10. An Overview of the PPP Process Cycle: How to Prepare, Structure and Manage a PPP Contract

This section describes the overview of the PPP project process which is then developed in detail — phase by phase — in chapters 3 to 8 of this PPP Guide.

The intention of this description is to give the reader a general view of the whole process, providing a preliminary description of its main phases. It also illustrates how the process may differ in some countries, depending on the tender route or modality selected (when there is more than one available in a country). See figure 1.13.

The process as described in this section and developed through the PPP Guide relates to the cycle of a PPP project. Normally this process starts with project identification and selection, and the PPP Guide assumes that this occurs on a project by project basis[120]. However, when the government assumes a program approach, project identification and selection, as well as the screening of projects as PPP candidates, will typically occur as part of the development of a program.

The definition of each phase, including the name and the scope of each of them, is somewhat arbitrary. There is no universal consensus on what should be included in each phase or where each should start or end. Thus, there are differing views, for example, about how to define contract “structuring” and what exactly should be considered “structuring” or even “feasibility” of a project contract. Additionally, there are different views and approaches about what should be the final outcome of the appraisal activity; whether the appraisal of the project should be regarded as phase in itself and the investment decision taken before confirming the suitability and feasibility of the project as a PPP, or whether both activities and decisions can be better handled in the same phase (which is the approach assumed by this PPP Guide for convenience, as fitting with the context of EMDE countries). See box below.

BOX 26: Considerations regarding appraisal and decisions assumed by this PPP Guide

Thus, since it is necessary to define a common ground in order to provide a proper explanation of the PPP process (as well as the different tasks to be undertaken and decisions made); this PPP Guide is necessarily adopting a flexible approach. The described process presented in figure 1.14 incorporates significant flexibility to reflect the main potential variations in the tasks, decisions and authorizations to be taken within each “phase”.

As a practical matter, the analysis and tasks to be carried out in many phases will actually extend beyond the arbitrary limit of the respective phase. For instance, some of the analysis to be carried out as part of the appraisal may not be finished until subsequent phases, or it may be necessary to revisit this analysis at a later phase.

The work to be carried out in each phase is also influenced by the applicable policy and legal framework.

What is clear though is what has to be done to successfully develop a project as a PPP. Regardless of the order or timing of each of the tasks or the different names and concepts used in different regions and jurisdictions, a PPP procurement will necessary imply significant work under a phased approach. As described in section 5.3, a PPP project must:

• Be based on an appropriate or optimum technical solution or “project”: this is usually referred to as identification;
• Be duly appraised to assess if it is feasible (both the technical solution and the delivery of the project as a PPP), that the PPP is the best procurement solution, and that it be duly prepared before tendering: this relates to appraisal and preparation;
• Have an appropriately structured PPP contract and a well-designed tender process: this will be referred in this PPP Guide as contract and tender structuring and drafting;
• Be effectively procured or tendered in accordance with the applicable legal and regulatory requirements: this may be referred to as the tender process itself (sometimes referred as “managing the transaction”); and
• Be managed during its contract life: this is called contract management.

FIGURE 1.13: General or Main Stages in the PPP Process

 

 

 

 

Each of the main phases of such process are analyzed in detail in the respective chapters of this PPP Guide (from chapter 3 to Chapter 8), following chapter 2.

Phase 1 (chapter 3) – Project Identification and PPP Screening

Objectives: To select the right project option (the best technical solution for the need), and to pre-assess the suitability of the project as a potential PPP so as to avoid sinking resources unnecessarily into the full assessment and preparation of unworthy projects.

Tasks: Usual tasks included in this phase are as follows:

• Identify/select project solution out of a number of options;
• Scoping the project;
• Assessing the project economics (including a socio-economic assessment by CBA in some countries) and prioritizing the most worthwhile projects, if needed;
• Screening the project as a potential PPP; and
• Prepare the project governance for the preparation process through tender launch, including developing a project management plan and defining the project team.

