed at a fairly high level. It is later on, at the feasibility stage and when the PPP arrangement is designed in detail, that
5 In this Guide, the term “government” refers to the public authorities, whether central, regional or local.
the financial model is further developed and refined (see 2.2.2 Prepare the detailed design of the PPP arrangement).
The assessment of costs translates into an estimate of the required revenues to meet those costs:
In PPPs where users pay directly for the service (the so-called “revenue- based PPPs”), the Authority and its advisers need to examine the capacity and willingness of users to pay, especially if tariffs need to be increased from current levels to meet revenue cash-flow targets. In many PPPs, the public sector will need to subsidise the service in order to make it affordable. The use of public subsidies can impact the Value for Money of a PPP arrangement requiring that the net life-cycle efficiency savings from the PPP option be large enough to compensate for the use of public funds;
In PPPs where the Authority makes the payments (“availability-based PPPs”), assessment of affordability is a key consideration in the design of the transaction. The Authority will enter into payment obligations over the life of the PPP contract (the so-called “service fee”), which represents long-term commitments and can influence the design of the transaction and its Value for Money proposition. Sometimes, options that combine direct charges to users with service fees may need to be examined.
Thus, affordability relates not only to the financial balance of the PPP arrangement, but also to public expenditure items in general. A PPP project is considered to be affordable if the public expenditure associated with it can be accommodated within the inter-temporal budget limit of the public sector.
Achieving the Value for Money that justifies the PPP option also depends on the ability to identify, analyse and allocate project risks adequately. Failure to do so translates into financial costs. Thus, at the project identification stage, in addition to assessing the sources of revenue linked with the affordability of the project, the Authority and its advisers need to establish a broad assessment of the risks that arise from the project requirements in order to manage them. Risk management is an on-going process which continues throughout the life of a PPP project. It takes place in five stages: Guidance 4,
Risk identification. The process of identifying all the risks relevant to the project;
Risk assessment. Determining the likelihood of identified risks materialising and the magnitude of their consequences if they do materialise;
Risk allocation. Allocating responsibility for dealing with the consequences of each risk to one of the parties to the contract, or agreeing to deal with the risk through a specified mechanism which may involve sharing the risk;
Risk mitigation. Attempting to reduce the likelihood of the risk occurring and the degree of its consequences for the risk-taker;
Monitoring and review. Monitoring and reviewing identified risks and new risks as the PPP project develops and its environment changes, with new risks to be assessed, allocated, mitigated and monitored. This process continues during the life of the PPP contract.
Broadly speaking, PPP project risks can be divided into commercial risk and legal and political risks: Guidance 6
Commercial risk can be divided into supply and demand risks. Supply risk concerns mainly the ability of the PPP company to deliver. Supply risk can be sub-divided into construction risk and supply-side operation risk (where construction and operation constitute the two phases of the project). Construction and supply-side operation risks include financial market risk due to, for example, changes in the cost of capital or changes in exchange rates and inflation. Demand risk relates to insufficient user volumes compared to base case assumptions;
Legal and political risks relate to, among other factors, the legal framework, dispute resolution, the regulatory framework, government policy, taxation, expropriation and nationalisation.
general, the private sector is better placed to assume commercial risk while
the public sector is better placed to assume legal and political risk.
If public guarantees are envisaged, the Authority and its advisers need to
assess the impact of the risk allocation on the cost of the guarantee and its future implications on public finances before granting the guarantee.
A PPP project is considered bankable if lenders are willing to finance it
(generally on a project finance basis). Guidance 8
The majority of third-party funding for PPP projects consists of long-term debt finance, which typically varies from 70% to as much as 90% of the total funding requirement (for example, in an availability-based PPP), depending
on the perceived risks of the project. Debt is a cheaper source of funding than
equity, as it carries relatively less risk. Lending to PPP projects (usually referred to as project financing or limited-recourse financing) looks to the cash flow of the project as the principal source of security (see Annex 1 for an
introduction to project finance issues as they apply to PPP projects).
The Authority and its advisers need to assess financial risks thoroughly. The financial risks experienced by PPP projects tend to be related to some or all
of the following factors: Guidance 9
Reliance on optimistic revenue assumptions and on levels of demand from a poorly chosen “baseline” case;
Lack of attention to financing needs in the project feasibility, which leads to larger amounts of debt in projects;
Long-term PPP projects that are financed with short-term debt, coupled with a sometimes unjustified assumption that the short-term debt can be rolled over at the same or even better refinancing conditions;
Floating rate debt that creates interest rate risk;
Governments that do not consider the allocation of risks properly and ignore the incentives the PPP company may have to renegotiate the contractual arrangements in its favour; or
Refinancing can also create unforeseen benefits for the PPP company, in which the government might not share if the contract does not explicitly provide for this possibility. (see Box 6 Sharing the gains from refinancing).
A PPP project yields Value for Money if it results in a net positive gain to
society which is greater than that which could be achieved through any alternative procurement route. It is good practice to carry out a Value for Money analysis – essentially a cost-benefit analysis – as part of the initial preparation of a project, regardless of whether it is procured conventionally or as a PPP.
In some countries like the UK, which have extensive PPP programmes, a PPP project is said to achieve Value for Money if it costs less than the best realistic public sector project alternative (often a hypothetical project) which would deliver the same (or very similar) services. Guidance 10 This public sector alternative is often referred to as the public sector comparator (“PSC”).
Carrying out a PSC exercise is part of building the business case for a PPP project. It is a legal requirement in many PPP programmes worldwide. Advisers need to make various cost adjustments to be able to do a detailed quantitative comparison between the PPP project and the PSC. These cost adjustments include differences in tax regime, for example.
It is generally assumed that the PPP option will be more efficient in
investment, operating and maintenance costs than the PSC. So the key question in assessing Value for Money is usually whether the greater efficiency of the PPP project is likely to outweigh factors that might make the PPP more costly – the main ones being transaction and contract oversight costs (i.e. additional bidding, contracting and monitoring costs in a PPP setting) and financing costs (i.e. possible added costs due to private sector financing, especially equity financing). Guidance 11,12,13
Experience suggests that the likelihood that a PPP provides Value for Money
is higher when all or most of the following exist: Guidance 2
There is a major investment programme, requiring effective management of risks associated with construction and delivery; this may be a single major project or a series of replicable smaller projects;
The private sector has the expertise to design and implement the project;
The public sector is able to define its service needs as outputs, which can be written in the PPP contract ensuring effective and accountable delivery of services in the long run;
Risk allocation between the public and private sectors can be clearly identified and implemented;
It is possible to estimate the long-term costs on a whole-of-life basis of providing the assets and services involved;
The value of the project is sufficiently large to ensure that procurement costs are not disproportionate; or
The technological aspects of the project are reasonably stable and not susceptible to short term and sudden changes.
The project identification phase therefore involves an early assessment of what payment structure is feasible, what the government or the users can afford to pay (and when), the impact on the project scope, service level, structure and the associated risks the private sector might be prepared to accept. This exercise should help the Authority to identify and manage any long-term fiscal obligations – implicit and explicit – that may result from the PPP project.
Debt and deficit treatment of PPPs by Eurostat
In challenging times for public finances, the national debt and deficit treatment of a PPP is always likely to be a critical issue from the perspectives of the Authority and government in general. The reason for this is that, given the economic convergence criteria in the Stability and Growth Pact 6 and the mandatory requirements of the Excessive Deficit Procedure, EU governments are concerned that they may be prevented from going ahead with an economically worthwhile PPP because of its ‘debt and deficit’ treatment.
