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Module 9 Selecting an Operator. Toolkit: Approaches to Private Participation in Water Services.

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Presentation on theme: "Module 9 Selecting an Operator. Toolkit: Approaches to Private Participation in Water Services."— Presentation transcript:

1 Module 9 Selecting an Operator. Toolkit: Approaches to Private Participation in Water Services

2 Introduction: Navigating through this E-Learning Module E-learning design:

3 Elements of the Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 5 Standards, Tariffs, Subsidy, Financials 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements

4 General Outline of Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements Module 9 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements Module 9 Selecting an Operator Module 9 Selecting an Operator

5 Module 9 - What will we learn? How can we SELECT the best Operator? What PROCUREMENT approach? How do we deal with a continually changing situation in the bidding period and in the longer term? What CRITERIA can we use to evaluate the Operator and his Proposal Management Contract for Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. What do we have to do to MANAGE the bid process, from sounding out market interest right through to selecting the successful Operator and awarding the contract How do we make sure we have the most economic and sustainable project? How can we SELECT the best Operator? What PROCUREMENT approach?

6 SELECTION CRITERIA MANAGING BIDS OTHER ISSUES Module 9 Selecting an Operator SELECTION METHOD

7 SELECTION CRITERIA MANAGING BIDS OTHER ISSUES Module 9 Operator Selection 1. Selection Method “ Choice of method for selecting an Operator who will provide the required services at best value for money” In this section we look at the PROCUREMENT process, and also review the three basic SELECTION methods : Competitive Bidding Competitive Negotiation Direct Negotiation

8 Clear and transparent.Transaction: - objectives should be explicit - selection criteria well-defined. - tender and decision making processes understandable by all Robust.Process: - resilient to procurement problems - not open to challenge by losing bidders Fair.Procurement: - undertaken on a level playing field - all bidders competing on equal terms. Cost-effective and timely.Cost and bid time: - appropriate for potential rewards of winning. “ Choice of method for selecting an Operator who will provide the required services at best value for money” Four characteristics of a good Procurement Process: 1. Method: Procurement Issues

9 Clear and transparent.Transaction: - objectives should be explicit - selection criteria well-defined. - tender and decision making processes understandable by all Robust.Process: - resilient to procurement problems - not open to challenge by losing bidders Fair.Procurement: - undertaken on a level playing field - all bidders competing on equal terms. Cost-effective and timely.Cost and bid time: - appropriate for potential rewards of winning. Manila “ Choice of method for selecting an Operator who will provide the required services at best value for money” Four characteristics of a good Procurement Process: 1. Method: Procurement Issues

10 “ There are three basic methods of Operator selection…..” 1. Method: Selection Methods Competitive Bidding Competitive Negotiations Or.. Direct Negotiation Or..

11 “ We look in more detail at three basic methods of Operator selection…..” 1. Method: Selection Methods Competitive Bidding (“Widely believed to be best method”): Government notifies public that it seeks Operator and seeks expressions of interest Formal screening process results in list of qualified bidders Bid documents are distributed Formal,public process used to present and evaluate bids, and select winner Competitive Negotiations (“ Simultaneous negotiations with various bidders”) : Service objectives specified; request for proposals from private operators Proposals reviewed and technically responsive bids selected Government negotiates contract terms and conditions with selected bidders Direct Negotiation (“ Most often for project ideas from private sponsors”) : Can be appropriate, for innovative solutions proposed by contractors Possible cost advantages for small schemes, where conventional bidding cost high Disadvantages: Difficult to assess competitiveness & maintain transparency

12 “ We look in more detail at three basic methods of Operator selection…..” 1. Method: Selection Methods Competitive Bidding (“Widely believed to be best method”): Government notifies public that it seeks Operator and seeks expressions of interest Formal screening process results in list of qualified bidders Bid documents are distributed Formal,public process used to present and evaluate bids, and select winner Competitive Negotiations (“ Simultaneous negotiations with various bidders”) : Service objectives specified; request for proposals from private operators Proposals reviewed and technically responsive bids selected Government negotiates contract terms and conditions with selected bidders Direct Negotiation (“ Most often for project ideas from private sponsors”) : Can be appropriate, for innovative solutions proposed by contractors Possible cost advantages for small schemes, where conventional bidding cost high Disadvantages: Difficult to assess competitiveness & maintain transparency Competitive Bidding Competitive Negotiation Direct Negotiation

13 Module 9 Operator Selection SELECTION CRITERIA MANAGING BIDS OTHER ISSUES SELECTION METHOD SELECTION CRITERIA 2. Selection Criteria “ The Contracting Authority needs to determine early on the objective methods it will use to select the best bidder” In this following section we look at the ways to choose between different bidders, reviewing the specific Criteria for bid evaluation: Technical evaluation Financial Evaluation Relationship between Technical and Financial Finally we review possible Bidding processes: Prequalification, 2 Envelope 2 Stage Bid Process

14 Module 9 Operator Selection 2. Selection Criteria “ This is one of the most commonly used selection systems……. ” Pre- Qualification Technical Evaluation Financial Evaluation Interested firms submit operating expertise and financial capacity Contracting Authority assesses these details Short list with three to six firms Only short-listed firms can submit a proposal Bidders submit proposals Bidders submit Technical Proposals, showing how they would run the contract Bidders provide information on Financial and technical ability Proposals assessed using ‘technical evaluation criteria’ Bidders have to pass a ‘technical threshold’ to be eligible for selection (e.g. scoring at least 80 percent on technical evaluation criteria) Financial proposals only assessed for those bidders who have been evaluated against technical criteria and have passed the ‘technical threshold’ Financial Criteria can be very simple, as following examples: Bidder asking for lowest tariff (Concession or Lease-affermage [See Module 1 for more info.] ) Bidder asking for Lowest Fee (Management Contract [See Module 1 for more info.] ) Bidder with best financial proposal awarded the contract