The infrastructure identification task is inherent to the process cycle of any infrastructure decision regardless of how it will be procured. It does not form part of the PPP cycle in strict terms, as in many cases and many countries projects will be already identified under a planning exercise, or they may be proposed by an agency or procurement authority during the government term legislature (and will be regarded as such as long as they fit the strategic objectives of the government).

For convenience, this PPP Guide includes this task in the same phase as PPP screening, to reinforce the importance of proper project selection (PPPs cannot perform miracles and a PPP will only succeed if it is an economically sound and sensible project). However, in some cases, especially in EMDEs and when the PPP route is mostly motivated by government financial needs (including the fact that sometimes if it is not procured as a PPP, it will not be procured), identification and appraisal come together with screening and testing of PPP suitability and feasibility

Before considering how a project can be procured, it is necessary to have a clear notion of what is the best solution to the relevant public need from the technical and strategy standpoint. For example, to solve a problem of congestion in a particular city, the possible solutions might be a light rail transit (LRT) investment, an upgrade of the road network, or a metro system. This assessment of possible solutions should be undertaken for any public project decision (in infrastructure, for a service, a policy, a law, or in any other government activity). This is the basis of good practice in project identification.

A number of options should be considered and compared (including a “do nothing” option as a baseline), and the most suitable will be selected according to a selection method. CBA and other simpler methods may be used for this purpose (for example, multi-criteria analysis, cost-effectiveness analysis).This process will identify a technical solution in general terms. At this phase, the project scope may be in the form of an outline including rough cost estimates. The scope and costings will be further developed through a final assessment in the Appraisal Phase.

In addition to using CBA for selection purposes, CBA may also be conducted in the project Identification Phase to pre-assess whether the project makes economic sense. In some countries, other appraisal tasks may also commence in the project Identification Phase. These analyses are generally referred to as pre-feasibility exercises, as they will be adjusted, evolved or further developed in subsequent phases before the project is tendered.

Once the project has been properly identified (including economic pre-assesment), this PPP Certification Guide assumes that the project will be screened as a PPP. This requires defining the contract scope in general terms and conducting a preliminary test of whether the PPP method of procurement is appropriate for the project.

At the end of this phase, a decision is made whether to proceed with a full appraisal analysis both of the project and the project contract as a PPP on the basis of a “PPP screening report”. The report should also include a description of how the project process will be managed under a project plan and related schedule.

Phase 2 (chapter 4) – Appraisal and Preparation Phase

Objectives: To assess whether the project and PPP project contract is feasible in order to mitigate the risk of project failure during tender or during the contract life of the project, and to further advance its preparation as a PPP.

The usual set of tasks to be carried during this phase are as follows.

• Refine project scope and pre-design, test technical feasibility and assess environmental impact;
• Refine socio-economic feasibility/assessment (CBA) or conduct it in full from the outset;
• Assess PPP commercial feasibility (which includes bankability) and test the market;
• Develop other financial assessments: VfM under the Public Sector Comparator method (PSC analysis) in some countries, PPP affordability, and national accounting impact analysis (in some countries);
• Preparation and due diligence: assess risks and conduct due diligence tasks;
• Pre-structuring the PPP; and
• Define procurement strategy/route and design the procurement plan.

Box 1.34 provides information on alternative processes for identifying and appraising PPP projects.

BOX 1.34: Alternative Processes for Identifying and Appraising PPP Projects

 

Phase 3 (chapter 5) – Structuring and Drafting Phase

Objectives: To define and develop a PPP contract solution and tender process that best fits with the specific features of the project contract so as to protect and, if possible, optimize VfM.

Tasks:

• Define the final structure of the project contract (financial stucturing, risk allocation and structuring, payment mechanism definition) and outline the contract;
• Finalize due diligence and preparation (finalizing the preparation tasks started in the Appraisal Phase);
• Re-assess or confirm previous analysis if needed (economic, financial, commercial – potentially including new market testing, and updating the PSC and affordability analysis);
• Finalize the reference design, technical requirements and output specifications;
• Define other business terms and contract structure matters (especially implementing contract management strategy and tools);
• Structure and draft the RFQ: defining the qualification criteria;
• Structure and draft the RFP: defining the proposal requirements and evaluation criteria (and regulations for the dialogue or interactive phase, when the tender process is of this type, or negotiation procedures when negotiations are allowed); and
• Finalize the draft contract for issuing with the RFP.

