Competitive Bidding Essay
An open and competitive procurement procedure begins with the promoter’s description of its requirements and an invitation to suppliers to indicate their interest in the contract and their professional capacity to fulfil it. The promoter then identifies potential suppliers and invites them to submit bids. After the bidding phase, most procurement systems require a public declaration of the competitors’ names and their bid prices and, ultimately, of the successful bidder. There is a wide variety of procurement procedures available for use in tendering when it comes to PPP arrangements. Many of these procedures have become prescriptive in nature.
Many local governments follow standard procurement procedures drawn up by the International Federation of Consulting Engineers (FIDIC). However, most commonly PPP contracts are awarded as the result of some form of competitive bidding procedure. Designing a competitive bidding process – and getting the best possible result – is easiest when the product or service required is a fairly standard one and the technical outputs can be defined with reasonable certainty in the bidding documents. Particular attention, therefore, should be paid to providing good quality information to potential bidders and to the detailed design of the bidding process. Defining the procurement process
Some initial decisions need to be made regarding the procurement and the bid evaluation process. It includes: Qualifying criteria for the evaluation and selection of shortlisted bidders Process for submission and evaluation
Details of pre-submission conference or meeting and of other opportunities to ask questions or seek clarifications Indicative procurement schedule
Other general instructions to applicants
Application forms (as annexes)
The choice of procurement method will depend on the government’s budget, capacity, desire to encourage innovation, need for high-level inputs, vulnerability to corruption, and objectives of the ppp project. Three main options, distinguished by the level of competition they create, are available:
1. Unsolicited proposals or direct negotiations.
2. Competitive negotiation.
3. Competitive bidding.
Unsolicited proposals or direct negotiations
When confronted with a unsolicited proposal, the government has three options: Direct negotiation to the offer. Purchase the project concept then competitively tender among a range of bidders. Offer original proponent a predefined advantage in recognition of the value of the original proposal(bonus system)and open up bidding. Entering into a sole-source process can save government time and money and may alert government to an unrealized opportunity for ppp. However, sole-sourcing can encourage corruption through lack of transparency, and the cost benefits to competitive bidding are lost. Competitive negotiation.
Competitive negotiation entail inviting a small group of bidders to a structured negotiation. The bidders are aware of the presence of the other bidders and there is pressure to obtain the best price. This arrangement is quicker and less expensive than full competitive process and can yield good prices. A time consuming procurement process may be seen as an opportunity cost to the private sector. This needs to be weighted against the degree of and value to transparency. 1. Competitive negotiations, another option of competitive bidding which generally involve the following stages: The government specifies its service objectives, and requests proposals from private operators for meeting these objectives. The government reviews the proposals and selects those that are technically responsive to the request proposals. The government then negotiates contract terms and conditions with the selected bidders. 2. Competitive negotiations may involve simultaneous negotiations with the objective of awarding one contract, or they may result in the award of several contracts.
3. Competitive negotiations are well suited to project in which technical variations are possible, there is much scope for innovation, and it would be difficult to secure project financing on the basis of standardized contract document. Advantages of competitive negotiations
They permit bidders to be more creative and innovative.
They reduce the incentive for bidders to deliberately underbid in order to win projects. They offer a richer means of screening bidders than price alone.
Bids can be difficult to compare.
Competition is less transparent than with competitive bidding.
Competitive bidding process
A competitive bidding process generally consists of:
1. public notification of the government’s intention to seek a private partner for the provision of, for example, water and sanitation services, including prequalification or a request for expressions of interest from private companies;
2. distribution of bidding documents and draft contracts to potential bidders;
3. a formal process for screening potential bidders and finalizing a list of qualified bidders;
4. a formal public process for presenting proposals, evaluating them, and selecting a winner. Different procedures for procurement include invitation to tender; and request for proposals (one- and two-stage processes).
Formation of a Procurement Committee
A Procurement Committee, often called a Tender Evaluation Committee, is formed for overseeing and conducting the bidding process. Typically, the Procurement Committee is formed with representatives from a number of MDAs with responsibility for the financial, legal and operational aspects of the project as well as the Bureau/Office of Public Procurement in order to have diversity and no one government group alone in charge of selecting the preferred bidder. The Committee appoints an in-house coordinator or an external consultant (Transaction Advisor) to manage the day-today aspects of the bidding process.
However, the Procurement Committee itself (and not the coordinator or Transaction Advisor) is responsible for making the final determination of the preferred bidder. The Procurement Committee, in turn, could be divided into functional teams to focus on evaluation of specific aspects of the bidders’ proposals. For example, the Procurement Committee could have separate teams for undertaking technical review, legal review, local preference review and financial review. The number of teams may depend upon the complexity of the project evaluation. Invitation to tender
Generally, an invitation to tender is issued when the promoter knows exactly what it wants and how it wants to achieve its goals. Most often, the tender is issued and the lowest bidder is awarded the contract. Although this approach reduces the cost involved in developing a PPP, it may limit the promoter’s opportunities to view other, more efficient and/or more cost-effective options for delivery of the service. Request for proposals
A request for proposals (RFP) is usually used when the promoter knows what it wants to achieve, but would like prospective partners to use their experience, technical capabilities and creativity to identify how the project objectives can best be met. One of the main differences between an RFP and an invitation to tender is that in an RFP the promoter is looking for value (that is, operating efficiency, cost-saving measures, innovations and so on), rather than the lowest bid. The request for proposals can be issued through either:
a one-stage; or
a two-stage process.