Eurostat requires that the debt and deficit treatment follows the requirements of the European System of Accounts (“ESA95”), which is mandated by a Council Regulation. Guidance 14
Eurostat has issued several interpretations of ESA95, including a Manual on Government Deficit and Debt. Guidance 15
For the purposes of recording PPPs, ESA 95 requires national statisticians to look at the balance of risk and reward in the underlying PPP arrangement. Such balance is judged by analysing the allocation of two key risk categories:
construction risks and market risks (i.e. availability and demand) between government and the PPP company:
Construction risk covers events related to the construction and completion of the PPP assets. In practice, it is related to events such as late delivery, non-compliance with specified standards, significant additional costs, technical deficiency and external negative effects (including environmental risk) which trigger compensation payments to third parties;
6 A criterion is that the ratio of government deficit to gross domestic product must not exceed 3% and the ratio of government debt to gross domestic product must not exceed 60%. See http://europa.eu/scadplus/glossary/convergence_criteria_en.htm.
Availability risk covers situations where, during the PPP operational phase, an underperformance linked to the state of the PPP assets results in services being partial or wholly unavailable, or where these services fail to meet the quality standards specified in the PPP contract;
Demand risk relates to the variability of demand (higher or lower than expected when the PPP contract was signed) irrespective of the performance of the PPP company. Such a change in demand should be the consequence of factors such as the business cycle, new market trends, a change in final users’ preferences or technological obsolescence. This is part of the usual economic risk borne by private businesses in a market economy (for an example, see Box 3 Traffic revenue risk allocation).
Table 2 illustrates the combinations of risk allocation between government and private sector (i.e. the PPP company) which result in the PPP being classified “on” or “off” the government’s balance sheet.
Accounting treatment of a PPP according to ESA95 rules
“ON” or “OFF” Government Balance Sheet
The conclusions from Table 2 are that:
If the government bears the construction risk, the PPP will always be on the government’s balance sheet irrespective of the allocation of the demand and availability risks;
If the private partner bears the construction risk, the PPP will be classified off the government’s balance sheet unless the government bears both demand and availability risk.
It is important for the Authority and its advisers to be aware that the risk allocation which they agree to in the PPP contract can have a direct influence on the treatment of the PPP arrangement on the national debt and deficit.
In addition to the key risks in Table 2, Eurostat also takes into consideration other ways through which governments get involved in PPP arrangements. Again, where such ways influence risk allocation, they may affect the debt and deficit treatment of the PPP. Ways in which government may become involved in PPP arrangements include: government financing, government guarantees and PPP contract termination clauses which involve financial compensation by the government. The impact on the treatment of PPPs of such government financial involvement depends on a careful interpretation of several features including the transfer of risks and rewards that takes place and the degree of government control over the underlying PPP asset.
In case of doubts regarding the appropriate statistical treatment for a PPP arrangement, a Member State statistical authority can request advice from Eurostat on a past (ex post) or future (ex ante) PPP project. Eurostat has established specific administrative rules for the provision of ex-ante advice.
2 Detailed preparation
The project procurement phase in the PPP cycle begins after the project has received approval by the relevant public authority based on a detailed feasibility report or business case. Such approval would support the development of the project as a PPP. Approval of the main project features is important as a prerequisite of the start of the procurement phase since detailed project preparation is a resource-intensive undertaking.
Before the formal procurement phase starts, preparation work is necessary at two levels. We refer to these as (i) getting organised and (ii) finalising all preparations before launching the tender. Chart 1 summarises these stages and their key steps, which are described in detail in this chapter.
Phase 2: Detailed preparation
Stage 2.1: Getting organised
- Set up the project management team
Set up project team and governance
- Implement the PPP’s project governance structure
Engage a team of advisors
- Identify the expertise needs of the team
- Select the necessary advisors to cover those needs
Develop a project plan and timetable
- Identify the several project activities and the critical paths
- Develop a detailed project plan and timetable
Stage 2.2: Before launching the tender
Carry out further studies, as needed
- Detailed assessment of the risks of implementing the PPP
Prepare detailed design of PPP
- Outline principal commercial terms
- Build detailed risk register
- Undertake detailed commercial and financial analysis
Define the scope for interaction with the private sector and consider the legal alternatives
- Select the procurement method
Select bid evaluation criteria
- Set up evaluation committee
- Select the criteria for scoring alternative bids
Prepare draft PPP contract
Prescribe the required service standards, risk allocation and payment mechanism in detail
Finalise draft PPP contract
Engage a team of advisers
2.1.1 Set up the project team and governance structure
The complexity and scale of most PPP projects will usually justify a team- based management approach to ensure that all the required skills are effectively applied.
A common way of implementing effective project governance for PPP project development is by a system of boards or committees. Different systems can be considered, but they normally include: Guidance 17
A project management team, responsible for managing the PPP project (including managing advisers) and reporting to the steering committee. Appointing a project director is of particular importance. During the intense procurement phase, this will be a full-time job. The skill set should include familiarity with private business as well as an understanding of how government administration works.
2.1.2 Engage a team of advisers
The importance of having in place a strong group of expert advisers cannot be overstated. The engagement of PPP advisers requires that sufficient resources are budgeted for that purpose early in the project cycle. The PPP project management team will require different types of advisers for different phases of the PPP project preparation process. Consultants would almost certainly have been used to prepare the various feasibility reports. They may
have been hired separately and in a more ad-hoc manner. It is when the procurement phase begins that a comprehensive plan needs to be developed for how advisers will be used:
The core team of advisers for the procurement phase will usually consist of a financial adviser, a technical adviser and a legal adviser (each of these composed of more than one individual). Other consultants will be required for specific inputs (e.g. separate consultants for environmental, social impact, regulatory risk and insurance matters). The exact nature of the broad advisory team will depend on the project and the in-house resources available. (see Box 1 PPP advice during procurement);
An Authority with considerable experience in PPP procurement can engage the advisers on separate mandates rather than a consortium mandate, with the project director, normally a public official, managing the entire process. It may be advisable, however, to hire a consortium of consultants, under one contract, led by one of them (often the financial
adviser); Guidance 18,19
Even if a single consortium of consultants is engaged, it is useful for the project director to be able to discuss issues with each member of the advisory group separately to ensure that any differences of opinion on difficult issues are brought out and solutions are identified. Guidance 20,
Public authorities should pay careful attention to the incentives created by different ways of engaging advisers and remunerating them. For example, if
the consultants hired to carry out the feasibility work are fairly certain that they will be kept on board to advise on the transaction, they may have a disincentive to disclose major problems with the project for fear that preparation will not continue. Alternatively if the transaction advisers are paid
a success fee in full when the PPP contract is signed, they may have an
incentive to deliver a project that is not yet bankable and that takes many months (or years) to reach financial close. It may therefore be useful at the outset of the process for the Authority to hire an initial high-level consultant to assist in the planning of all the technical assistance that will be needed during the process, prepare terms of reference, etc.
2.1.3 Develop a plan and timetable for project preparation and procurement
A key initial task for the project management team or teams (in fact, probably
an initial task for the advisers) is to develop a detailed project plan, including
a timetable for project preparation and procurement. The plan needs to take into account all the key steps in the process including: Guidance 22
Document development;
Bidding process and private sector interface; and
Government approval process.
PPP preparation is a complex undertaking with parallel activities feeding into critical paths. It is important that activities that are on the critical paths be initiated at the planned time and monitored closely to ensure that they proceed as planned and do not cause delays to other activities. It is helpful to use project-planning software to create the timeline in the form of a Gantt chart. The chart can then be easily updated from time to time (the project director should require the project management team to do this).
