Presentation on theme: "From Preferred Bidder to Financial Close"— Presentation transcript:
1 From Preferred Bidder to Financial Close Iain MenziesThe World BankSt. Petersburg - 24 May 2008
2 Bidder Selection Process “ The Bidder Selection Process involves 5 key steps, and a clear Bid Management Structure needs to be established to implement these”MarketSoundingNotify +Prequals.BiddingBidEvaluationNegotiation
3 NegotiationBidEvaluationMarketSoundingNotify +Prequals.NegotiationBidding“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.There are several negotiation options:No NegotiationContract can be signed immediately when all technical and financial issues are resolvedThis provides greatest transparency and objectivityEspecially useful for two stage bidding, or when unmodified contracts signed with the bid:
4 NegotiationBidEvaluationMarketSoundingNotify +Prequals.NegotiationBidding“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.There are several negotiation options:No NegotiationNegotiate Preferred BidOr..If issues still to be resolved, negotiations can start with the preferred bidderEven if a reserved bidder is retained, the Contracting Authority has less competitive tension in the negotiationThe Contracting Authority has to have resources and capacity to maintain its position against a possibly more experienced negotiatorBidders and Financiers may request major changes during negotiation, and the Contracting Authority has to be able to respond effectively to this
5 NegotiationBidEvaluationMarketSoundingNotify +Prequals.NegotiationBidding“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.There are several negotiation options:No NegotiationNegotiations can be with two or more bidders, playing off one against the otherThis may help to get a better deal than offered in the competitive bidsDisadvantage: Lacks transparency as has to be held in secret, and people may not be confident of an unbiased decisionNegotiate Preferred BidOr..Competitive NegotiationOr..
6 NegotiationBidEvaluationMarketSoundingNotify +Prequals.NegotiationBidding“ The Bid by the Operator with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.There are several negotiation options:No NegotiationNegotiate Preferred BidOr..Final option is a second round of formal biddingThis retains transparency, but allows bidders to improve financial offers, after seeing competitors bids.Disadvantage: Not suitable for adjustment of non-price bid conditionsCompetitive NegotiationOr..Additional Bid RoundOr..
7 Negotiation Process Negotiation is a process, not an event. BidEvaluationMarketSoundingNotify +Prequals.NegotiationBiddingNegotiation is a process, not an event.The City and the winning bidder will have different perspectives during negotiations:Bidder to reduce risk and increase profitsCity to reduce costs and maximise valueOutput of negotiation will include PPP Agreement with all ancillary agreements, schedules and subcontracts
8 Negotiation ProcessBidEvaluationMarketSoundingNotify +Prequals.NegotiationBiddingNegotiation process needs to be planned and resourcedThe City must assign a negotiating team:Qualified and experiencedUnderstands City’s position on key issuesEmpowered to take decisionsAssisted by project team and local/international advisorsThis could be a full-time job for the teamManage and track evolving documentationRecord details of negotiated points and resolutions
9 Be Prepared – the Bidder will be! EvaluationMarketSoundingNotify +Prequals.NegotiationBiddingThe winning bidders will have formidable resources:The winning bidder negotiation team will be supported by its financial, legal and technical advisorsThe winning bidders lenders will be involved and have their own legal (and technical) advisorsThey are all experts in their fieldThe winning bidder and the lenders (and their advisors) have negotiated many such deals beforeBE PREPARED
10 What do we mean by “financial close”? In international project finance transactions the common definition is:When the project documentation has been executed and the conditions precedent have been satisfied or waived. Drawdowns are now permissible.Conditions precedent (CPs) are conditions/matters that must be dealt with before the bidder is allowed to draw on the loans. They will be listed in the loan agreement and the PPP Agreement.
11 Financial Close – Conditions Precedent Conditions Precedent (CP) are a challenge, especially in RussiaCPs are not recognized under Russian law – contract is effective when signedLoan agreements with international lenders will contain CPs to their effectivenessPPP Agreement will contain CPs, but they will all need to have been satisfied before PPPA signature
12 Financial Close – Project Documentation Many project documents to be concluded to reach financial close:ShareholdersGrantingAuthorityLenders /BondholdersShareholder’s AgreementPPP AgreementOperatorProjectCompanyServicesPurchaserEnd-usersOperation & Maintenance Agreement (O&M)Purchase Agreement (e.g., power purchase agreement)Supply Agreement (e.g., gas supply agreement)Construction ContractsConstructionContractorRaw MaterialSupplier
13 Financial Close – PPP Agreement CPs in the PPP Agreement may include:Required insurances obtainedCity approval of construction manuals and Design DocumentsIndependent Engineer appointedLand Plot Lease Agreements executedDeveloper has been granted access to Land PlotsAll Necessary Approvals for construction have been receivedAll Project Agreements approved by City and in effectCity has entered into Subcontractor AgreementsPerformance Bond in place
14 Financial Close – Loan Agreements CPs in the Loan Agreement may include:PPP Agreement signed and effectiveCity resolution or equivalent approving execution of PPPADirect Agreement with City is signed and effectiveOther security documents received (eg share pledge, assignment of project documents, guarantees)All government consents, approvals and licenses have been obtained (eg State Expertisa, RFR, land plots, safety acceptance)Projects insurances obtainedLegal opinions received (Russian Law compliance)Construction/EPC contracts agreedOther major procurement contracts (eg rolling stock for Nadex)Initial equity subscription from Developer
15 Financial Close – Lenders Due Diligence There may be many types of lender financing the project, each with different perspectives and risk appetite:International lenders – financial risks and project fundamentals (City payment risk, cash flows, FX risk, interest rate risk, inflation risk etc)IFIs – bureaucratic, environmental and social requirementsRussian lenders – not yet tested, usually fall in line with international lendersThey will not finance the project unless they are satisfied with the terms of the PPP Agreement (and the other project documents) and the associated risk allocationIf they are not satisfied they will seek to negotiate, directly or indirectly, or walk away
16 Financial Close – What Can Go Wrong? Failure to agree on critical issues during negotiations:Unrealistic expectations and deadlinesChange in political support (eg new Governor, government)Political issues high-jacking negotiationsGrantor does not understand issues, intransigence, lack of consensusPersonality/cultural clashesFall-out between bidder consortium members on risk allocation (eg between EPC contractor and operator)Failure to meet CPs:Delays in government consents and approvalsEconomic/Financial Crisis:Project becomes un-afordable to City or un-bankable (credit crunch)Social/Environmental Issues
17 From Preferred Bidder to Financial Close - Summary Negotiation ProcessIdentify key issues, prepare negotiation positionsAppoint negotiation team – qualified, experienced, empowered, supported by international advisor teamsDo not underestimate time and resources required – this can be a full time jobFinancial ClosePlan and prepare to meet all requirements in timely manner – this will require buy-in from many City Committees and some federal agencies (eg Expertisa, RFR)
18 From preferred bidder selection to financial close THANK YOU !!!Iain MenziesThe World Bank