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PROCUREMENT OF MANAGEMENT CONTRACTS and LEASES for OPERATION of UTILITIES – ECA EXPERIENCE (*)

PROCUREMENT OF MANAGEMENT CONTRACTS and LEASES for OPERATION of UTILITIES – ECA EXPERIENCE (*).

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PROCUREMENT OF MANAGEMENT CONTRACTS and LEASES for OPERATION of UTILITIES – ECA EXPERIENCE (*)

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  1. PROCUREMENT OF MANAGEMENT CONTRACTS and LEASES for OPERATION of UTILITIES – ECA EXPERIENCE (*) Preamble:This is a slightly more readable version of the “Power Point” slide presentation made by Salim Benouniche (**) at the Workshop on “ Management Contracts and PPPs” organized by Procurement Group in World Bank Fiduciary Forum 2008, National Conference Center, (Lansdowne Va). (*) ECA:Europe and Central Asia Region (**) Procurement specialist, Infrastructure & Energy , ECSPS

  2. Part I. Typical ECA Utilities Situation and Risks Involved I.1 INTRODUCTION: After a short description of the common scheme, world wide, the specific situation of utilities in ECA Region will be detailed, in terms of main difficulties, risks, issues, followed by mitigation measures in design and procurement: I.2 A COMMON SCHEME, Bank-wide To rehabilitate plants and networks, which are often in a poor initial condition, then operate and maintain them, it is necessary: to determine first as clearly as possible the BASELINE DATA.

  3. Then to OPERATE for a few years to reorganize the utility and measure the real parameters: this is usually the purpose of partnerships with a private operator: • There may be two phases: • a first MANAGEMENT CONTRACT with a private Operator lasting 2 to 6 years normally comes as a transition before launching the Procurement of • a second phase: 2nd Management Contract, LEASE or CONCESSION (8 to 25 years)

  4. PPPs In ECA: more Management Contracts I.3 Specific ECA SITUATION: • In ECA we currently find mainly MANAGEMENT Contracts (Albania, Armenia, Kosovo, Uzbekistan), a few LEASE Contracts (Armenia, Turkey, Georgia), very few examples of CONCESSIONS (Former Yugoslavia and Bulgaria). • The MANAGEMENT CONTRACT is the most frequent type in ECA due to the difficulties encountered in ECA (TRANSITION) COUNTRIES; the management contract is a TRANSITION CONTRACTbecause it is a mixed contract, only partly performance-based,with an important fixed fee component similar to a Technical Assistance contract (70% to 80%) and a smaller performance based fee component (20% to 30%)

  5. MANAGEMENT CONTRACTStend to lastlonger in ECA, either by extension or by repetition (from 3 to 8 years). • The procurement procedure is usually “one stage bidding” after prequalification, It is based on a technical proposal and a financial proposal submitted in two envelopes by each bidder. The technical evaluation includes a minimum pass/fail score that must be secured before the financial proposal can be opened. Then , the criterion is generally only price. • One exceptional case (Armenia 2, QCBS procedure) was based on post qualification.

  6. THE MAIN DIFFICULTIES in ECA COUNTRIES: • BASELINE Data are very difficult to establish (no bookkeeping, no reliability, etc.); • LOW REVENUES do not cover costs for maintenance, refurbishment and extension of the public services; it comes from low tariffs, poor billing and collection (Central asian countries in particular face a “quasi fiscal debt” case) In Yerevan, at start only 7% of the domestic consumers paid user fees. In some cases, the Bank waived part of its rules to finance operating costs at start.

  7. POLITICAL commitment and new LEGAL and REGULATORY frame are key (independence of contract monitoring unit and of Management Board too). • TECHNICAL LOSSES (e.g. high percentage of “Non Revenue Water”) reflect the poor technical conditions of the plants and networks; • PERSONNEL management, and RESTRUCTURING of former public companies are important to improve collection and billing revenues first, and performance later. • Who is responsible for Procurement execution is not clear: Operator should be and execution of the INVESTMENT PLAN in due time should bind the client.