The main work in this phase corresponds to two main tasks:

1. The structuring and drafting of the project contract; and

2. The structuring and drafting of an enforcable package of procurement documentation, including the RFQ and RFP.

Structuring the contract: The structure that was developed at a preliminary level in the previous phase must now be refined (especially with respect to the financial structure, payment mechanism and risk allocation, as it is usually in this phase that the risk analysis is developed in substantial and greater detail). The rest of the business terms should also be developed before starting to draft the contract.

Structuring the RFQ and RFP: It is not only the contract that has to be designed during this phase. The tender process must also be structured and designed because it should be tailor-made to fit the characteristics of the project. The tender process will have been selected at the end of the Appraisal Phase, but many details will now be defined according to the project specifics. These include the bar for pass/fail qualification criteria and the specific evaluation criteria. They also include some relevant features of the tender process, such as bid bond requirements, time to submit, and detailed regulations for dialogue or interaction in these type of tender processes.

Drafting is the process of effectively developing all the contents and provisions of the tender package, including the RFQ, RFP, and contract. Drafting should occur only after the main characteristics of each document have been outlined, discussed and approved. The timing of the drafting of the documents may vary depending on the tender process selected. In an open tender, the qualification conditions are included in the same document and form part of the RFP. In these processes, the tender is one single package covering qualifications and selection requirements, requirements to submit proposals, evaluation criteria, and contract regulations.

In two-stage processes, it may not be necessary to finalize the RFP at the same time as the RFQ. However, the foundations of the proposal requirements and evaluation criteria, and especially those of the contract, should be defined before the launch of the qualification process. The period between launch of the qualification process and receiving submissions is the time available to refine and finalize the RFP and contract[121].

The structuring and drafting process is a highly iterative task. The contract structure is linked to the resolution of risk matters, financial and commercial feasibility, and therefore affordability. These will all still be assessed during this phase, and they depend on the final definition of the technical requirements and output specifications.

Once all assessments are finalized in parallel and iteratively with contract structure refinements, the drafts are closed and submitted for internal approvals, so as to obtain the green light for launching the tender process.

Phase 4 (chapter 6) – Tender Phase (to award and sign contract)

Objectives: To smoothly but rigourously manage the process to select the best value proposal in a competitive and regulated environment, and execute the contract with the most suitable and reliable bidder.

Tasks:

• Launching the tender;
• Qualify bidders (and shortlisting them in some processes);
• Issue clarifications;
• Dialogue, interact or negotiate contract — in interaction processes;
• Close RFP and contract in issue the invitation to propose (ITP)— in interaction processes;
• Evaluating proposals;
• Negotiate proposals — in some processes;
• Awarding and calling for contract signature;
• Checking precedent conditions (approving contract in some countries) and signing the contract; and
• Financial close.

The key activity during this phase is the management of the tender process as it has been designed and regulated through the RFQ and RFP. The process should be managed as smoothly as possible to maximize the value inherent in the project.

Many features and characteristics of the tender process will be the same as in any other public procurement process. The same general objectives of procurement (such as transparency and fairness) apply to a PPP procurement as to other procurement processes. However, PPP procurements are more complex than most other procurement processes, and the particularities of the PPP will demand additional attention and resources from the procuring authority.

The Tender Phase can be divided into several stages, which will depend upon the type of procurement process that has been selected.

Generally there are four main stages into which any tender process may be divided.

• Pre-qualification (in open tenders with a pre-qualification stage) or shortlisting (in a process with shortlisting or pre-selection of candidates);
• Bid period from launching through to bid submission or reception (in open tenders without pre-qualification) or from an invitation to offer (or to negotiate) through bid submission in other processes;
• Bid evaluation (including qualifications in one-stage open tenders) and award — the procuring agency receives, analyzes/assesses, evaluates and selects a winner (usually referred to as the preferred bidder); and
• Contract signature or “commercial close” (from decision to award to the effective date of contract) – financial close may occur at the end of this period or at a later time after contract signature.