15 Module 9 Operator Selection 2. Selection Criteria “ This is one of the most commonly used selection systems……. ” Pre- Qualification Technical Evaluation Financial Evaluation The Contracting Authority decides whether to follow this or some other approach. The right selection procedure is crucial to get the right Operating partner. It sets the technical and financial mechanisms and scoring procedures. It decides the relationship between technical and financial evaluation and the weight given to results of technical and financial bids. Evaluation processes and scoring principles and weightings have to be developed before the bidding process starts The broad principles of the evaluation framework have to be communicated to the bidders Training should be provided to staff reviewing the bids, to ensure consistency

16 Module 9 Operator Selection 2. Selection Criteria “ This is one of the most commonly used selection systems……. ” Pre- Qualification Technical Evaluation Financial Evaluation Technical Evaluation Financial Evaluation The Contracting Authority decides whether to follow this or some other approach. The right selection procedure is crucial to get the right Operating partner. It sets the technical and financial mechanisms and scoring procedures. It decides the relationship between technical and financial evaluation and the weight given to results of technical and financial bids. Evaluation processes and scoring principles and weightings have to be developed before the bidding process starts The broad principles of the evaluation framework have to be communicated to the bidders Training should be provided to staff reviewing the bids, to ensure consistency Relationship between Technical and Financial Evaluation

17 MANAGING BIDS SELECTION CRITERIA OTHER ISSUES SELECTION METHOD MANAGING BIDS Module 9 Operator Selection “ We need to manage the operator selection process effectively” 3. Managing Bids In this following section we look at the BID MANAGEMENT process, and review the five basic process steps : Market Sounding Public Notification and Prequalification Evaluation of Prequalification Responses Bidding Evaluation of Bids Negotiation when necessary

18 MANAGING BIDS SELECTION CRITERIA OTHER ISSUES SELECTION METHOD MANAGING BIDS Module 9 Operator Selection “ We need to manage the operator selection process effectively” 3. Managing Bids In this following section we look at the BID MANAGEMENT process, and review the five basic process steps : Market Sounding Public Notification and Prequalification Evaluation of Prequalification Responses Bidding Evaluation of Bids Negotiation when necessary A note on Bid terminology:

19 Bid Evaluation Market Sounding Notify + Prequals. NegotiationBidding 3. Managing Bids – Process Steps “ The Operator Selection Process involves 5 key steps, and a clear Bid Management Structure needs to be established to implement these”

20 Bid Evaluation Market Sounding Notify + Prequals. NegotiationBidding 3. Managing Bids – Process Steps “ The Operator Selection Process involves 5 key steps, and a clear Bid Management Structure needs to be established to implement these” Bid Management Structure

21 “ Talks with potential bidders at an early stage about structure and scope of the project is a good idea. Typically these are informal soundings, based on a project briefing, a consultation paper or a pre-bid road show” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Benefits : Gaining ideas about structure and scope of proposed project, and their acceptability to bidders Potential bidders welcome involvement; they voice commercial concerns, It increases bidder interest and increases overall procurement effectiveness Early consultation can also involve other stakeholders (Module 3) Form of Market Sounding: Can vary from request for comments on original briefing, to a structured process with questions testing market response to specific ideas Can involve ‘road show’ or meetings with selected potential bidders Points to be aware of : To avoid bidders seeking collectively to influence the transaction to their advantage, make use of experienced advisers to ensure suggestions are well founded Early canvassing of range of opinions helps to avoid accusations of bias in the formal procurement process

22 PRE- QUALIFICATION “ Public Notification and Prequalification establish the capable bidders” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding PUBLIC NOTIFICATION c. Evaluation of Responses b. Criteria & Submission a. Purpose & Documentation

23 PRE- QUALIFICATION “ Public Notification and Prequalification establish the capable bidders” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding PUBLIC NOTIFICATION c. Evaluation of Responses b. Criteria & Submission a. Purpose & Documentation Public Notification Purpose & Documentation Criteria & Submission Evaluation of Responses

24 PRE- QUALIFICATION “ Public Notification and Prequalification establish the capable bidders” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding PUBLIC NOTIFICATION c. Evaluation of Responses b. Criteria & Submission a. Purpose & Documentation Criteria: Additional issues

25 “ Following prequalification, bidders will be invited to submit proposals” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Provide Information Interact with Bidders Specify proposal form & content The contracting Authority will need to: The better the available information, the better the bidders will have a common uderstanding and be able to provide a responsive, comparable bid. Also, increases fairness and transparency The more relevant information available, the less risk bidders will factor in to price. Information on legal, technical, and commercial aspects is required, and future plans Principle information sources: Bidding documents, Information memorandum A data room Meetings with Management & staff of the utility Bidders and their financiers generally welcome dialogue on form of contract to be adopted Bidder feedback should be incorporated in the design process, resulting in better, compliant and more affordable bids Two main approaches to Bidder Feedback: Bidder Conferences Arms length Consultation ( & 2 stage bidding) PROPOSAL FORM & CONTENT Technical Proposal: Information requested should only relate to the evaluation criteria, including firms capability. Information required should match the type of contract arrangement envisaged Each bid should detail the bidders proposals for meeting obligations and service levels Financial Proposal: Information requested to be necessary for financial evaluation, such as fees, subsidy or investment, to meet evaluation criteria Financial models (eg spreadsheet format) may be required for the more complex contract forms: Other requirements: Bid bonds; Signed legal, acceptance of the bid process; Copy of contract signed at bid stage.