CHECKLIST: Getting organised
The project management team, working in the Authority and its group of advisers, will have to address a set of questions regarding organisation before proceeding to the next stage. For example:
Are all relevant project approvals in place?
Is a credible and well-resourced team in place to manage project preparations and procurement?
Are sufficient financial resources available to the Authority to cover the costs of the preparation and procurement phase?
Are project governance structures and processes established to ensure effective decision making?
Are credible and experienced advisers appointed?
Have all relevant stakeholders been identified and consulted to check their commitment to the project?
Is a realistic procurement timetable in place for the procurement phase?
Has appropriate care been taken to deal with the impact of specific issues, such as coordinating approval processes in the case of a multi- jurisdiction project?
Advisers are normally involved at every stage of the PPP project cycle, including the initial feasibility assessment, project preparations, project procurement and project implementation. A non-exhaustive list of examples of the legal, financial, technical and environmental assistance typically provided by PPP advisers, in particular during the procurement phase, will include the
following: Guidance 23,24
Advise the public sector on the issue of the legal powers (or vires) necessary to enter into the project contracts and on the legal feasibility of the project
Assist in the assessment of the legal feasibility of the project (for example, where appropriate, relating to cross jurisdiction issues)
Advise on the appropriate procurement route
Advise on, or draft, the initial contract notice
Advise on, or draft, procurement documentation such as pre-qualification questionnaires, invitation to tender and evaluation criteria
Develop the PPP contract and bid documentation for the project
Evaluate and advise on all processes and legal and contractual solutions throughout the procurement phase, including contract negotiation
Provide support in the clarification and fine-tuning of legal aspects
Draft the output requirements and specifications of the PPP project
Develop payment mechanisms in the PPP contract (with the financial advisers)
Evaluate and advise on all technical solutions during the procurement phase
Undertake technical due diligence on bidders’ solutions
Carry out any site condition, planning and technical design work
Support the development of all financial aspects of the project
Advise on how to secure the public funding for the project (if any)
Advise on the applicability of specific sources of funding, and how these can be optimised in the funding structure
Ensure that all financial aspects of the bidders’ solutions meet the requirements for submitting a financial bid
Optimise, scrutinise and possibly audit the financial models submitted by bidders
Evaluate and advise on financial proposals throughout the procurement phase
Advise on the bankability issues raised by the PPP contract
Undertake financial due diligence on bids submitted
Assist in the negotiations with the lenders
Assist in the strategy and completion of the interest rate hedging at financial close
Examine the potential environmental impact of the project
Assist in environmental due diligence, including required permits and certifications
Identify potential environmental risks and how submitted bids address them
Consider the mitigation of such risks and the impact on the scope and technical design of the project
2.2 Before launching the tender
Pre-tender steps
Prepare detailed design of PPP arrangement
Stage 2.2 has two main goals:
Further develop all aspects of the PPP design (responsibilities, risk allocation, payment mechanism, etc.) in a progressive and iterative manner, concluding with a full draft PPP contract; and
Select the tendering method, decide on bid evaluation criteria and prepare the complete tender documents.
At the end of Stage 2.2, the project management team will be ready to prequalify consortia interested in bidding for the project and issue the invitation to tender. It is useful to end Stage 2.2 at that point because in some jurisdictions a high-level clearance will be required before publishing the procurement notice and proceeding with the invitation to tender. The end of Stage 2.2 is therefore an important milestone in the project delivery phase of the PPP cycle.
Some steps of the PPP cycle may not proceed in the rigid chronological order as Chart 3 implies as there are often overlaps. For example, the final tasks of detailed PPP design preparation may continue during the later prequalification exercise. This will often be the most efficient way for the advisers to proceed.
Even though the core technical, financial and economic studies will have been carried out during the feasibility phase, there may be a need for further, more focused studies during the procurement phase. Guidance 25
Preparing the business case and appraising the project may have brought to light aspects where more detailed work is needed.
The studies during the feasibility phase will have been oriented most of all to helping the Authority or other authorities take a yes/no decision and select among major project alternatives, not necessarily to refine the PPP design in preparation for contract drafting.
As the PPP design advances, decisions about risk allocation may require additional studies. For example, in some projects (e.g. involving tunnels) it may be useful for the Authority to carry out an initial study of ground conditions and make these available to bidders.
The Authority and its team of advisers should take great care to ensure a clear delineation of the extent to which the private sector can rely on the results of information given by the Authority. Unintentional warranties given by the public sector can undermine risk transfer. Legal advice should always be sought on potential legal responsibility or liability arising out of the provision of information by the public sector to the private sector. As a general principle, the private sector should be required to do its own due diligence investigations rather than rely on information provided to it.
A revenue-based PPP can be self-supporting if investment costs are funded entirely by private financing and project revenues derive solely from user charges. In many cases, however, full cost recovery through user charges may not be feasible – e.g. because of limited willingness to pay or affordability constraints. In these cases – where the public sector has to provide financial support to make the PPP financially feasible either at the start or on a recurrent basis – EU grants may be available for PPP projects to cover part of the funding gap.
Public authorities pursuing PPPs should be aware of the terms and conditions of EU grant funding to be able to benefit from them to the fullest extent. The European Commission has issued guidance on the legal and methodological issues involved in combining EU funds with PPPs, in particular in the framework of the JASPERS initiative , in order to facilitate and increase the uptake of PPPs in Structural Fund projects. Guidance 26 The main issues addressed in this guidance include the following:
A) Understanding EU grant eligibility requirements relating to PPPs and how to determine the maximum permitted amount of EU grant funding for a specific
PPP Guidance 27
The EU grant can cover up to 85% of eligible expenditures. Co-financing by the government (at least 15%) is always required. If the PPP will generate some revenue from user charges, the “eligible expenditure” for purposes of determining the amount of the EU grant is reduced by the net contribution (i.e. after covering operating and maintenance costs) that such user-charge revenue makes to capital expenditures (determined on a discounted basis). This is known as the “funding gap” approach. The direct beneficiary of the grant must be the public authority responsible for the PPP, generally the Authority. This makes the procedures somewhat more complicated than if the PPP company could receive the grant funds directly, but it has been found to be workable.
B) Understanding the procedures (including timing) for the submission of documents and the approval of funding
Approval of funding before bidding for the PPP takes place. In many ways, this is the preferred solution. The grant arrangements can be thoroughly vetted, planned and specified in advance, and bidders will be asked to bid on that basis. This requires detailed structuring of the PPP project before going to the market, but (as noted elsewhere in this Guide) this is the best approach regardless of the presence of any grant funding Approval of funding after the preferred bidder has been selected. In this approach, although it is well understood at an earlier stage how an EU grant can be incorporated into the PPP and the contract and bidding are well structured to take this into consideration, the approval of the grant is not obtained until after the preferred bidder has been selected. This approach is advantageous where the results of the PPP bidding process need to be clarified in order to enable key elements of the grant application to be filled in (e.g. if there would be significant uncertainty about the size of grant required).
C) Structuring a PPP that includes EU grant funding in a way that does not weaken incentives and reduce Value for Money
For example, EU grants should not incentivise the private partner to allocate too much of the costs to capital expenditures rather than operation and maintenance expenditures – thus removing one of the benefits of PPPs, namely optimal whole-life costing. Good practice can be maintained by careful structuring of the PPP contract and the bidding process. This should not be difficult if competent advisers are engaged. It will also be less of a problem where the grant funding is modest and there remains a significant amount of private funding.
