Unpacking the process: Public Private Partnership bidding

The bidding process in a Public Private Partnership milieu can be somewhat complicated. PROF KJ MALULEKE unpacks what the bidding parties are expected to do.

In a Public Private Partnership (PPP) milieu, the bidding process involves a private sector party that strives to mobilise human and capital resources, with a view to investing in public infrastructure. This could be in the form of a road or rail network that needs to be developed from a greenfields state, or usable road or rail transport infrastructure. The critical point is the selection of a private sector bidder capable of designing, financing, building, operating, and transferring the infrastructure back to the transport authority.

Who should facilitate project conceptualisation and the bidding process?

When dealing with mega infrastructure projects, the contracting authority may recommend the appointment of an array of specialists in the PPP landscape. These “transaction advisors” constantly give transaction advisory support in the form of planning, feasibility analysis, procurement, and institutionalisation. The transaction advisory team is needed to provide technical support – as well as legal and financial advice – throughout the project lifecycle, from conceptualisation and registration to transaction process trigger point. When a project is conceptualised, it is the responsibility of an interim transaction advisory team to kick-start the process until the contracting authority authorises its legitimacy.

The transaction advisory team and the bidding process

It is worth noting that the financing and construction of public infrastructure aims at stimulating economic development and should therefore be given the highest priority. It must be stressed that during this catalytic process, project conceptualisation is facilitated by the newly-formed interim transaction advisory team. Working in conjunction with the line government department that owns the infrastructure, the transaction advisory team would facilitate the registration of the project as a PPP with the contracting authority. In South Africa, this will be the National Treasury. Also of critical importance is that governments the world over have shown greater interest in investing in public infrastructure.

Why is a public sector comparator necessary?

The public sector comparator ensures that the right procurement methodology is followed. The rationale for this is to determine whether there will be value for money when the procurement follows the PPP model. Should the pendulum prove that the cost of procuring services the traditional way is high compared to the PPP option, then the former must be abandoned for the latter.

Who procures services?

When procuring the services of a private sector party through a PPP option, it must have been proven through a public sector comparator analysis that the arrangement will be cost effective and that there will be value for money. The transaction advisory team is empowered to rigorously interrogate the procurement process from the initial stage until the final selection is made after the best and final offer (BAFO) has been presented. By the time it is publicly announced that Consortium X has been awarded a concession contract, it needs to be understood that the process was not conducted by the prescribed officer of that organisation, and that a team of experts with relevant technical skills were involved in the process.

Requests for pre-qualification

It is the responsibility of the transaction advisory team to ensure that the bidding process is conducted ethically within the PPP procurement guidelines. Where services are being procured for a mega PPP project, it would be ideal to commence with a so-called “request for pre-qualification”. The reason for this is to determine whether the prospective bidders have the capability to perform according to the contract requirement. The request for pre-qualification process

Shareholders’ agreement of a concession holder

In a PPP setting, a shareholders’ agreement constitutes a documented arrangement among the shareholders of a newly-formed consortium, or “project company”. It governs the relationship of shareholders and their collective approach to the project. It ensures that shareholders are treated fairly and that their rights are protected.

Private investment in public infrastructure development is also driven by the preference of international financial institutions, other lenders, and some governments for projects built and operated by the private sector. The preparedness of the private sector to manage and also take risk is perceived as being able to provide the public sector with greater efficiency, cost-effectiveness, and transfer of know-how.

Concession agreement

If the public sector wants to pass the project risk to the private sector, the project may be transferred through divestment or a concession agreement. Embarking on a divestment strategy will mean the public sector must sell either all or part of the public entity that operates a public service to the private sector. Alternatively, the public sector must enter into a long-term contractual agreement (concession agreement) with the private party with a view to operating a facility which directly provides a service to the end users.

Agreement between concession holder and project designer 

A design agreement is said to be in place when the concession holder engages the services of a private sector entity to craft a design to guide project construction. The typical method used for private sector involvement includes, inter alia, contracting a private sector entity through a build operate and transfer (BOT) agreement. Management contracting involves the public sector appointing a private sector entity to provide services to the public sector for a fee. A typical example in the toll road industry would be the public sector (SANRAL) issuing tenders for the management of weighbridges by a private sector party. In this case, little of the project risk is passed to the private sector, but the public sector stands to benefit from the contracted private sector party through technological innovation and efficiency enhancement.

Agreement between concession holder and construction company

There has to be an agreement between a concession holder and the construction company, whereby the latter takes responsibility for the care of works during the construction period. The agreement remains valid until the works have reached completion and have been handed over to the operator. After the handover, the operator takes responsibility for the care of the works, although the construction contractor will remain on site to carry out the performance tests and fulfil its obligations during the defect liability period. The construction phase of the BOT project is generally governed by a turnkey construction agreement, also known as a “design and build” or an engineering, procurement, and construction contract. A construction agreement spells out detailed facts on how to deal with delays and cost increases arising in the form of penalties and other associated project costs. 

Agreement between concession holder and operator

An important relationship, which will need to be managed carefully, is that between the construction contractor and the operator. Problems arise particularly during commissioning of the works and performance testing*. The consortium or concession holder will want to ensure proper operation of the works during the concession period and will therefore enter into an operation and maintenance agreement with the operator of the facility. The operator’s obligations should mirror those set out in the concession agreement, the offtake purchase agreement, and those required to ensure the continued and efficient operation of the project.

Agreement between contracting authority, concession holder, and financing institution

Financing for a project can be obtained from public or private sources, or a combination thereof. Public sources of finance include government grants or loans from sources such as the Public Investment Corporation (PIC). Project funding may also be solicited from foreign or multilateral agencies such as the World Bank’s International Bank for Reconstruction and Development. There has to be an agreement between the lenders, participating companies, and the concession holder, particularly when the transaction is aimed at enabling participating companies to become equity shareholders.

Conclusion

When a project is initiated, the interim transaction advisory team will conduct a project conceptualisation and pre-feasibility analysis and present it to the line department or principal. The principal will look at and transmit the project concept to the contracting authority for further consideration. Should the contracting authority be satisfied that the project qualifies as a PPP project, then it needs to be registered as such. In line with the line department’s submission about desiring to commission a comprehensive PPP study, the granting authority needs to formalise the recognition of the transaction advisory team that must navigate the project until the project company or concession holder is appointed. While in discussion with the line department or principal regarding a PPP project’s feasibility, the contracting authority will concurrently liaise with multilateral financing institutions. While the concession holder decides on PPP project financing, the contracting authority’s role is to be neutral on the financing method and ultimately select the appropriate method in line with the project. 

* Delmon, J. (2005) Project finance, BOT projects and risk.