26 “ Recap of the key elements of the bid management process..” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Provide Information Interact with Bidders The contracting Authority will need to: Information: Relating to evaluation criteria & Contracts Specify proposal form & content Technical Proposal Financial Proposal Bid Bonds, Process Acceptance, Pre- Signed Contracts Technical Proposal Financial Proposal Other items Interact with Bidders Provide Information Bid Bonds

27 “ The evaluation approach is set at the start of the selection process.” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Here we review steps in a two-envelope evaluation, to look at practical issues: Compliance Technical Evaluation Compliance: Each bid is checked to see that it complies with procedures and requirements set out in Instructions to Bidders Material non-compliance may disqualify a bid, or need remedial action May include detailed review of proposed contract changes: When an unconditional signed draft contract is required, changes may be deemed non-compliant, and bid disqualified Where there is more flexibility, adjustments may be made to the financial risk allocation, to compare all financial proposals on an equivalent basis Technical Evaluation (Envelope1): Technical and Financial envelopes are often evaluated separately, with financial proposals only considered after the technical evaluation, to avoid price issues from affecting technical marking

28 “ The evaluation approach is set at the start of the selection process.” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Here we review steps in a two-envelope evaluation, to look at practical issues: Compliance Technical Evaluation Financial Evaluation Select Preferred Bid Selection of preferred Bidder Having completed technical and financial evaluations, a preferred bidder can be selected If a Technical threshold approach was used, the preferred bidder is the one with the best financial offer Financial Evaluation (Envelope 2): Financial envelope may be returned unopened if the Technical proposal is non-compliant, or fails to exceed threshold score Financial proposal opening options: In Private: e.g. Sofia, financial package opened and evaluated in secret. May raise questions about transparency In Public : e.g. Manila and Bucharest concessions, projected onto screen at public meeting. Opening in Public maximizes transparency, and can allow rapid identification of winning bid. Opening in Private can allow confidentiality if another round of bidding is envisaged

29 “ The Bid by the Operator with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved. No Negotiation Negotiate Preferred Bid Or.. There are several negotiation options: Contract can be signed immediately when all technical and financial issues are resolved This provides greatest transparency and objectivity Especially useful for two stage bidding, or when unmodified contracts signed with the bid: If issues still to be resolved, negotiations can start with the preferred bidder Even if a reserved bidder is retained, the Contracting Authority has less competitive tension in the negotiation The Contracting Authority has to have resources and capacity to maintain its position against a possibly more experienced negotiator Bidders and Financiers may request major changes during negotiation, and the Contracting Authority has to be able to respond effectively to this

30 “ The Bid by the Operator with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved. No Negotiation Negotiate Preferred Bid Or.. Competitive Negotiation Or.. Additional Bid Round Or.. There are several negotiation options: Final option is a second round of formal bidding This retains transparency, but allows bidders to improve financial offers, after seeing competitors bids. Disadvantage: Not suitable for adjustment of non-price bid conditions Negotiations can be with two or more bidders, playing off one against the other This may help to get a better deal than offered in the competitive bids Disadvantage: Lacks transparency as has to be held in secret, and people may not be confident of an unbiased decision

31 “ The Bid by the Operator with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place” 3. Managing Bids Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved. No Negotiation Negotiate Preferred Bid Or.. Competitive Negotiation Or.. Additional Bid Round Or.. There are several negotiation options: Competitive Negotiation in the UK: Best & Final Offers

32 “ There are several other issues that may have to be dealt with when deciding how to select an Operator” SELECTION CRITERIA MANAGING BIDS OTHER ISSUES SELECTION METHOD OTHER ISSUES 4. Other Issues

33 “ There are several other issues that may have to be dealt with when deciding how to select an Operator, including:” 4. Other Issues Winners Curse & Lowball bids Variant Bids Complaints & Appeals Flexibility & Future Rebidding If the winning bid is too low (e.g. through bidder error) it may be unsustainable, and the contract and services may be disrupted later. There is a risk of underbidding as often the bid information is inaccurate or missing Care can be taken in designing bid selection procedures to reduce these risks, through consultation and other measures. In complex bids a variant ‘service-price’ bid may offer the Authority better value for money than a base bid. For evaluation purposes, the Bidder has to demonstrate the differences from a base bid. An effective complaints and appeals procedure may reduce the risk that an unsuccessful bidder may try to overturn the preferred bid. The issue of re-bidding at the end of the Arrangement period needs to be addressed, and the matter of flexibility in future bidding of any follow on arrangement

34 “ These other issues can be looked at in more detail, if required…” 4. Other Issues Winners Curse & Lowball bids Variant Bids Complaints & Appeals Flexibility & Future Rebidding Winners curse & Lowball Bids Variant Bids Complaints & Appeals Flexibility & Future Rebidding

35 SELECTION CRITERIA MANAGING BIDS OTHER ISSUES SELECTION METHOD Reviewing Module 9 ‘The Module has looked at the whole range of issues in Arrangement design, concerning “Selection of the Operator”………….’ Competitive Bidding Competitive Negotiation Direct Negotiation Operator Pre- Qualification Operator – Tech. Evaluation Operator – Financial Evaluation Procurement Issues Choice of Bid Process Winners Curse Variant Bids Appeals Flexibility & Rebids Bid Evaluation Market Sounding Notify + Prequals. NegotiationBidding

