3.1 Establishing the Project Team, Incorporating Advisors and Finalizing the Project Management Plan for this Phase
It may happen that the project team was established before appraisal, contracting advisors to handle both appraisal and the structuring and drafting of the tender package. Otherwise at the end of the Appraisal Phase, the team responsible for analyzing and managing the PPP process should have analyzed the capabilities and resources required for the structuring and drafting tasks. The need for the support of external resources depends on the availability of internal resources within the government or the procuring agency, as well as on the scope of work already developed during the Appraisal Phase (see chapter 3.13).
At the inception of the structuring, the project team should be fully defined and advisers should have been hired as needed.
The focus of the work for this phase for each type of capability or expert on the project team is as follows.
- Procurement or transaction-specific experience in managing, or supporting the management of, international PPP tenders. This role is usually offered by one of the other experts;
- Financial: For risk structuring and final financial structuring, VfM analysis, the refinement of financial analysis, and affordability calculations;
- Economic: This capability may not be required if the project solution is already defined and approved, and no changes are considered through this phase;
- Technical: For the refinement or further development of the project design and technical specifications, especially to develop performance requirements;
- Legal: Most of the due diligence will have been done in the Appraisal Phase. Therefore, the primary legal capability needed is for procurement advice and contract drafting;
- Environmental: To the extent environmental issues are still open and may influence the final technical design, risk allocation/performance requirements of the project, or when work to obtain environmental permits is continuing in this phase;
As explained in earlier sections, when hiring advisers it is necessary to decide between an integrated team, appointed under one single advisory contract (this can provide a more cohesive team), or separate selections (this can provide more flexibility for hiring the best experts in each discipline, but will demand/consume more time and resources from the government). See chapter 3.13.3 for details.
Also, as suggested in chapter 3, international experience is very relevant (when duly combined with local expertise). Advisors may add significant value by providing access to knowledge of relevant precedents and best practices when defining RFQ, RFP and contract provisions.
Apart from implementing the project team structure and selecting advisors, a project management plan should be in place before starting the specific work of this phase, including a working plan and stakeholder management plan, especially regarding decision-makers that will give the final green light for launching. As with any project, these plans should be developed as part of the procuring authority’s application of good practice project management principles such as those contained in the Project Management Body of Knowledge (PMBOK) or the PRINCE2 methodology.
3.2. Defining/Confirming the Contractual Model and Contract Scope (if needed)
This step will not usually be necessary if the pre-structure and project definition were sufficiently advanced during the Appraisal Phase. However, when different legal contract types or legal forms are contemplated and suitable for the project in the relevant jurisdiction, the final decision may not have been taken yet or may require further due diligence.
The final contract scope (for example, whether or not to separate the operations of a train system from management of the rail/system infrastructure) may also not have been finalized during the previous phase, but a preferred route or a short list of solutions should have been identified.
In such cases, the decision about the contract model and scope should be made after final legal due diligence analysis and further reflections on alternative contract scopes, but before commencing the structuring and final shaping of the project.
3.3. Finalizing Due Diligence and Preparation
Preparation lies at the heart of the Appraisal Phase and has been explained in chapter 4.
However, some investigations and due diligence (for example, geo-technical conditions, developing an archaeological map, collecting utility allocation information, developing an environmental management plan and related requirements, and so on) may not have been completed during the Appraisal Phase and should be finalized during this period.
Taking short cuts in preparation (either to avoid the cost or in a misguided attempt to speed up the tender process) by omitting the data collection and passing the burden of work and cost to the bidder(s) is bad practice that causes many projects to fail (that is, by receiving no bidders, or having significant delays in initiating construction or extensive renegotiations).
3.4. Further Developing the Project Definition and Technical Requirements (and refining cost estimates)
Technical requirements will usually have been defined during the Appraisal Phase, including the technical specifications for construction and/or a reference design (on the basis of which bidders will prepare their technical proposals for construction). However, in some processes, the final definition of the technical requirements is completed during the Structuring Phase. Performance requirements will usually be refined or detailed during this phase too, especially since they are intrinsically linked to the payment mechanism.