D) Determining the way (or ways) that EU grant funds can be applied to the
PPP. Guidance 28,29,30,31,32,33
Parallel co-financing of capital expenditure (capital grant). In this method, a distinct component of capital expenditure is financed by the private sector and another by the EU grant and government funds. Blended co-financing of capital expenditure (capital expenditure subsidy, capital grant). This is the most common model. The EU grant and State funds are used jointly with the financing mobilised by the private partner to make payments during the construction period under a single prime construction contract. DBO (design build operate) contract. This is an extreme form of the approach above in which private financing has been entirely replaced with EU grant and State budgetary funds, but there is just one prime contract covering both the construction and operating phases. Partial grant funding of service fee (payment subsidy). Grant funds could be used during the operating period as full or partial payment of availability payments, that is, time-based payments which would otherwise be made solely by the Authority, as opposed to user charges (N.B. the feasibility of this model, in particular the application of EU funds to cover availability payments which would be incurred after the December 2015 deadline for EU funds expenditure in the current financial perspective, is not yet clear.
In all cases, it is essential for the user of this Guide to seek proper advice and discuss the project with the relevant EU authority (e.g. national management authority, DG REGIO), maintaining a dialogue during project development and procurement, to ensure that the PPP is being designed and procured in a way that will give the greatest assurances that the applicable EU grant will be forthcoming and to avoid later procedural complications.
Finally, there are other considerations to be taken into account when incorporating EU grants into a PPP, for example: choice of the right tender evaluation criteria; ensuring that the grant will not be considered to be illegal State aid; minimising the risk – through careful contract design – that a “significant modification” might result in a required repayment of the EU grant; or the extent to which a failure to complete the project would result in the obligation to repay the grant.
2.2.2 Prepare the detailed design of the PPP arrangement
Guidance 34,35
All aspects of the PPP arrangement (e.g. responsibilities, risk allocation, payment mechanism) need to be developed in further detail, with the ultimate goal of producing the draft PPP contract. It is advisable to deal with this in smaller sub-steps rather than to try to draft a full PPP contract right away. This simplifies the internal review process: it is better to focus the initial internal discussion and approval on the broad commercial aspects of project design rather than on detailed legal terms.
The first sub-step might be to prepare a document outlining the principal commercial terms (heads of terms). Once the heads of terms have been internally approved, the Authority should progressively develop and refine the different topics. Guidance 36 Certain aspects (e.g. payment mechanism) might first require the preparation by the advisers of discussion notes presenting and assessing various alternatives.
The risk allocation of the PPP arrangement will be further developed with the help of advisers and the results checked against prevailing market conditions. Preliminary risk matrices or registers will have been used in the feasibility phase. They will be further refined in this phase. Guidance
The assessment of demand risks is essential in PPP projects. The allocation of demand risk is effected through the payment mechanism in the PPP contract, which may seek to transfer some, all or none of the demand risk to the private sector (see an example of this in Box 3 Traffic revenue risk allocation and Box 4 Payment Mechanism).
The financial model of the expected PPP 7 (sometimes called a “shadow bid” model) is prepared initially by the Authority and its advisers for use in the feasibility analysis. In this phase, the shadow bid model should be further developed and refined and it should be used to examine alternative risk allocations and payment mechanisms.
7 Note that this model is not the same financial model that a bidder will prepare and submit with its proposal.
Forecasting traffic demand is crucial in all transport PPPs since traffic influences both project costs (through capital and maintenance expenditures) and project revenues, especially if direct user charges, such as tolls, are the main source of cash flow for the PPP company. An accurate estimation of the future level and composition of traffic volumes is, however, a difficult task:
Traffic forecasts tend to overestimate actual traffic levels (the so-called “optimism bias”); Guidance 38
Given such uncertainty, the allocation of traffic revenue risk is a key decision in the design of a transport PPP contract and it is linked to the choice of payment mechanism (see Box 4 Payment Mechanism). There are several options for allocating traffic revenue risk. Guidance 39 Consider motorway PPPs:
At one end is the conventional toll road where revenues derive from toll payments and, thus, the PPP company (and its lenders) are exposed to full traffic revenue risk;
At the other end lies the “availability-based” option where the PPP company receives fixed periodic payments from the public budget as long as the road is available for use. In this case, the PPP company bears little or no traffic revenue risk;
In between there are several options designed to share the traffic revenue risk, such as:
a) Revenue sharing bands: lower and upper thresholds to share
traffic revenue risk between the PPP company and the public sector if traffic is outside the thresholds;
b) Flexible-term contracts: the PPP contract will end when the
PPP company has received a certain amount of revenues from users (e.g. the “Least Present Value of Revenue” approach,
implemented mostly in Chile); Guidance 40
c) Financial re-balancing: provisions to change the economic
balance of the contract if traffic is much lower/higher than planned or at set regular intervals.
Recent practice in transport projects has seen the use of a mixed payment mechanism consisting of an availability payment (intended to cover operating expenses and debt service) and a direct user charge (e.g. toll) that provides the equity return. Guidance 41
Before engaging in the formal bidding process, the Authority’s team will need to select a competitive procurement procedure. Several procedures are permitted under EU legislation. These procedures are not designed specifically for PPPs: they apply to all goods, works or services contracts.
Guidance 42,43
Complexity of PPPs The complexity of a PPP combined with the lack of specific EU legislation in respect of PPPs means that it is essential for the Authority to have a sound knowledge of the EU public procurement legal framework in advance of launching a tender. The Authority’s team should include a procurement specialist who should work closely with the legal advisers to ensure compliance with the procurement legislation at EU and national level. In addition, it is advisable for the senior management team to have a working knowledge of the relevant EU procurement legislation. Guidance 44
Works and services concessions Works and services concessions are arrangements under which the right of exploitation of the works or services rests with a concessionaire. Concessions must adhere to the basic principles of the EC Treaty (i.e. transparency, equal treatment, proportionality and mutual recognition). Guidance 45
Institutionalised PPPs Institutionalised Public Private Partnerships refer to a specific type of PPPs where public and private parties establish an entity with mixed capital in which the private party takes part actively in the operation of contracts awarded to the partnership. The European Commission has released a specific Interpretative Communication to address the application of EU procurement law in this instance. Guidance 46
Four procedures EU legislation allows four procurement procedures: open, restricted (these two are also sometimes referred to as “standard procedures”), negotiated (an exceptional procedure) and competitive dialogue (the use of which is subject to conditions). Guidance 47,48,49,50,51,52,53,54 The choices may be more limited under national laws and specific legal advice is required for each jurisdiction. Table 3 below compares a few key features across the four EU procurement procedures which can be used for procuring PPPs. The Authority should always take legal advice before selecting the procurement procedure.
A comparison of EU procurement procedures
No prequalification or pre- selection is permitted. Any interested company may submit a bid.
The number of bidders may be limited to no less than five in accordance with criteria specified in contract notice (prequalification and shortlisting permitted).
The number of bidders may be limited to no less than three in accordance with criteria specified in contract notice (prequalification and shortlisting permitted).
The number of bidders may be
limited to no less than three
(prequalification
The specifications may not be changed during the bidding process, and no negotiations or dialogue may take place with bidders. Clarification is permitted.
Negotiations permitted throughout process. Successive stages can be used to reduce the number of bidders (further short-listing).
Dialogue with bidders permitted on all aspects (similar to negotiated procedure, including further short- listing). When dialogue is concluded, final complete bids must be requested based on the solution(s) presented during the dialogue phase.