36 Checklist : Module 9 Selecting the Operator Choosing the selection method: Consider relative importance of transparency, speed, cost, and innovation Choose a selection method: competitive bidding; competitive negotiation or; direct negotiation Setting the selection criteria for competitive bidding Set technical evaluation criteria for prequalification Set technical evaluation criteria for bidding Set financial evaluation criteria Determine how the technical and financial criteria will be combined: weighted average, technical threshold, best financial or fixed price, best quality Manage the stages in bidding Initial market sounding to determine operate interest and concerns Public notification and prequalification to bidders on the short list Specify the contents of bids and detailed bidding process Evaluate Negotiate or allow bidders to further improve their bid, if necessary Dealing with other issues Relationship between information required in proposals, evaluation criteria, and contractual obligations Avoiding underbidding Variant bids Appeals and complaints Maintaining flexibility for future re-tendering

37 More Information: Module 9

38 Supporting Material The Toolkit Financial Model Toolkit Case Study material Toolkit Website: For comments or further details contact Cledan Mandri Perrott at

39 Toolkit: Module 9 End of Module

40 Toolkit: Module 9 Return to Start

41 Toolkit: Module 9 DO NOT MOVE or ERASE THE FOLLOWING SLIDES

42 Transparency: Manila Example Back to Module

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44 Selection: Competitive Bidding ADVANTAGES Encourages Transparency Provides a market mechanism for selecting the best proposal Protects the Government’s key terms from erosion through intensive negotiation Stimulates interest among a broad range of potential partners “ Competitive Bidding is widely believed to be the best method of Operator selection in most circumstances…..” DISADVANTAGES Can be hard to implement, unless outputs standardized, and technical parameters clearly defined. Makes Evaluation of innovative or non-standard bids difficult. May encourage underbidding May entail high costs for bid preparation – may deter some bidders Back to Module

45 Selection: Competitive Negotiations ADVANTAGES Encourages Bidders to be creative and innovative Reduces the incentive for bidders to deliberately underbid to win projects Offers a richer way to screen bidders than price alone, get to know Operators and judge if good partner Suited to technical variation, and innovation Useful when project finance difficult to procure on standard contract form. DISADVANTAGES Bids can be difficult to compare and evaluate Competition is less transparent than competitive bidding – may allow corruption and reduce legitimacy of process Cost for bid preparation may deter some bidders Additional Risks: More subjective, less transparent, may give bidders undue influence “The Contracting Authority engages in simultaneous negotiations with two or more bidders…..” Back to Module

46 Selection: Direct Negotiation ADVANTAGES Provides incentives for companies to find solutions to local service problems Increase the chance of private involvement when the costs of competitive bidding would be high relative to expected revenues (e.g. small towns) Can attract innovative projects Stimulates interest among a broad range of potential partners DISADVANTAGES Absence of competition reduces pressure for cost effectiveness Lacks transparency, and may be more likely to be perceived as corrupt (which reduces political sustainability) Without competition, difficult to assess if bid reasonable and cost effective. Increased risk of contract reversal, especially where public is against private sector involvement. “Direct negotiation most frequently occurs when an idea originates with a private sector sponsor, who seeks to negotiate terms and conditions directly…..” Back to Module

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48 “ Technical Evaluation Criteria are used to assess if the firm would do a good job if selected. This is done at two stages in the process…. ” Technical Evaluation Criteria Prequalification Evaluation Objective: To assess bidders general operating and financial capacity Operating Capacity: Experience with private participation arrangements Quality of staff & other resources (e.g. utility management expertise) Financial Capacity: Balance sheets and profitability Support by financial institutions Track record in financing similar deals Note: Financial capacity is part of Technical evaluation, because it concerns the bidders ability to deliver its obligations (not what he will charge to do this) Technical Bid Evaluation Objective: To assess bidders specific technical and financing capacity related to the bid. Note: At this stage more criteria are added Technical Approach: Management Contract: Quality of Management Team Proposed working methods Management Systems to be transferred Concession Contract: Above factors may be included More emphasis placed on approach to plans for improving overall operations and for rehabilitation of infratsructure Financing/Investment Plans (if appropriate): Details of financing plans for working capital & capital investment: Strength & deliverability of finance plans Commitment by equity and debt providers Degree of acceptance of contract terms and risk allocation Prequalification Stage 1 Technical Bid Evaluation Stage 1 Back to Module

49 “ Technical Evaluation Criteria are used to assess if the firm would do a good job if selected. This is done at two stages in the process…. ” Technical Evaluation Criteria Example: Weighted Average Technical Score Example: Scoring scale for Technical items Prequalification Stage 1 Technical Bid Evaluation Stage 1 Back to Module

50 Weighted Average Technical Score “ One example of a possible Technical scoring system… ” Back to Module

51 “ An example of points scoring system for technical items… ” Possible Scoring of Technical Items Back to Module

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53 “ There are many possible financial criteria. It is important to select appropriate criteria to match the needs of the specific arrangement proposed……. ” Financial Evaluation Criteria Examples of Possible Financial Criteria  Customer or operator tariff required  Up front fee, periodic lease payments, or concession payment to the contracting authority  Price for shares or assets to be sold  Capital investment levels committed by the private sector  Coverage (or new connection) targets  Service or management fees payable to the operator  Subsidy payable by the contracting authority. Examples of Possible Financial Criteria  Customer or operator tariff required  Up front fee, periodic lease payments, or concession payment to the contracting authority  Price for shares or assets to be sold  Capital investment levels committed by the private sector  Coverage (or new connection) targets  Service or management fees payable to the operator  Subsidy payable by the contracting authority. Factors affecting Financial Criteria Selection  Type of arrangement proposed  Level of cost recovery achieved by existing tariffs  Predictability and value of future tariff-based revenues  Contracting authority’s objectives  The rules for setting future tariffs  The need to avoid low-balling by bidders Factors affecting Financial Criteria Selection  Type of arrangement proposed  Level of cost recovery achieved by existing tariffs  Predictability and value of future tariff-based revenues  Contracting authority’s objectives  The rules for setting future tariffs  The need to avoid low-balling by bidders Back to Module