The actual outline of the process and a more detailed description of the phases will vary depending on the tender process type.

At one extreme of the spectrum of tender process types is the one-stage open tender. The main variation of the open tender process is the two-stage open tender with pre-qualification. At the other extreme of the spectrum of variations, there are various interactions or dialogue processes.

In an open tender with one stage, the steps or sequence of the tender process will be as follows.

1. Bid period (from launching through to bid submission) — bidders prepare and submit their bids, together with their qualifications;

2. Qualification and evaluation — the procuring agency receives, analyzes/assesses, evaluates and selects a winner (the preferred bidder); and

3. Contract execution — from award to contract signature.

From an internal agency standpoint, the qualification and evaluation stage is also divided into 2.1 “Qualification”, 2.2 “Evaluation” (usually starting with technical and other potential valuation drivers subject to qualitative assessment, and later the economic/price offer and potentially other numerical criteria), and 2.3 “Award”. In some jurisdictions there can be negotiation between the procuring agency and the preferred bidder before the contract is awarded.

Even under open tender there may be variations in the award process: in some jurisdictions it is necessary to obtain the authorization of a general attorney or general auditor, or to obtain ratification by the legislature (for example, parliament). The award stage itself has two sub-stages in some jurisdictions, with the award decision being considered provisional for a certain time before it becomes definitive.

Some jurisdictions allow for limited clarifications of the offer after contract award. In addition, the RFP will generally define some precedent conditions to be met (which must be completed within a certain time limit) before contract signature can occur. In particular, the constitution of the SPV that will sign the contract must be provided to the government.

In other types of processes, the timing and therefore the stages varies significantly. For example, under a competitive dialogue method based on two stages, the process will be handled according to the following stages and sequence.

1. RFQ: From invitation to qualify, and then to Submission of Qualifications (SoQ);

2. Evaluation of qualifications and selection of the shortlist: This stage finishes with the publication of the results of selection and appointment of the qualified (or shortlisted) bidders;

3. Dialogue or interactive phase: This stage starts with the issuance of the invitation to negotiate or call for dialogue (during which the contract will be discussed and refined in EU dialogue process);

4. Bid/offer submission: This may be done in a form of consecutive offers and a final bid (sometimes between only two competitors); and

5. Contract execution: From award to contract signature. This may include final negotiations in some processes.

Apart from the dialogue or interactive process itself, the rest of the process and management challenges are the same as in other procurement methods. The authority will have to qualify (in this case usually to shortlist) and evaluate offers so as to select the awardee and subsequently manage the contract execution process.

In addition to signing the contract, the awardee must achieve financial close which is the point at which it has finance available for the project. As mentioned in section 7, in some countries financial close is done soon after signing the contract. In other countries, more time is required for the awardee to reach financial close, but construction does not start until financial close has occurred. These variations are explained further in chapter 6 (additionally, appendix A to chapter 6 offers the perspective of the private partner in managing the process of preparing and submitting the bid, and closing the financing).

With this phase, the procurement process finishes and the Contract Management Phase then starts.

Phase 5 (chapter 7) – Contract Management Phase — Construction

Objectives: To proactively manage the contract so as to avoid or minimize the impact of risks and threats (in this case, during the Construction Phase) associated with changes, claims and disputes. In this phase, it is especially important to monitor compliance with construction requirements.

Tasks:

• Establishing governance and a contract management team;
• Establishing and executing contract administration — including the development of a contract management manual (initially focused on the Construction Phase);
• Oversight and managing site handover, permits and design;
• Monitoring private party’s compliance and performance during construction;
• Managing delays;
• Managing communication and stakeholders;
• Managing changes (due to change orders proposed by government or suggested by the private partner), claims (due to retained or shared risk events), and disputes;
• Administrating payments during construction in co-financed projects; and
• Commissioning/acceptance and start of operations.