No scope for negotiations with a bidder after bids are submitted.
Not relevant because the negotiations can continue until the contract is agreed. There need be no “final bid” per se.
Only permitted to clarify, fine tune or specify
bid. No
Lowest price or most economically advantageous tender
Either at this stage or, at the latest, at the beginning of the procurement phase, a tender evaluation committee should be established. The composition of the committee will often be prescribed by national law. The role of the evaluation committee is to oversee the procurement process and take (or recommend) key decisions, such as decisions about the shortlist and the preferred bidder. The tender evaluation committee will generally be advised and supported by experienced and specialised consultants (often the transaction team of advisers).
The choice of criteria for scoring and ranking alternative competing bids is a key decision in procuring a PPP. The objective is to tailor the PPP contract award criteria to the particular project and contract terms to achieve the best possible results (Value for Money). Guidance 55
Failure to apply award criteria properly can be a source of challenge to the procurement outcome. The public contracting authorities should, therefore, always take appropriate advice before the bid evaluation criteria are finalised.
As a rule, award criteria (and the weighting to be applied to each criterion) should be specified in advance. This may be problematic in the case of a competitive dialogue procedure where detailed award criteria are rarely known in advance. In this instance, EU law allows that the criteria be listed in decreasing order of their importance. In either case, the award criteria must appear in the contract notice or the descriptive document and may not be changed during the award procedure.
The largest payments to the Authority (up-front or periodic);
The shortest duration of the PPP (before handing the assets over to the Authority); or
There are a number of examples of imaginative use of award criteria to achieve particular objectives. For example, Chile uses the Least Present Value of Revenue criterion in toll motorways. In this case, the concession ends once the PPP company has received cumulative revenue whose net present value equals the value it has bid. This is a way of combining a criterion based on the lowest remuneration with a mechanism for allocating traffic risk to the public sector. Guidance 56
2.2.5 Prepare the draft PPP contract
Guidance 57,58
A full draft PPP contract should be attached to the invitation to tender. It should cover the following topics at a minimum:
Risk allocation (this is usually achieved through setting out events which give the PPP company a right to some compensation);
Service performance standards and targets, which need to be objective and measurable;
Procedure for permitted modifications, as well as their scope and nature;
Payment mechanisms (e.g. tariffs, subsidy, grants) and adjustments to payments in response to various contingencies (see Box 4 Payment Mechanism);
Penalties (and possibly bonuses) which have financial consequences or give rise to warning notifications (eventually leading to termination of the PPP contract);
Security and performance bonds, insurance;
Term of the PPP contract;
Conditions for termination (categorised by party and by type of event) and compensation upon termination (for each type);
Step-in rights (both for lenders and, in emergency situations, the public sector);
Definition and impact of force majeure and change in law; and
In the past, practice was often limited to including a summary of the main commercial terms with the invitation to tender. Nowadays, it is considered better practice to prepare and issue a full draft PPP contract with the invitation to tender. This is unavoidable in both the restricted and competitive dialogue procedures as there is no room for negotiations post final bids. Legal advisers should be involved in preparing the full draft PPP contract.
Guidance 59,60,61
A useful way to approach the design of the payment mechanism is to start with a basic / ideal structure for the Authority. Ideally, the Authority will want to pay the PPP company, in arrears, a fixed price for (and only for) each unit of service which has been provided and has met the service quality requirements. This would comply with the key PPP principles that payments should be made only if the service is available and these should not be based on the PPP company’s actual costs (a PPP contract is not a “cost-plus” contract). This basic / ideal mechanism would give the PPP company strong incentives to perform but would require the PPP company to bear excessive risks. “Excessive” in this context could mean that the premium required by the PPP company to bear the risks would not be worth the gain obtained from increased efficiencies. It could also mean that the PPP company would be too likely to make excess profits or face high losses, which would threaten the viability of the PPP arrangement. The detailed design of the payment mechanism can then be derived moving away from the basic / ideal mechanism ensuring a balanced risk-reward for the PPP company. In particular, it is important to make sure that the risks which are largely beyond the control of the PPP company are not allocated to the PPP company.
Further adjustments to the basic / ideal mechanism should be considered:
The payments to the PPP company usually need to be indexed to compensate for cost increases due to inflation (the indexation should be based on an agreed set of published indicators);
Cost items which are beyond the control of the PPP company can be handled on a pass-through basis (i.e. the Authority reimburses the costs actually incurred by the PPP company). Where this technique is contemplated, the Authority should ensure that the cost items subject to the pass- through are limited and defined in detail;
The deductions made to the service fee for poor performance should be linked to the degree of deficiency in the service quality. The service quality measurement needs to be verifiable and objective. Generally, the deduction amounts should be consistent with the losses that the Authority or the users would incur as a result of the service shortfall;
Demand risk is often considered as at least partially beyond the control of the PPP company. A variety of mechanisms is available to shift some or all of the demand risk away from the PPP company. For example, the service fee / user charge can be gradually increased as demand falls. Also, a minimum payment guarantee (i.e. the PPP company is paid a certain amount even if actual demand falls below an agreed minimum) can be implemented. →
When designing the payment mechanism, the Authority and its advisers should pay attention to features which could give the PPP company perverse incentives or which are complicated or ambiguous (as these may later on give rise to disputes). The payment mechanisms of comparable projects / sectors (where available) may also be a useful benchmark. The Authority’s advisers should use the “shadow bid” financial model to test alternative payment mechanisms. A scenario analysis should be run to calibrate the parameters of the payment mechanism to ensure that it performs satisfactorily under a set of likely performance scenarios. Although poor performance should have a material impact on the equity return of the PPP company, it would be counterproductive for it to jeopardises debt service payments too easily (as this could result in the bankruptcy of the PPP company or make the PPP contract difficult to finance).
CHECKLIST: Before launching the tender
Before launching the tender, the Authority needs to feel satisfied its has addressed a series of key questions, many of which result from the work undertaken or overviewed by the advisers. For example:
Are the requirements and scope of the PPP project clear and fixed?
Have all the environmental and planning approvals been identified and obtained?
Are there any unresolved issues regarding site and land acquisition?
Does the Authority have the powers to award the PPP contract and enter into a long term contractual arrangement?
Has a Value for Money assessment of the proposed PPP investment been carried out?
Is the scope of the PPP project affordable from the point of view of the public sector periodic payments required (availability-based PPP) or are tariff levels realistic and affordable for the users (revenue-based PPP)?
With availability-based PPPs, have budgets and government or parliamentary approvals been obtained for any public sector payment obligations?
Is there enough evidence of sufficient commercial interest from contractors, operators, lenders and investors to justify launching the tender?
Have project risks been identified and a potential risk allocation been assessed?
Have plans to publicise the launch of the project been agreed and finalised?
Has a project information memorandum been prepared?
Have the bidder qualification and bid evaluation criteria been developed?
Has the draft PPP contract been prepared including the project specifications, service standards, payment mechanism and proposed risk allocation?
The procurement phase, as the term is used in this Guide, begins with the publication of the procurement notice and ends with financial close, the point at which project activities (beginning with construction) can start. It has been broken down for convenience into two stages: (i) the bidding process and (ii) the period from the award of the PPP contract to financial close. Chart 4 outlines the stages and steps in the procurement phase.