54 “ There are many possible financial criteria. It is important to select appropriate criteria to match the needs of the specific arrangement proposed……. ” Financial Evaluation Criteria Examples of Possible Financial Criteria  Customer or operator tariff required  Up front fee, periodic lease payments, or concession payment to the contracting authority  Price for shares or assets to be sold  Capital investment levels committed by the private sector  Coverage (or new connection) targets  Service or management fees payable to the operator  Subsidy payable by the contracting authority. Examples of Possible Financial Criteria  Customer or operator tariff required  Up front fee, periodic lease payments, or concession payment to the contracting authority  Price for shares or assets to be sold  Capital investment levels committed by the private sector  Coverage (or new connection) targets  Service or management fees payable to the operator  Subsidy payable by the contracting authority. Factors affecting Financial Criteria Selection  Type of arrangement proposed  Level of cost recovery achieved by existing tariffs  Predictability and value of future tariff-based revenues  Contracting authority’s objectives  The rules for setting future tariffs  The need to avoid low-balling by bidders Factors affecting Financial Criteria Selection  Type of arrangement proposed  Level of cost recovery achieved by existing tariffs  Predictability and value of future tariff-based revenues  Contracting authority’s objectives  The rules for setting future tariffs  The need to avoid low-balling by bidders Commonly used approaches for each major Arrangement Type Back to Module

55 “ There are many possible financial criteria. It is important to select appropriate criteria to match the needs of the specific arrangement proposed……. ” Financial Criteria: By Type of Arrangement Back to Module

56 Bid bonds Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Bid Bonds: “In most major projects, the contracting authority requires the bidder to submit a bid bond with the bid. Bid bonds are normally issued by a bank or other financial institution with an acceptable credit rating. They are intended to prevent the eventual winning bidder from withdrawing from the project without appropriate justification. If the bidder does withdraw, the bank that provided the bond will be required to pay the bond over to the contracting authority.” Back to Module

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58 “ A key issue is how to balance the relative weightings of the technical and financial proposals, and three methods are described (Pro’s and Cons are shown later)… ” Relationship: Technical and Financial Evaluation Technical Threshold, Highest Financial Score Weighted Average, Technical & Financial Scores Fixed Budget, Highest Financial Score Technical Threshold, Highest Financial Score Fixed Budget, Highest Financial Score A common procurement approach: Choose weights for the technical and financial score The weighted scores are combined to produce an overall score The weighting system has to be predetermined to avoid appearance of manipulation to suit any bidder Careful analysis of the weights is needed to ensure the preferred combination of price and quality Technical score evaluated first; Bidders informed, then Financial Proposals reviewed. Calculation straightforward, then winning Bidder informed Back to Module

59 “ A key issue is how to balance the relative weightings of the technical and financial proposals, and three methods are described (Pro’s and Cons are shown later)… ” Relationship: Technical and Financial Evaluation Technical Threshold, Highest Financial Score Weighted Average, Technical & Financial Scores Fixed Budget, Highest Financial Score Weighted Average: Example formulae Technical Threshold, Highest Financial Score Fixed Budget, Highest Financial Score A common procurement approach: Choose weights for the technical and financial score The weighted scores are combined to produce an overall score The weighting system has to be predetermined to avoid appearance of manipulation to suit any bidder Careful analysis of the weights is needed to ensure the preferred combination of price and quality Technical score evaluated first; Bidders informed, then Financial Proposals reviewed. Calculation straightforward, then winning Bidder informed Back to Module

60 “ A key issue is how to balance the relative weightings of the technical and financial proposals, and three methods are shown, with advantages and disadvantages……. ” Relationship: Technical and Financial Evaluation Technical Threshold, Highest Financial Score Weighted Average, Technical & Financial Scores Fixed Budget, Highest Financial Score Under Concession Contracts, an initial Technical Threshold is usually followed by an award on financial criteria All bidders are first scored technically A ‘Technical Threshold’ is set (e.g. at a score of 80 points out of 100) Remaining bid with best Financial offer wins EXAMPLES: Amman, Cartagena, Manila & Senegal Back to Module

61 Technical Threshold, Highest Financial Score Weighted Average, Technical & Financial Scores Fixed Budget, Highest Financial Score Weighted Average, Technical & Financial Scores Technical Threshold, Highest Financial Score Relationship: Technical and Financial Evaluation “ A key issue is how to balance the relative weightings of the technical and financial proposals, and three methods are shown, with advantages and disadvantages……. ” This approach has not been widely used in the Water Industry Bidders informed of available budget Bidders give best technical proposal within the budget Management Contract: This would be the available Management Fee Affermage-Lease: Budget limits tariff setting (maximum tariffs and subsidies) Back to Module

62 “ We can tabulate and compare the key issues for the three options….. ” Pro’s and Cons of the Scoring Options (1) Technical Threshold, Highest Financial Score Weighted Average, Technical & Financial Scores Fixed Budget, Highest Financial Score Back to Module

63 Pro’s and Cons of the Scoring Options (2) Back to Module

64 “ This gives the approach to combining technical and financial criteria……. ” Weighted Average; Technical + Financial Back to Module

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66 Bid Terminology “ Some thoughts on Bid terminology” Back to Module