  8. Lack of Competition in some Sectors, increasing risk aversion: few Bidders Water Operators “World-size”: only 5 major companies (=> ,only one bidder in Tbilisi: negos failed); concentration in Power Sector also. • Few Left Bidders tend to negotiate amount/wording of Guarantees, Contract • Underbidding sometimes leads to sustainability problem, early contract crisis • Parent Companies (JV shareholders) walk away from ailing local company

  9. The Cycle of Underperformance (after Shugart) Low tariff Low incomes Low customer satisfaction Failure to pay Inefficient operations Poor commercial discipline Lack of funds Water-shortages, low pressure, poor quality Poor Maintenance Leakage Lack of investment Waste

  10. A “Guidance Note on Strategy” was issued to address the case where the first Management Contract incumbent competes for a subsequent Contract, Lease or Concession: • difficult to establish a “level playing field” for other competitors • solution adopted: waiver of conflict of interest provisions to allow the incumbent to compete, based on the provision of a maximum of information to all competitors. (see website: at the end of the “Consulting Services Manual”)

  11. JOINT VENTURE ISSUES: The Operator is in most cases a new locally incorporated company created after the award, its shareholders are usually the prequalified applicant Joint Venture Partners: • Typically, depending on the size of the contract (e.g. >= 1 mln $/year), one or two subsidiaries of a major company of the sector (Parent Company having financial capacity, technical expertise), or developed country Operator and a Technical Consulting Firm, with or without a Local Partner. • When the locally incorporated Operator is created, the Major Company(ies) becomes often a “GRAND PARENT” of the Operator:

  12. “GRAND PARENT” Holdings ॥_______ _______॥_ _ _ _ _ + _ _ _ _ I I I Parent 1 (Oper.) Parent 2 (Tech.) Parent 3 (Local or Bank) I______________I _ _ _ _ __ _ _ _I ॥ ll New Locally Incorporated Subsidiary = PARTY to the CONTRACT

  13. A PARENT/SHAREHOLDER COMPANY GUARANTEE, WHY? To be pre-qualified, JOINT VENTURES often refer to financial capacity figures or technical expertise of the “Grand Parent(s).” T OPRC has ruled in 2002 on such a case that “Grand Parent Company (ies)” should, alternatively,  either ‘CO-SIGN” (i.e. be party to) the Contract (or put more Equity)  or provide aPARENT COMPANY GUARANTEE, together with a letter of agreement stating the commitment to provide the Operator with Technical expertise and support.

  14. This Guarantee comes in ADDITION to the PERFORMANCE SECURITY. It is similar in form: UNCONDITIONAL, payable UPON FIRST DEMAND.

  15. EXTRACTS from ARMENIA II Management Contract RFP: RFP 4.5.5. If the individual company or any of the Consortium partners constituting the Successful Bidder have submitted data, credentials, or any other information in their Technical Proposal Part VII (Information Forms of Annex E to this RFP) that are those of a parent company, the Company Management Board may, in its sole discretion, also require the relevant parent company or companies to be party to the contract. by co-signing the contract, or if it is not willing to co-sign the Contract, to provide an additional guarantee of the same kind as that mentioned in RFP section 4.5.4., for an amount calculated on the basis of six month of Management Fixed Fee. (The Guarantee mentioned in RFP 4.5.4 is the Performance Guarantee)

  16. WHAT IS THE RISK COVERED? This guarantee is needed: • to ensure that the capacity (financial & technical) taken into account at prequalification stage is really backing the Operator during execution. • to cover the risk of J.V. partners stepping out of the Operator’s Contract, either by selling their shares, or by stopping their (financial/technical) support: the Operator would then become an empty shell unable to reach performance standards.

  17. THE OTHER GUARANTEES: • The GENERAL PERFORMANCE SECURITY is triggered by lack of performance or not meeting the main Levels of Service; • The PAYMENT GUARANTEE ,for leases only, covers the payment of the Operator’s Monthly repayment [of the Grantor’s part] of the total Customer Tariff Collections, especially in the case of Bankruptcy of the Operator (annually maintained).

  18. . HOW IS THE AMOUNT CALCULATED? In case of Bankruptcy, or Termination of the Contract due to Operator’s Default, the Grantor often needs 6 months or more to award a New Operator Contract following a competitive procedure. During this period, the services to end-users must be ensured at an acceptable level of performance, and this is financed by the total amount of the two (cumulative) Guarantee and Security: Parent Guarantee + Performance Security >= 6 months of Operating Expenses

  19. Part II. Procurement IssuesA) Procurement procedure launch: Timing and Issues • FINANCING should be reasonably known to avoid uncertainties in the Design of Contract – example: Contract designed for 6 years, financing available only for 4 years. Result: 4 years firm tranche + conditional tranche of 2 years (+1 year possible extension) • Borrowers should explore in advancefunding availability from various sources not to affect or delay contract signing. • Participationin competition may be an issue – example: previous incumbent allowed to compete for a subsequent contract? (see conflict of interest/level playing field guidance note) • Preparation costs can be very high for the Borrower, (e.g. for an aborted lease contract more than $ 1 million)