The decision between having a single or a two-stage procedure for requesting proposals will depend on the nature of the contract, on how precisely the technical requirements can be defined and whether output results (or performance indicators) are used for selection of the contractor or concessionaire. If it is deemed both feasible and desirable for the contracting authority to formulate performance indicators or project specifications to the degree of precision or finality necessary, the selection may be structured as a single-stage process. In that case, after having concluded the pre-selection of bidders, the contracting authority would proceed directly to issuing a final request for proposals. Request for Expressions of Interest (RFEI)
The RFEI is intended to provide the promoter with sufficient information to draft a clear RFP in cases when the local government has identified its objectives, but may not have fully defined the project or service to be delivered. The use of an RFEI can assist in two ways: it reduces the time and expense involved in evaluating a larger number of proposals; and it improves the quality of proposals.
In this sense, the RFEI is used to gain information to help in drafting the RFP.
Request for Qualifications (RFQ) or Pre-qualification
A RFQ is used in situations where the promoter and the project team have amore defined project, but do not know if there are any private sector partners with the resources, experience or interest to undertake the project. It is a step within a contract awarding procedure in which the party inviting the tenders selects the companies to participate in competitive bidding for the contract. To this end, potential participants in the competition are requested to submit information on their companies. The RFQ document is more specific than the RFEI document. In traditional government procurement it consists of the verification of certain formal requirements, such as adequate proof of technical capability or prior experience in the type of PPP, so that all bidders who meet the pre-selection criteria are admitted automatically to the tendering phase.
Bidders should be required to demonstrate that they possess the professional and technical qualifications, financial and human resources, equipment and other physical facilities, managerial capacity, reliability and experience necessary to carry out the project. Qualification requirements should cover all phases of an infrastructure project, including financing, management, engineering, construction, operation and maintenance, where appropriate. Based on the pre-qualification results, a shortlist is drawn up of the companies eligible to compete. The bidders answer the RFQ with Expressions of Interest. The RFQ process is used as a “shortlisting” method to pre-qualify selected potential partners who will then receive the RFP. It is not designed to gain answers as to how the project will be completed. Depending on the pre-qualification requirements set out in the documents, different groups of companies will be selected.
One recent trend is that pre-qualification requirements laid down by promoters such as local governments have started to include not only the price and quality of the service they wish to procure, but also requests to address poverty, upgrade welfare and/or create employment opportunities. Often the bidding companies need to prove their recent experience with a previous assignment similar in nature and outcomes. Thus, the purpose of this stage is to enable the contracting authority to formulate its requirements in a manner that enables a final competition to be carried out on the basis of a single set of parameters. Put simply, this is an opportunity to ensure that in the final evaluation, the contracting authority is able to compare “apples to apples” rather than “apples to oranges.” Often local small businesses or community-based organizations are best suited to resolve a particular service delivery problem. In such cases, it is important not to leave them out of the bidding process.
One of the means through which this can be achieved is to simplify the tender documents. Obviously, pre-qualification, drafted without taking these potential bidders into account, could serve as an obstacle to the effective and innovative solutions to the existing problems. Meanwhile, the pre-qualifications can still be an effective mean pre-define the bidders for the RFP, when the criteria are correctly specified and weighted according to their value to the PPP project. Simplification of tender documentation
The system of tender submission should not require too many forms of supporting information, which could be unnecessarily complicated for small businesses to complete satisfactorily. Besides, the administrative burden for smaller businesses in dealing with tender form requirements for government bodies is disproportionately greater and more expensive than for larger companies. Thus, the tender submission of documentation should be rationalized and simplified as far as possible to make it easier for small contractors to deal with the paperwork involved. However, this simplification of the documentation should not influence negatively the essence of the contract and the contractual obligations. Evaluation of Applications and Shortlisting of Bidders
The applications are evaluated based on the technical and financial capabilities to implement the project as per the selection criteria given in the RFQ. At this stage, the evaluation normally focuses on threshold criteria such that all proposals meeting the criteria are shortlisted for the next stage and all non-confirming proposals are rejected. A Pass/Fail approach is generally the preferred approach for evaluation of responses to the RFQ. However, a target number (3-5) of shortlisted bidders is usually preferred in order to ensure sufficient competition but not at the same time overcrowd the bidding process, and therefore sometimes only the highest qualifying firms will pass on to the full tender phase. If firms feel there are too many bidders, and thus the odds of winning are low, they will not participate in the full tender. Advantages of competitive bidding
It ensures transparency.
It provides a market mechanism for selecting the best proposal. It stimulates interests among a broad range of potential partners. It works best where outputs are standardized and all technical parameters can be clearly defined. It may encourage underbidding if renegotiation is possible later.