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68 Bid Management Structure Before starting the bidding, the Contracting Authority needs a clear Bid Management structure. This may be different and more focused than any previous general sector reform structure. The structure could include: Steering group representing key Government Agencies Supervising technical team to do the work Steering Group: Drafting bid documentation; determining bidders on short list; identifying winning bid; advising Contracting Authority Ability to conduct procurement in timely, efficient and transparent manner, with checks and balances Contracting Authority: Final approval on key decisions May form a Negotiating Team ( which may include some Steering group members. “A clear Bid Management Structure needs to be established……” Back to Module

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70 “ The formal procurement process is likely to start with Public Notification of the tender opportunity. Public Notification Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Some issues include: Public notification can be through electronic or traditional means The advertisement goes through Government channels (national and international) and media outlets. Form and content of advertisement may reflect needs of procurement law The advertisement generally includes: general description of the project invitation to suitably qualified companies, groups or consortia to participate in the tender process Companies responding to the invitation are sent to the prequalification documentation Following advertisement, contact between the contracting authority and potential bidders needs to be managed for fairness & transparency Back to Module

71 “Prequalification ensures that bidders have technical and financial capability and a track record in performing similar tasks” Purpose & documentation Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Prequalification can also: Reduce overall cost and complexity of the bidding process Increase interest of short listed bidders (as chances of win are higher) Bring clarity to bid process, as key project characteristics are defined. Prequalification documentation typically includes: Project Information Memorandum – provides background information of the proposed arrangement Instructions to Tenderers – outlines the bid process and the selection criteria for bidders Prequalification Questionnaire – lists information required from firms seeking prequalification Back to Module

72 “ Prequalification information is required to be able to assess parties against the Prequalification Criteria” Criteria & Submission Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Information typically collected includes: Experience or track record on similar contracts Geographic presence Size of existing customer base (population served) Financial standing Finance-raising capacity Type of financing intended to raise if private financing is required Staff and resources. Legal status of the bidding entity. Back to Module

73 “ Prequalification information is required to be able to assess parties against the Prequalification Criteria” Criteria & Submission Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Information typically collected includes: Experience or track record on similar contracts Geographic presence Size of existing customer base (population served) Financial standing Finance-raising capacity Type of financing intended to raise if private financing is required Staff and resources. Legal status of the bidding entity. Back to Module

74 “ Three additional issues on criteria and submissions..” Criteria & Submission Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Availability of Suitable companies: When defining the prequalification criteria, the following issues to be noted; The number of substantial international enterprises providing water services is small Local private sector water capacity may be limited (especially if water sector is Government owned) Criteria may be designed to allow widest range of companies to bid (this could include construction companies, or privatized utilities) on a stand alone or consortia basis) A Utility Operator traditionally leads consortia, but it may be beneficial to allow investors to lead where private finance is sought. Consortia Bids: When consortia seek prequalification, evaluation should look at: Overall consortium strength. No one consortium component will offer all the expertise and experience required Financial standing. Collective standing, including parent company support and commitment available to the consortium Extent to which the consortium members have worked together before Multi-firm Bids: Consortia can join together in a variety of ways including: Joint venture bidding company. All parties take equity stakes Lead company. Where the lead company is the prime contractor, with other firms brought in as sub-contractors Key Issue: Contracting Authority needs to ensure that the Bidding Entity: Meets the criteria Can provide legally binding assurances that it will meet its contract obligations Back to Module

75 “ The Prequalification Documents should get the bidders to demonstrate credentials using a standardized framework, allowing rapid comparison and evaluation” Evaluation of responses Bid Evaluation Market Sounding Notify + Prequals. Negotiation Bidding Scoring: Define predetermined scoring matrix Define scales for marking each criterion How many bidders: Decide how much the process should narrow field of bidders Bidders prefer smaller shortlists, and may withdraw if shortlist is too long particularly if more than five bidders Designing Prequalification Rules: Define a prequalification Threshold – All bidders who pass a threshold qualify to bid. May result in too few or too many bids Define the number to be shortlisted – Specify the number to be listed, and select that many firms starting with the highest ranking. May exclude some high quality bidders Hybrid – Combine the two methods, five meeting threshold, or the three top ranked if threshold not achieved by enough bidders. Back to Module

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77 Bidding: Provide Information “ With assets buried underground, and questionable management reports, it is a challenge to provide accurate good quality information to bidders” The contracting authority will need to provide—or identify as unavailable— information on such matters as: The utility’s current and proposed service area The current characteristics of service (quantities supplied, metered, and paid for) A basic inventory of the assets and their condition and serviceability Current performance standards levels (relating to quality, pressure, supply security, interruptions, sewer flooding, sewer collapse, and the like) Human resources (numbers, skills, wage rates, conditions of service, pension arrangements) Tariffs and commercial practices (tariff level and structure, subsidy arrangements, disconnection arrangements) Commercial operations data, including the number and condition of meters, the quality of the billing system, and collection rates Financial performance. Principal methods of providing data to bidders: Bidding documents ( may include Information Memorandum) A data room Meetings with Management & Staff of the utility Data: CD-ROM’s can give Systems Data, Close Circuit TV surveys of typical sections of underground assets, and other information. Information can also be through a web-based project intranet with the bidding documents. Data Room: May give further information about the state of the utility business e.g.: Technical Audits & reports Financial and commercial information (including state of metering, billings & collections) Data on Staff, inventory and other resources Access: Access to Data Room and to staff and management needs to be controlled to ensure adequate & equal availability of access by all bidders Back to Module