Stage 3.1: Bidding process
Procurement notice, prequalification
and shortlsting
- Issue public procurement notice
- Send an invitation to prequalify to interested parties
- Shortlist bidders and publish prequalification report
-Send invitation to tender to shortlisted bidders
- Hold a bidders conference
- Issue the necessary written clarifications
- Select preferred bidder
Stage 3.2: PPP contract and financial close
Finalise PPP contract
- Negotiate contract details with preferred bidder
- Implement non-material changes to the contract and sign PPP contract
Conclude financial agreements
- Conclude the financing and ancillary agreements associated to the PPP project
Reach financial close
- Sign all PPP related agreements
The PPP bidding process involves a series of steps summarised in Chart 5 below. The goal of the bidding process is to maximise Value for Money by creating appropriate incentives through a competitive process for the award of the long-term PPP contract.
Procurement notice, prequalification and shortlisting
During the bidding process, sufficient attention should be placed on the key good procurement principles of transparency and equal treatment, which will help bolster the legitimacy of the PPP and its acceptance by stakeholders.
These good procurement principles must be respected from the time the formal tendering process begins. Informal discussions with companies may take place before the process formally begins – and this is particularly important in respect of large projects. For example, while keeping in mind that achieving a level playing field amongst potential bidders is the eventual goal, the Authority may organise info days, technical briefings, early public release of technical documents, etc. As soon as the procurement notice is published, all potential bidders must be given equal treatment and a careful audit trail of all contacts with potential bidders must be kept.
This section of the Guide focuses primarily on commercial principles of procurement having general applicability and not on the detailed requirements of EU legislation transposed into national law (although certain EU requirements will be noted in some instances). The goal is to convey to readers the logic and rationale behind the various steps and considerations, rather than to present them simply as procedures prescribed by law (e.g. required time periods are not discussed).
Readers of this Guide are encouraged to seek advice on how to conform the procurement activities described here to the requirements of national law.
3.1.1 Procurement notice, prequalification and shortlisting
Guidance 62,63,64,65
Publishing the public procurement notice marks the start of the formal procurement process. The Authority must comply with all requirements
related to the publication of notices in the Official Journal of the European Union (OJEU). This is followed by a questionnaire to allow interested companies to demonstrate their qualifications (also known as the submission of an “expression of interest”).
The purpose of prequalification is to include only those bidders that appear to be capable of carrying out the PPP in an adequate manner.
The wording of the brief project description contained in the OJEU notice should be broad enough so that it will not need to be subsequently changed – which might then require the notice process to start over again.
Typically, interested parties that respond to an initial notice are sent a short statement of information about the project and instructions or a questionnaire. These form the basis of a qualification submission that such parties must make to demonstrate their capacity to implement the project.
The invitation to prequalify (or prequalification questionnaire, as it may be called) should contain at least the following:
The broader context of the project;
An overview of the project, including the intended allocation of major risks and envisaged responsibilities of each party;
A list and summary of the major studies that will be made available to bidders concerning the project;
The intended procurement process;
The qualifications that companies can put forward (e.g. parent or subsidiary companies’ qualifications);
The criteria and tests that will be used to evaluate the prequalification statement (but not necessarily the precise details to be used in any scoring or ranking since that could lead to some manipulation by the candidates); and
It is standard practice for the Authority’s legal advisers to draft both the PPP procurement notice and the prequalification questionnaire.
The purpose of shortlisting is to reduce the number of bidders to generally three to five. Bidding for a PPP, especially a complex PPP, is a costly undertaking for a bidder. The aim is to maximise competition, not the number of bidders. The presence of too many bidders on the shortlist may reduce the interest of some in participating and may cause good bidders to drop out.
In some cases, the public sector has sought to encourage candidacy by agreeing in advance to make a payment to each losing bidder that would partially reimburse it for the costs of bid preparation. Such payment could be made from money that the Authority would receive from the winning bidder (once again, specified in advance). The size of the payment has to be
calibrated to discourage frivolous bids. Practice varies widely between countries. The Authority should ask their advisers about current market practice in the relevant sector and jurisdiction.
In evaluating the qualification submission, the Authority will focus on the technical capability, business capability and financial position of the potential bidders. In line with EU public procurement legislation, these capacities must be, in principle, demonstrated jointly, rather than individually, by the members of a consortium.
The prequalification submission will usually be required to describe the following:
Business activities of the consortium (e.g. how many projects of a similar nature, suitably defined, the consortium has implemented over a specified number of past years);
Financial information (e.g. thresholds involving turnover and net worth);
Legal information about the PPP consortium, including any relevant litigation involving the companies; and
Quality of personnel available to be involved in the project.
The first step of the prequalification and shortlisting process is often to determine which consortia have passed the thresholds on all the relevant dimensions (i.e. pass/fail tests). Most of the criteria (e.g. company revenue) are expressed in terms of clear and objective thresholds. If that determination gives a number of consortia that exceeds the maximum number pre-specified for the shortlist, then a systematic and predetermined process for scoring or ranking should be used to narrow down the list to arrive at a shortlist.
Sometimes shortlisting is done partly on the basis of responses that are submitted to a set of open-ended questions about how the companies would address certain key issues if they were to win the PPP contract. For example, in the competitive dialogue procedure, initial shortlisting can be based partly on an assessment of the outline or indicative solutions given by the candidates.
At the end of the process, a well-substantiated prequalification report should be prepared to have a good audit trail. Unsuccessful candidates should be debriefed.
3.1.2 Invitation to tender
Guidance 66,67
Preparation of the tender documents will usually have begun during the last steps of the project preparation phase but to be time efficient, finalisation often takes place during the prequalification period.
The invitation to tender documentation should contain all the information that bidders will need to bid. It is important that advisers devote sufficient time and effort to develop the documentation in enough detail to ensure comparability of the bids and to reduce the need for debate and clarification before signing the PPP contract.
The tender documentation, which is usually extensive in detail and volume, will normally include (but not be limited to) information such as
the following: Guidance 68,69
• Detailed information memorandum about the project;
• Summary of the key commercial principles, including the obligations of each party and risk allocation;
• Detailed output specifications and minimal required technical design and technical features;
• Full draft PPP contract (which, in some countries, would be based on mandatory standard contract terms or on required guidelines of some kind);
• Instructions to bidders concerning all the information they must submit and the detailed procedures for submission;
• Evaluation criteria; and
• Requirements for bid bonds or equivalent security.
3.1.3 Interaction with bidders
Under EU procurement law, the nature and level of communication permissible with bidders will be determined by the procurement procedure chosen (see 2.2.3 Select procurement method).
In order to maximise the benefits of PPPs and obtain maximum Value for Money, it is critical to manage the bid process well.
Shortly after issuing the invitation to tender it is usual to hold a bidders’ conference to explain issues and take questions from the bidders. Written clarifications should be provided to all bidders.
It is also typical to provide for a data room open to bidders where they can access detailed documents concerning all aspects of the project.
Guidance 71
The complexity of large PPP projects will normally require a high degree of interaction between the Authority’s project management team and the
bidders. Guidance 72
The terms and conditions for an interactive process, including the procedures, protocols and rules should be included in the broader set of conditions, rights and obligations to which bidders consent. The objective of developing this iterative process is to improve the quality of the proposals by:
Fostering innovative solutions from different bidders;
Clarifying any technical, financial, and commercial issues; and
Providing direct and specific feedback to bidders on key aspects of their bids.
The Authority’s project management team has to take particular care to protect each bidder’s commercial in-confidence material and intellectual property. More generally, the project management team will have to consider probity principles and rules as part of the implementation of the interactive process.
