1. Angelo Vian President of FEPAC Washington, D.C., U.S.A. – May 10-11, 2007 Biennial Meeting International Lending Agencies and Consulting Industry – BIMILACI FEPAC´s paper for discussion # 1

2. Harmful consequences on the Quality of Projects due to inappropriate remuneration of the consultancy During BIMILACI 2005 meeting, FEPAC presented its guidelines for the selection and hiring of consultancy services, adopted by consensus of the countries belonging to the Federation. FEPAC has adopted convergent criteria with the guidelines of the World Bank and recommends the selection of a consultancy by combining the evaluation of the technical proposals and price of each company quoting during the process, giving a higher percentage of importance to the technical component.

3. FEPAC also proposes to include within the Guidelines, a formula to evaluate the price proposal which induces to offer market prices. Such inclusion may be accomplished modifying ITC 5.7 as shown on next slides. According to its Guidelines, FEPAC suggests to adopt 2 nd formula in the majority of the cases, being it representative at best of the market prices.

4. Proposed modification for ITC 5.7: Sf = 100 x Fm / FSf FmF Proposed modification for ITC 5.7: The formula for determining the financial scores is the following: [Insert either one of the following formulas] 1) Sf = 100 x Fm / F, in which Sf is the financial score, Fm is the lowest price and F the price of the proposal under consideration. or

5. Sf = 100 x FM / (FM + |FM - F|) SfFM F |FM - F| FMF 2) Sf = 100 x FM / (FM + |FM - F|), in which Sf is the financial score, FM is the average price of all proposals evaluated, F the price of the proposal under consideration, and |FM - F| is the absolute value of the difference between FM and F. [or insert another inversely proportional formula acceptable to the Bank] The weights given to the Technical and Financial Proposals are: T = [Insert weight: normally 0.8], and P = [Insert weight: normally 0.2]

6. FEPAC’s request to the Banks was, and continues being, to guide the client to adopt such criteria, so as to end up contracting with fair prices – market prices– and the consequent and necessary quality of the job. On the contrary, during these two years the situation of the Consultancy in the countries of the region became unsustainable, due to the more frequent practice of selecting Consulting services based on price.

7. There are many cases that prove the bad consequences of low quality of the Consultancy in the execution of projects, provoking losses of great importance to private and public investors in the region. FEPAC considers valid and quite necessary the support of the Banks for a real change of behavior in the mentioned theme.

8. Therefore, we consider that the Banks have to clearly state that the concession of a loan is conditioned, in any case, to the borrower strictly follow the Banks Guidelines for what concerns Consultancy Services selection. Those Guidelines, in fact, prioritize the Selection Based on the Quality and Cost (QCBS), being clearly established that the Selection Based on Lower Least Cost (LCS) is an exception, to be used only for standard or routine jobs, for which the amount of the resulting contract is expected to be quite reduced.

9. By stating the condition afore mentioned as previous for a loan approval, the Banks will contribute to really change the existing behavior of selecting Consultancy services trough the lowest cost procedure, backing up the thesis of the bad consequences resulting from the contracts assigned with minimum price selection criteria.

10. We propose that FEPAC jointly with BIRF and BID carry out a study, in each of the Latin American countries, on the harmful effects arisen from hiring consultancy services for low prices, including an analysis on how and why this kind of contracting was carried out in the most evident cases.

11. Lower price Bidding? Bidding by technical and price wrongly applied or wrongly specified? Ethic problems in the proposal analysis or in the selection criterion application? Other?

12. In our opinion, the harmful effects are not only related to the quality of the consultancy services and their consequences on cost and schedule of the projects, but also related to the weakening of the Consultancy sector and their effects on the economy of the country. In FEPAC, we are convinced that the Consultancy industry is a strategic asset of the countries, and its activity contributes to countries development and to raise the standard of living of the population.

13. FEPAC firm opinion is that hiring Consulting services at lowest prices, you end up paying a very high price, since what you obtain is a low quality service, which finally has an impact in the quality, cost and schedule of projects.

14. The study that FEPAC is proposing at BIMILACI 2007 will analyze, country by country, which of the guidelines suggested by the Banks or by FEPAC are difficult to apply, or not efficient, in order to contract Consultancy services on the basis of a price which may support and match the quality required.

15. Additionally, we propose that such study will include the analysis of a second aspect, related to the expected cost of each stage of the consultancy services necessary to support efficiently the technical development of a project. It consists in determining, having as reference real jobs successfully executed, the reasonable cost of the different phases of the project studies, in relation, for example, to its expected capital investment. Different types of projects will be considered and also different phases of the Consultancy services involved.

16. Other procedures for the valuation of the consultancy services, without considering the expected cost of the project, will be consolidated in a "Consultancy Services Budgets Preparation Manual", considering the specific characteristics of each country, taking advantage of the material already available in FEPAC.

17. We estimate that the study proposed is of vital importance to our countries in order to avoid paying the high cost of the low prices in the engineering services. We look forward to obtain the BIRF and BID collaboration and financial support to carry out, jointly with FEPAC, this very important task.