Regardless of the option selected, the essential elements to be included in a contract are: The parties to the agreement,
Interpretation, sets forth the definitions of important terms and providing guidance on the interpretation of the contract’s provision’s: The scope, territorial jurisdiction and duration of the agreement, The objective of the contract,
Circumstances of commencement, completion, modification and termination of contract; The rights and obligations of the contractor;
The rights and obligations of the Government;
The requirement for performance bonds to provide security for Government if the construction and service delivery falls below standards; Insurance requirements to provide security for the insurable matters; Government warranties;
Private sector warranties:
Consequence to a change in law;
Service quality and performance and maintenance targets and schedules; The identification of regulatory authorities if any and the extent of their roles and authority; The responsibilities of the contractor and the Government with regard to capital expenditures; The form of remuneration of the contractor and how it will be covered, whether from fixed fee, fixed fee plus incentives or another arrangement; How key risks will be allocated and managed;
The contractors right and responsibility with regard to passing through or entering public or private property; Reporting requirements;
Procedures for measuring, monitoring and enforcing performance; Procedures for coordinating investment planning;
Responsibility for environmental liabilities;
Procedures for resolving disputes;
Delay provisions describing what is and is not an excuse for a delay in construction and operations; Force majeure conditions and reactions;
Procedures to be followed when either party to the PPP contract wishes to change any material portion of the contract; Indemnification circumstances;
The right of each party to any intellectual property brought to the project or created during the project, including the steps to be taken to protect the intellectual property of third parties, such as information technology software manufacturers; Conflict of interests and dispute resolution;
Description of the conditions under which either party may terminate the contract, the process to be undertaken in that regard, and the consequences to each party of a termination; The circumstances that may permit either the Government or any financial institution to “step in” to the contract to protect its rights under the PPP contract; Consequences of a change in the ownership or key personnel of the private partner; Mechanisms whereby the parties to the PPP contract will interact with each other going forward; Requirement that each party comply with all laws pertaining to the project, including obtainable environmental, zoning, planning and other permits; Conditions by which public sector employees are employed by the private sector contractor, including any restrictions on termination or redundancies for operational reasons; and Conditions precedent: describes any conditions precedent to be fulfilled by either party before the contract takes effect. This list is illustrative and does not capture every clause required in a contract. The final content of the contract will depend on the project scope, local legal requirement and precedent, and advice of legal advisors. It may include more elements as per demand of situation and size of the project.
PPP projects have lately become a popular operation model in public infrastructure development all over the world. Long-term contractual arrangements with PPPs change the traditional roles of the public and private sectors. Public sector bodies become clients and private sector bodies become service providers with a large responsibility of the project in question. PPP projects offer different kinds of benefits to both public and private parties. Both partnership parties also have different kinds of goals; however, the common goal is that both parties win. As the results in the text show, proactive law becomes relevant in contract law and contracting. Practicing proactive contracting requires more planning of legal relations. The goal is to prevent difficult future situations and avoid problems. Proactive contracting emphasizes contract preparation.
That is why, for example, issues and questions concerning risks, risk management and creative contractual mechanisms play a significant role. In business relations, proactive contracting invites and gathers different professions to participate in a new type of co-operation. A common language has to be found, for example, between the people in companies with technical, financial, and legal backgrounds. In this way, it is possible to assess the possible risks and other critical contractual questions in the contract preparation phase. A partnership mindset is essential in PPP projects. A client and a project company form the main contractual relationship in terms of PPP projects. In addition to this, for example, a project company has several contracts with subcontractors. These partnerships are complex contractual relationships in which trust plays a big role. Co-operation requires constant care in the form of communication and reciprocal trust to strengthen it. Trust is achieved by the companies and public sector representatives binding themselves to shared goals.
Furthermore, once strong trust has been built and established, firms may enjoy lower costs than those without such trust. In the business context, trust seems to be based partly on economic calculations and partly on the trusting party’s basic values as a human being. Each PPP project consists of several different contracts, so that they are actually a bundle of contracts. These contracts cover, for example, construction, financing, and services. PPP projects are long-term and very complex contractual arrangements which require careful and time-consuming preparation and negotiations. Dozens of different risks exist as well. As regards risks with PPP projects, the proactive way is the only reasonable way to handle and allocate them. This requires investments from the parties. As the results in the text show, changing circumstances play a significant role in long-term contracts and, for instance, in PPP projects in terms of contract law. It is sensible for the parties to prepare for changing circumstances.
This requires proactive mindset and actions. In practice, this means that parties have to create flexible contractual mechanisms for contracts so that they can respond to possible changing circumstances in the future. These mechanisms can be, e.g. clauses concerning changes in official regulations and legislation, hardship, renegotiations, and force majeure. As the results in the text show, in Finnish PPP projects and their contractual arrangements, tailored contract clauses, insurances, securities, and guarantees have been used as tools for managing and allocating risks. It has also been noted that the most problematic situations arise when risks are not individualized. Problems also occur when a risk is individualized but the risk-bearing party is not determined. Proactive law and risk management play significant roles in PPP projects. Moreover, tailored contract clauses and mechanisms also have a great significance.