The definition of the technical requirements is a natural evolution of the definition of the contract scope. When defining technical requirements, too much inflexibility should be avoided; PPPs focus on providing opportunities for innovation and paying for service outputs (see chapter 4.4.2).
Section 9.2. in this chapter explains the relevance of the performance requirements to the commercial terms and contract architecture, as well as how they link with the payment mechanism or the revenue structure of the contract.
3.5. Revisiting Economic Analysis (if needed)
In some projects, the design/technical solution is only preliminarily defined during the Appraisal Phase, and the cost and revenue estimates may be provisional or uncertain. In these cases, deeper technical/cost analysis (and traffic and revenue for volume-related projects) should be carried out during the Structuring Phase. Depending on the results, it may be necessary to revisit the Cost-Benefit Analyses as well.
3.6. Developing and Finalizing the Contract Structure: Financial Structure and Payment Mechanism
The contract was pre-structured or the preliminarily structure was defined during the Appraisal Phase. In the current phase (Structuring Phase), the final structure is defined (or the pre-structure is refined), so as to confirm all of the principal commercial terms before it is documented by drafting the contract. This is one of the essential tasks to be carried out during this phase.
Some examples are listed below:
- It may have been decided during appraisal that 30 percent of capital expenditures (Capex) will be directly financed by the government during construction. Typically, however, it will not have been decided whether there will be works progress payments or milestone payments and so on, and this must be determined during structuring;
- A range or limit for the contract term may have been approved during appraisal, but the final decision on an exact contract term will usually be made during structuring; and
- The basic payment mechanism will have been defined during appraisal (for example, payments based on availability in a rail PPP project, with the main criteria defined), but the service levels must be defined or refined during structuring, as well as the mechanics for deductions.
This stage usually, in practical terms, overlaps with the definition of the main parameters of the qualification and evaluation requirements, as well as with the final development of the project technical requirements (both for construction and operation and maintenance – O&M).
Several of the main areas of structuring are financial.
- Financial support mechanisms;
- Overall compensation instruments, especially when a co-financing scheme is used;
- Other support instruments, for example, public funding instruments and guarantees (explicit or contractual), which interrelate with risk structuring;
- The payment or revenue mechanism; and
- The contract term.
All of these issues must be reflected in the draft contract. They also influence the financial model and plan, and hence affect the ceiling of payments (or the floor on any concession fee in user-pays projects). Also, in the event of exceeding previous estimates it may be necessary to reopen or reassess the commercial feasibility, VfM, and affordability analysis.
Financial structuring matters (mechanisms for co-financing and the overall compensation structure), the payment mechanism definition, and the final service requirements are explained in detail in specific sections of this chapter (section 4).
3.7. Refining the Contract Structure: Definitive Risk Structuring and Allocation
A preliminary risk assessment will have been conducted in the Appraisal Phase, identifying the main categories of risks and main risk events for the particular project, and a decision on overall allocation will have been taken. Generally, risks should be allocated to the party most capable of managing them; circumstances in which other approaches to risk allocation may be appropriate are discussed later in this chapter.
During this phase, the risk structure is refined: more specific risks events may emerge, but above all, some risks allocation decisions will be further detailed to define the risks retained by the government and the extent to which some risks are shared (for example, defining benchmarks and impact ceilings to restrict the right for claims).
The risk allocation influences the financial feasibility analysis and the VfM exercise, and this is an essential input for drafting the contract.
Contract drafting work should start once the risk allocation is defined, unless there are significant signs that the project is not feasible due to new information that emerged during the risk analysis.
Risk structuring and allocation are explained in detail in a specific sections of this chapter (section 5).
3.8. Updating the Financial Model and Potential Confirmation or Reassessment of Financial Analysis Matters. Setting the Ceiling of Payments
The financial base case must be updated to reflect the refinement of the risk allocation structure and any changes in the financial structure of the project. This will result in changes to the procuring authority´s financial model and plan.
This definitive financial model will determine the ceiling for payments (or floor for concession fees) to be reflected in the RFP provisions. This is done to establish the maximum (or minimum) payment acceptable for a qualifying bid.