3.1.4 Evaluation of tenders and selection of preferred bidder
Guidance 73,74,75,76,77,78,79
Once the tenders are submitted, they must be evaluated to arrive at the selection of the preferred bidder.
Bids will generally be first assessed on a number of pass/fail criteria before deciding on the single preferred bidder:
For example, even if the evaluation score is not based on a technical evaluation, a determination must be made that the technical solution proposed by a bidder is feasible, deliverable and robust, that it is based on reliable technologies, that it meets all minimal technical requirements set and that the costs and financial structure are consistent with the technical solution;
It is important to look at the proposed project management also: the bidding consortium must come across as a cohesive entity rather than just a collection of companies put together for bidding purposes.
A key issue is the choice of the criteria for the evaluation and scoring of alternative bids (see 2.2.4 Define bid evaluation criteria).
Occasionally, only one bidder will submit a tender despite the Authority having issued the invitation to tender to several shortlisted candidates. In good procurement practice, the question of how to proceed should be considered case by case: Guidance 80
If it appears that bidder interest was low because of deficiencies in the tender documents (including the project specifications or the draft PPP contract) and these can realistically be remedied, then the best solution might be to repeat the tender procedure, this time on a better footing;
If it appears that the bid was made in the bidder’s belief that there would be good competition (and this should be supported by the Authority’s advisers carrying out benchmarking of costs and in some cases by insisting on actual market testing of the costs of the major subcontracts), then the best solution might be to continue with the procurement and consider the sole bidder to be the winner, provided that the tender is fully compliant and meets all pass/fail evaluation criteria.
An important issue relating to the PPP contract award concerns the new EU Remedies Directive (2007/66/EC), which was required to be transposed into national law by 20 December 2009. Guidance 81 The two most noteworthy elements of this Directive are the following:
A minimum standstill period of 10 days is required between the contract award decision and the actual conclusion of the contract to allow rejected bidders time to conduct their review and decide whether they want to challenge the award. (Note that such a standstill period had already emerged in case law; the purpose of the new Directive provision is to standardise the terms across Member States); and
More importantly, an aggrieved bidder can bring an action to have the contract rendered ineffective if the Authority contravened EU procurement rules in a serious way. Previously, the sole remedy was to award monetary compensation to the aggrieved bidder, but now the contract would come to an end. How the various rights and obligations of the parties will be sorted out in this case is left to national law.
CHECKLIST: Bidding process
To carry out a successful bidding process, the Authority and its team of advisers need to ensure that all key questions related to the bidding process have been adequately addressed. For example:
Is the institution responsible for awarding and managing the bidding process clearly identified?
Does the format of the pre-qualification documents allow bidders to present information about themselves and clearly sets out the evaluation criteria and processes applicable in pre-qualification complying with the openness and transparency required by EU legislation?
Do the pre-qualification evaluation criteria include all relevant features related to the quality and strength of the bidders in terms of their capacity to deliver and their awareness of the PPP project?
Does the invitation to tender document include a draft PPP contract, which should set out, among other things, the payment mechanism and penalty regime? Does it include the output requirements of the Authority?
Does the invitation to tender document contain all essential components of the PPP project, especially the minimum technical, environmental, legal and financial requirements to be provided by bidders which constitute a compliant bid?
Have adequate provisions ensuring that the Authority offers no information warranties and setting rules of access to the data room been included in the invitation to tender document?
Have all critical processes necessary to manage the interaction with bidders during the bidding process (including a code of conduct, communication with bidders, audit trails and meetings, consortia changes and bidders’ due diligence) been considered and implemented?
Have the evaluation criteria and processes been established and evaluation teams and committees appointed before bids are submitted?
3.2 PPP contract and financial close
PPP contract and financial close steps
The finalisation of the PPP arrangements, leading to commercial and financial close, involves a series of steps summarised in Chart 6. The activities involved in these steps often deal with detailed and fine-tuning matters. Close interaction between the Authority, the private partner and its financiers is essential. This stage, in particular, requires thorough organisation and management for it to proceed efficiently. It should be planned carefully, generally making use of experienced advisers. Many PPP projects have experienced lasting difficulties as a result of a lack of adequate planning or expert advice.
3.2.1 Finalise the PPP contract
As noted in 2.2.3 Select procurement method, the different procurement procedures imply varying forms / intensity of discussions once the preferred bidder has been selected. Guidance 82,83 For example, under the EU restricted or competitive dialogue procedures, once the final tenders have been received and a preferred bidder has been selected, the final adjustments to the PPP contract should be limited to clarifications and confirmation of commitments.
Irrespective of specific EU considerations, a basic principle of good procurement is that any change to the PPP contract agreed with the preferred bidder during final negotiations must not be material to the procurement (i.e. another bidder could have been selected if the amended term had been proposed in the tender documents). For example, changing a fundamental aspect of the risk allocation would clearly go beyond what is permitted under good procurement practice and under EU law.
The final discussions with the preferred bidder are often referred to as “final negotiations” (even if they are not strictly negotiations under some
procurement regimes). At the start of this phase, the Authority’s negotiating team and the preferred bidder will need to agree on a framework for final discussions / negotiations. This framework will typically include issues such as:
The discussion timetable;
The definition of the remaining issues; and
The recording of agreed matters.
3.2.2 Conclude financing agreements
PPPs are normally financed in whole or part through project finance arrangements (see Annex 1 ). To the extent possible, the Authority should require bidders to secure fully committed financing packages along with their bids. This will ensure that the finalisation of the financing agreements can take place simultaneously or shortly after the signing of the PPP contract.
In difficult financial market conditions (e.g. reduced liquidity), fully committed financing packages may be difficult to obtain at the time of bidding. This may mean that the financing agreements will not be concluded immediately once the PPP contract is signed.
Prior to the 2009 credit crisis, PPP financings for major transactions were usually provided through syndication arrangements, whereby a small number of banks underwrite the financing of the project and “re-sell” it to a syndicate of banks after financial close. With the crisis, most PPP projects are funded through club deals: each bank assumes it will hold its stake of project debt to maturity. In some cases, these club arrangements can only be concluded after the appointment of the preferred bidder (the so-called “post preferred bidder book-building” explained below).
The strength of the financiers’ commitment to fund the PPP project at bid stage will depend on the particular project and market. The Authority should at least require that bidders evidence a reasonably deliverable financing plan in their proposals. Bidders should demonstrate that the debt, the equity and, where applicable, the grant providers have reviewed and accepted the broad design of the PPP and the major contractual provisions (e.g. the proposed risk allocation). A funding commitment from the lenders will often be conditional since they will generally not be in a position to complete their detailed due diligence and approval process until a few weeks before financial close.
Once the lenders have carried out their detailed review of the project documentation and their detailed due diligence, they will sometimes require changes to the PPP contract. The Authority’s ability to accept the lenders’ requests will be limited as changes to the PPP contract will go against good procurement principles. Before signing the financing agreements, the lenders will also need to review and be satisfied with the full set of project contracts the PPP company will enter into (e.g. construction contract and operating & maintenance contract).
In large PPPs, in particular in the UK, it is not unusual to see the Authority taking an active role in securing competitive financing terms by imposing a
debt funding competition. A debt funding competition requires the preferred bidder to carry out a competition amongst potential lenders in order to obtain the best financing terms possible. The Authority picks up part or all of the benefits gained through any improvement in the financing terms. The Authority needs to oversee the competition process, which means that it often has to involve experienced financial advisers. Debt funding competitions may not be suitable for projects or in markets where financial innovation is expected to play a significant role in the competitive position of bidders. Moreover, it may not be suitable in conditions of limited financial liquidity. Guidance 84 In these circumstances, the private sector may need to engage in post preferred bidder “book-building” under which the full lending group is assembled using lenders which may have supported unsuccessful bidders.