78 Bidding: Interract with Bidders (1) “ Two main ways to interact with bidders.. Arms Length Consultation Contracting Authority & Advisers present ideas Bidders invited to respond Bidders can be provided with draft documentsand asked for comments Advantages: Bidder feedback at an early stage can result in more practical and affordable bids Potential Limitations: If not managed carefully can weaken bidders confidence in the whole bid process. Also, bidders may use the forum to collectively persuade the authority to reduce private risk allocation to public detriment. Note: Arms length consultation will decrease the likelihood of this, but with less bidder input & ideas. Possible Issues in Consultation design:  Bidders with good ideas about how the transaction can work better may be unwilling to share ideas with competitors.  Bidders will often respond favorably in public to ideas over which they hold significant concerns.  Bidders may collectively seek to obtain advantageous changes to the transaction terms from the contracting authority and its advisers. Bidder Conferences Back to Module

79 Bidding: Interract with Bidders (2) “ Arms length consultation limits shift of risk allocation, but may also limit bidder input.” Arms Length Consultation Bidders comment independently on draft bidding documents and proposed contract Contracting authority considers how reasonable the suggestions are Common areas of interest can be identified Two rounds of comment and review usually enough Bidder Conferences Advantages: Common areas of concern identified without pressure to accept most bidder friendly approach. Potential Limitations: May not pick up fully the bidders concerns, or innovative ideas. Accusations that different information given to different bidders can be dealt with through good bid management Back to Module

80 Bidding: Technical Proposal “ The invitation to submit a technical proposal needs to specify the information and the format required. It should be limited to information needed to evaluate the bid.” Information on Firm’s Fitness & Willingness to Bid Details of how the utility’s bid requirements will be met This might include: Organization & structure of bidding consortium Key Personnel Capital Investment Plan Financing Plan ( but if 2 envelope bid, no details of final) Operating Plan Management Systems Comments on the Proposed Contract Details of how the utility’s bid requirements will be met This might include: Organization & structure of bidding consortium Key Personnel Capital Investment Plan Financing Plan ( but if 2 envelope bid, no details of final) Operating Plan Management Systems Comments on the Proposed Contract This is the basic information for simplest contracts More information is needed for the more complex contract types e.g. lease or concession, to demonstrate technical capability The Technical Proposals should show the Bidder’s capability and commitment to achieving the bid obligations, including the levels of service required. Back to Module

81 Bidding: Technical Proposal “ The invitation to submit a technical proposal needs to specify the information and the format required. It should be limited to information needed to evaluate the bid.” Information on Firm’s Fitness & Willingness to Bid Details of how the utility’s bid requirements will be met This might include: Organization & structure of bidding consortium Key Personnel Capital Investment Plan Financing Plan ( but if 2 envelope bid, no details of final) Operating Plan Management Systems Comments on the Proposed Contract Details of how the utility’s bid requirements will be met This might include: Organization & structure of bidding consortium Key Personnel Capital Investment Plan Financing Plan ( but if 2 envelope bid, no details of final) Operating Plan Management Systems Comments on the Proposed Contract The Technical Proposals should show the Bidder’s capability and commitment to achieving the bid obligations, including the levels of service required. Buenos Aires Concession: Technical Proposal requirements Back to Module

82 Buenos Aires Technical Proposal “ The Technical Proposal should be structured to the project requirements.” Back to Module

83 Bidding: Financial Proposal “ The financial proposal should include information needed for the bid evaluation. The more complex the evaluation criteria, the more the amount of information needed.” Simple Financial Proposals: Could include basic measures such as fees, cost of service, subsidy required etc.. Simple Financial Proposals: Could include basic measures such as fees, cost of service, subsidy required etc.. Financial Model Depending on the contract form this might include: Inflation and other macroeconomic assumptions Demand projections and unaccounted for water Capital Investment Plan & Expenditure Operating and maintenance costs) Financing Tariffs and Revenues Billing and collection rates Taxation Accounting Rules Financial Model Depending on the contract form this might include: Inflation and other macroeconomic assumptions Demand projections and unaccounted for water Capital Investment Plan & Expenditure Operating and maintenance costs) Financing Tariffs and Revenues Billing and collection rates Taxation Accounting Rules Basic financial information for simplest contracts Financial models (e.g. spreadsheets) when more information is needed for the more complex contract types e.g. lease or concession, to demonstrate Financial stability and strength of the proposal Bidders can be given certain key assumptions (e.g. inflation) to ensure comparability at evaluation. Standard templates may be provide to generate key parameters (e.g. key outputs, tariffs) Back to Module

84 Bidding: Financial Proposal “ The financial proposal should include information needed for the bid evaluation. The more complex the evaluation criteria, the more the amount of information needed.” Simple Financial Proposals: Could include basic measures such as fees, cost of service, subsidy required etc.. Simple Financial Proposals: Could include basic measures such as fees, cost of service, subsidy required etc.. Financial Model Depending on the contract form this might include: Inflation and other macroeconomic assumptions Demand projections and unaccounted for water Capital Investment Plan & Expenditure Operating and maintenance costs) Financing Tariffs and Revenues Billing and collection rates Taxation Accounting Rules Financial Model Depending on the contract form this might include: Inflation and other macroeconomic assumptions Demand projections and unaccounted for water Capital Investment Plan & Expenditure Operating and maintenance costs) Financing Tariffs and Revenues Billing and collection rates Taxation Accounting Rules Basic financial information for simplest contracts Financial models (e.g. spreadsheets) when more information is needed for the more complex contract types e.g. lease or concession, to demonstrate Financial stability and strength of the proposal Bidders can be given certain key assumptions (e.g. inflation) to ensure comparability at evaluation. Standard templates may be provide to generate key parameters (e.g. key outputs, tariffs) Financial Modeling issues Back to Module