  20. B) Prequalification (PQ) • “criteria” or requirements should be balanced: if excessive in number or level, risk to reduce access and competition, on the other hand: risk for the client => foresee the real needs/data over the period (population to be served, etc.) • Main criteria: (i) population served, (ii) operator’s experience, (iii) financial capacity, (iv) joint venture leadership, (v) ability to provide qualified staff. • Whose qualifications form basis for prequalification? The entities seeking PQ should have adequate qualification and experience (parent or “sister” company data issue) • Withdrawal of partners (or change) should be avoided

  21. C) Selection Process (incl. RFP) up to signing (1 stage, 2 envelopes bidding) • Criteria for each phase (quality vs. price): Least Cost or QCBS method? (If QCBS, respective weights in combined evaluation: 70/30 or 50/50?) • Fine tuning the RFP (amending RFP is possible): after pre-bid conference and “questions and answers”, but not later • Withdrawal/Changes in JV partners or parent companies support • “LOW BIDDING?” Bidder choice, Client risk: Bidder should remain responsible for consequences of low bidding => Bidding documents can be made more specific about minimum standards of quality and quantity of inputs required (e.g. minimum number of staff months)

  22. Performance Indicatorsshould be realistic, easy to measure, and their number tends to be reduced • Conditional Bidsand inappropriate assumptions made by bidders in their bid are a problem • Contract negotiation delays: some Bidders try to “re-write” all clauses (this may lead to abortion)

  23. D) Implementation problems and issues • Inappropriate staff/ early changes of key staff • Investment fund delayed, delays in procurement by operator • Inappropriate Financial Model: Tariffs and Regulation issues • Political, red tape, delays: If authorities or local party do no comply with assumptions/obligations in time (impact on performance indicators, role of Independent Auditor) • Control on Personnel: conflicts or lack of operator leverage

  24. Withdrawal by Operator or sale of shares of locally incorporated Company (“empty shell” problem may be the consequence of low bidding) • Attempts to re-negotiate, or to sell expensive proprietary software should be avoided • Confusion of roles: Bank/Independent Auditor or Dispute Resolution Board

  25. Part III. Innovations or experiments in the Procurement and Design of ECA Management Contracts ( nuts & bolts ) • (i) Previous incumbent allowed to compete with full disclosure of information to others in the case of a second Performance-Based contract (after conflict of interest/level playing field discussion: see OPCPR Guidance Note at the end of the Consulting Services Manual) • (ii) Parent Companies or Partners of JV can choose: either to co-sign or to provide an additional Parent Company Guarantee (= 6 months of operator’s cost) – [see Clause slide] [Georgia + 2 recent examples: ALBANIA 4 and ARMENIA 2 (MWWPP “out of Yerevan”)]

  26. (iii) Method of Selection and Criteria: One Management Contract has been selected under Quality and Cost Based selection method (QCBS usually applied to Consultant’s contracts) with 70% weight on Quality, and 30% on price) Note: 70% may be a redundant use of quality criterion with the first stage pass/fail requirement of 75 points in technical quality score, and may lead to a very high price

  27. (iv) The yearly percentages of fixed fee payment are no more equal, but partly “front loaded” to take into account the wish of the operators to reflect the higher level of needs in the first years of a Management Contract. (example: Breakdown on six years Armenia 2 RFP: 23%, 21%, 14%, 14%, 14%, 14%, and on 4 years: 32%, 29%, 20%, 19%) • (v) RFPs and draft contracts are updated and fine tuned after pre-bid conference and series of questions and answers, and an amendment to RFP is issued.

  28. (vi) To take into account and mitigate the “perceived risk” of undue unilateral encashment of the unconditional Performance Security, a clause has also been added to have an assessment by the Independent Auditor of the Breach of Contract before encashment.(Turkey lease, Armenia 2) • (vii) Performance Guarantee amount can now be reduced on a yearly basis. • (viii) In Albania, RFP allowed, in case of Joint Venture, a consultant to take the lead of the J.V .

  29. (ix) New wording in RFP was used (Armenia 2) to avoid Partners in joint venture using the references of sister companies belonging to the same group (not members of JV) • (x) In a re-bidding case, the Bank has suggested to decrease the minimum figures of population served required for prequalification, to keep them at the present real level. • (xi) To avoid underbidding, the Bank is considering to suggest a borrower to try indicating in the RFP a required minimum number of man-months for key staff.

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