Guidance 85
A large number of financing agreements are needed for a project financed PPP. These agreements have three basic purposes:
They are designed to protect the interests of senior lenders vis-à-vis other providers of finance (e.g. equity investors) and sub-contractors of the PPP company. In particular, the senior lenders will wish to ensure that the risks borne by their borrower (i.e. the PPP company) are satisfactorily mitigated. In practice, this means that, to the greatest extent possible, the risks borne by the PPP company under the PPP contract are ‘passed through’ to the sub-contractors;
The agreements need to clearly establish that the servicing of the senior of debt takes priority over the remuneration of all other forms of finance (this is what senior debt means); and
The suite of financing agreements is designed to ensure that, should the project go wrong and endanger the servicing of the debt, the lenders have the powers to take the actions they deem necessary to protect their loan.
This last point is crucial as it goes to the heart of the benefits that a PPP can deliver for an Authority. A well designed PPP aligns the interests of the lenders with those of the Authority as both parties aim at a successful project. The lenders are incentivised and empowered to ensure that potential project problems are addressed in a timely manner and that their loan is safe. For this reason, the Authority should be able to rely on the incentives the lenders have to deal effectively with problems (both during construction and operation) which would threaten the project’s performance. This reliance on the lenders is a major source of risk transfer from the public to the private (see Annex 1). Guidance 86
The typical financing agreements to be prepared and concluded comprise:
Senior loan agreements: agreements between the lenders and the PPP company setting out the rights and obligations of each party regarding the senior debt);
Common terms agreement: an agreement among the financing parties and the PPP company which sets out the terms that are common to all the financing instruments and the relation between them (including definitions, conditions, order of drawdowns, project accounts, voting
powers for waivers and amendments). A common terms agreement greatly clarifies and simplifies the multi-sourcing of finance for a PPP;
Subordinated loan agreements (where subordinated or mezzanine debt is used in the financing structure). These loans are provided by the project sponsors and/or by third party investors;
Shareholders’ agreement (as part of the constitutive documents of the PPP company);
Direct agreement between the lenders and the Authority: this allows the senior lenders to take over the project (to “step in”) under certain circumstances specified in the PPP contract;
Accounts agreement: this involves a bank which will control the cash flowing to and from the PPP company in accordance with the rules set out in the agreement;
Intercreditor agreement: an agreement between the creditors of the PPP company. It spells out aspects of their relationship to each other and to the PPP company so that, in the event a problem emerges, ground rules will be in place;
Hedging agreement: an agreement which enables the PPP company to fix the interest rate on part or all of its debt;
Security agreements (e.g. share pledge, charge over accounts, movables pledge, receivables pledge);
Parent company guarantees and other forms of credit enhancement where the sponsors of the PPP company or its sub-contractors do not offer sufficient financial strength; and
Legal opinions from the lender’s legal advisers on the enforceability of the contracts. Enforceability of contracts is a key issue the lenders will tackle in their due diligence. This will include the review of the powers of Authority to enter into transactions (the so-called vires issue).
The financing agreements often contain many cross-references and will have to be prepared as a coherent package. Guidance 87
Guidance 88,89,90
Adequate insurance coverage for a wide range of events is important for a PPP project because the single-purpose and thinly capitalised nature of the PPP company make it unlikely that it will be able to self-insure to any meaningful extent.
The interests of the Authority and of the senior lenders are largely aligned on insurance matters. The Authority can rely on the lenders to impose suitable insurance requirements on the PPP company. Nevertheless, it is a prudent safeguard for the Authority to require the inclusion of certain minimum insurance requirements in the PPP contract (although these should not go beyond what the lenders are likely to need). The insurance requirements should be developed and negotiated with the support of professional insurance advisers since project finance-related insurance is a highly specialised area.
The main categories of insurance coverage that the Authority would normally require comprise:
• Contractors’ “all risks” insurance (covering the physical loss or damage to all the works and equipment on the construction site);
• Third party liability insurance; and
• Possibly, “Delay in start-up” insurance (covering the loss of revenue or profit due to a delay in project completion).
During the operation phase:
• “All risks” property insurance;
Specific environmental insurance may also be required for some projects.
For each kind of insurance coverage, the PPP contract should set out the basic features of the policy, the minimum level of coverage, the principal exclusions and the maximum deductibles (i.e. thresholds below which the insurance company will not pay).
The PPP contract will need to deal with other important insurance matters, such as:
It may be in the Authority’s interest to agree to indemnify the PPP company if a risk becomes “uninsurable” (or insurable at a prohibitive cost);
The Authority (and the lenders) will require that the insurance policy are concluded with insurance companies of a minimum financial standing.
Financial close occurs when all the project and financing agreements have been signed and all the required conditions contained in them have been met. Financial close enables funds (e.g. loans, equity, grants) to start flowing so that the project implementation can truly start.
Any remaining conditions precedent of the financing agreements need to be fulfilled before funds can be disbursed. Typically: Guidance 91,92
Permitting and planning approvals have been secured;
Key land acquisition steps have been achieved;
Clarification of the remaining technical design issues;
All funding approvals are in place (e.g. all the remaining issues needed to secure release of grant funding from a donor are solved).
The Authority will need to confirm that the requirements of all internal approvals have been met. These could include:
Confirmation of legality of the procurement;
Approval for the derogation from any standard contracting terms;
Value for Money check; and
The PPP company and the Authority often need to carry out a considerable amount of detailed work to reach financial close. The effort needed should not be underestimated. The Authority will need to manage its tasks effectively and should seek the support of its advisers.
CHECKLIST: PPP contract and financial close
To negotiate the PPP contract and reach financial close, the Authority and its team of advisers need to ensure that key questions related to the PPP contract, financing and ancillary agreements have been adequately addressed. For example:
Has a negotiating team been assembled and empowered to take decisions on most issues pertaining to the PPP contract?
Have the Authority and the negotiating team agreed a negotiating strategy, including (i) an assessment of the position of the Authority on key issues and (ii) a risk management strategy?
Have the legal advisers evaluated the marked-up draft PPP contract proposed by the bidders, assessing it against its risk allocation and Value for Money implications?
Have the financial advisers assessed affordability, project costs, sources and costs of funding and project bankability (including private consortium composition, structure, risk distribution and funding plan)?
Have the negotiations resulted in terms and conditions that vary substantially and materially from the bid offer and therefore could be open to challenge because they are less favourable or could have resulted in the selection of a different bidder?
Have all the legal and administrative requirements of contract award been complied with?
Is the final PPP contract still affordable and does it represent Value for Money?
This chapter deals with the period during which the PPP project is being implemented (i.e. from financial close to the expiry of the PPP contract). It addresses the most common issues which officials at the Authority may have to face during the life of the project. A PPP project implies a regular monitoring of the performance and taking appropriate actions in accordance with the terms of the PPP contract. In some circumstances, a project may require changes to the contract (e.g. modifying the service specifications or the scope of the project). Chart 7 summarises the main stages and steps involved in the project implementation phase of a PPP.
Stage 4.1: Contract management
Attribute management responsabilities
- Contract management team in place
- Contract administration manual approved
Monitor and manage project delivery and
- Timeline and responsibilities for all tasks and subtasks
- Monitor PPPs operational and financial activity
Managing changes provided in the contract
- Implement routine changes to the contract
Managing changes not provided in the contract