85 Financial Model Issues “ A financial model can help to check the technical and financial proposal, but also in the future may be used for future contract or tariff adjustments” Financial Modeling Issues: The model can help to establish all aspects of the financial strengths of a bid. It can also be used as the basis for future contract or tariff change. However, requiring a financial model can also cause difficulties: Subjectivity and loss of transparency in the evaluation If the award is based on simple financial parameters ( e.g. tariff levels) then the evaluation process can also be simple. When models have to be compared, the fact that the evaluators may not agree with some of the modeling process or detail may lead to charges of change or subjectivity Lack of Clarity about effect If the arrangement contains procedures for future financial adjustments, it has to be made clear whether the financial model will be used to trigger or support the adjustment process (e.g. if there is an unforeseen cost increase, will the model be used to agree the level of tariff increase?) Back to Module

86 Bidding: Other Bid items “ There are a number of supplementary items that may be used to ensure bid and contract compliance” Bid Bonds Acceptance of Process Signed Contracts Most major projects, bidder submits bid bond with bid Bid bonds issued by bank or other finacial institution Prevents bidder from withdrawing from bid without justification. If bidder withdraws, financial institution pays Contracting Authority Issue: To avoid risk of legal challenge later, from unsuccessful bidders trying to re-open bid evaluation process The bid process can be designed to be fair, and bidders can be asked to sign a binding letter: Showing satisfaction with the process so far Accepting decision of the evaluation process Agreeing not to challenge the process SIGNED CONTRACTS Once selected, preferred bidder may attempt to change parts of the arrangement To overcome this, bidders may be asked to indicate acceptance of the arrangement, through signing the draft contract at bid stage Financiers may sign as well, if financing is a key Downside: Complicated to get agreement in complex contracts, takes time and several rounds of consultation Some bidders may not be happy with particular terms, refuse to sign and withdraw Back to Module

87 Information: Evaluation and Contracts Back to Module

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89 Competitive Negotiation Back to Module

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91 “If the winning bid is too low (e.g. through bidder error) it may be unsustainable, and the contract and services may be disrupted later.” Some options may mitigate the problem, but most come with a cost, which must be weighed against the cost of underbidding. There are some things the contracting authority may be able to do in the selection risk to reduce the problems of winner’s curse and low-ball bidding: Compare bidders’ offers with its own estimate of a financially viable bid, based on its own “shadow model.” If the bid seems too good, the contracting authority can query or even disqualify it. Any threshold between acceptably and unacceptably low bids is arbitrary, however, and this approach may prevent the operator from getting the best price. Accept the bid, but take steps to make default less likely. For example, the bidding procedures might provide for the contracting authority to discuss the bid with the operator, perhaps giving the operator the option to withdraw if it agreed the bid was not financially sustainable. If the operator insisted that the bid was financially sustainable, the contracting authority might negotiate a higher performance bond or simply increase its vigilance in order to react to any problems before they became a crisis. Ensure consistency between the criterion for selecting the operator and the rules governing price resets. For example, a price reset based on an estimate of the operator’s costs (independent of its bid) scheduled early in the contract period invites low-balling when the bidder offering the lowest customer tariff wins. Prequalify only bidders with a significant reputation at stake. This may help, so long as operators’ low-balling is to some extent observable, that is if people can observe a pattern in which some firms ask for price increases after winning a contract more often than others do. Winners Curse & Low Bids Back to Module

92 “Normally it is best for all bids to be based on the same set of bidding documents. However, in complex contracts it may be advantageous to allow variant bids.” ADVANTAGES: May show beneficial Service-Price Combinations Allows Authority to consider alternative service options, or to test cost of transferring certain risks to the Bidders. DESIGN ISSUES: Admissibility and criteria for admission of variant bids to be set out at the start of bidding Bid Process design needs to make clear distinction between: Base Bid Mandatory Variant Bids Bidders’ Variant Bids. Bidders should provide details of the differences between the variant bids and the base bid, and quantify the impact on the financial proposal. Decision needs to be made whether to evaluate all variant bids, or only evaluate the variants of the preferred bidder Evaluation of variants can add considerable time to the overall program Variant bids Back to Module

93 “Even in the best run procurement process there is a risk that bidders will seek to overturn the selected bid. It is good to establish a process to cover risk of challenge.” In many jurisdictions the Complaints and Appeals Process is determined by law. A suitable mechanism for handling complaints might therefore specify: Who will be responsible for hearing and arbitrating complaints and appeals On what basis complaints and appeals will be heard How complaints and appeals should be formulated Whether a fee will have be deposited for each complaint (to discourage frivolous complaints) What the deadlines are for the receipt of complaints and appeals and their resolution. Complaints & Appeals Back to Module

94 “Whether to allow re-bidding at the end of the Arrangement term needs to be considered” Governments typically want flexibility when an arrangement ends. They might wish to take the utility back into public management, adopt a different form of private participation, or at least have competitive tenders to select the best operator for the next stage. Preserving Flexibility: Contract designed so that utility is not dependent on Operator at the end of the Period, ensuring that: Billing and Management Systems stay with the Utility Ensure that Assets can be transferred Key supply contracts remain effective If the Operator has undepreciated investment remaining in the utility, provide a termination payment as compensation to the Operator. Encouraging competition in any re-tendering: How to deal with advantage any incumbent might have? Incumbent has better information on cost, efficiency and revenue potential Other firms may feel reluctant to compete Options: Exclude incumbent?: But may come at a high cost if a successful and established Operator forced out Better Solution?: Ensure that Operator is obligated to deliver a full information set near the end of the Arrangement Flexibility & Re-Tendering Back to Module

95 Toolkit: Module 9 DO NOT MOVE or ERASE THE PREVIOUS SLIDES AFTER “END” OF MODULE


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