Provided the level of payments required to make the project commercially feasible remains below the limits approved in the Appraisal Phase for affordability purposes, the decisions made in the previous phase, based on the financial mode (in those cases when an investment decision is taken at the end of appraisal), do not need to be reconsidered.
3.9. Testing, Marketing and Communicating the Project
The project should have been sounded out with the market during the Appraisal Phase (see chapter 4).
It is good practice to conduct further market testing during the Structuring Phase to collect reactions, suggestions, and concerns from the industry (investors, contractors, and lenders).
When the government decides not to test the project any further (based on the fact that it has been meaningfully tested during the Appraisal Phase), the project should be marketed to promote the interest of the industry and to let the potential bidders prepare themselves for the tender.
Communication is also a concern during this phase, as it is during appraisal.
All these matters are explained further in section 6.
3.10. Defining and Drafting other Commercial Terms and Contract Provisions
Many other commercial terms or structuring matters are standard in a particular PPP market or they may be established by law or a framework. Nevertheless, they must be appropriately drafted into the contract. This can be a significant task, especially when there are not many precedent PPP contracts in the jurisdiction, or where adequate standards are not in place.
These additional and important matters (apart from financial structuring and risk structuring, although many of them are related to these) may include the following;
- Performance requirements, performance management issues, and other provisions, such as reporting obligations and monitoring provisions;
- Contract breaches, penalty system(s), and possible default events;
- Occasions calling for compensation and rebalancing regulations;
- Other financially related provisions: financial structure (minimum equity), changes in financing (refinancing) and ownership, insurance requirements, performance guarantee, and lenders’ rights;
- Intellectual property and confidentiality;
- Contract changes;
- Dispute resolution matters;
- Early termination provisions; and
- Hand-back provisions.
A selection of the most relevant of these matters will be explained in section 9.
3.11. Defining Qualification (and potentially short listing) Criteria. Structuring and Drafting the RFQ
Qualification is a condition that must be met by a party seeking the right to make an offer or bid on any public contract. The objective is to set a minimum bar of capability for entering into a procurement (works or services) contract. As in many other structuring issues, qualification is an art related to the search for a suitable balance. The qualification levels required should diminish the risk of project failure caused by a lack of capabilities and capacity, but the criteria should be carefully defined (and appropriately tested) so as to avoid unduly limiting competition. All projects should customize qualification requirements in order to achieve an appropriate balance, based on the particular project's needs.
In some jurisdictions, the qualification requirements and criteria are provided at the same time and in the same document as the requirements for bid submission and the evaluation criteria (for example, many countries in Latin America name the document "bases de licitación" or the "basis for tender"). In other words, the RFQ and RFP are combined. In this case it is not customary to restrict the number of potential bidders in a short list, but to qualify all companies or consortia that meet the minimum criteria.
In some other cases, qualification (then usually called pre-qualification) is completed before the RFP is issued. In many cases, this is done without restricting the number of qualifying bidders. However, some countries restrict the number of qualifying bidders through a ranking and short listing process, issuing the RFP to a short list of the most capable bidders (for example, in India and the Philippines).
Section 7 provides further information on this topic, including when and why short listing may be appropriate.
3.12. Defining the Proposal Requirements and Evaluation Criteria. Structuring and Drafting the RFP
This task refers mainly to the following;
- Defining the formal requirements for bid submission. What should be presented/submitted, and in what form, to allow for evaluation; and
- Establishing the evaluation criteria on the basis of which the awardee will be selected and called for contract signature.
The evaluation criteria will usually reflect provisions within the procurement framework (for example, possible inclusion of qualitative criteria, maximum or minimum weightings for price versus qualitative aspects, and so on). This may be guided by the policy framework (PPP guidelines) to create consistency in a PPP program, but many sub-criteria (especially those of a qualitative nature) will need to be adapted or defined in an ad hoc manner for the specific project.
In addition to evaluation and proposal requirements, the RFP regulates other relevant matters, such as protection for the government (for example, the right to cancel or to negotiate with a bidder or anyone else), the process of issuing questions, the time limit to submit, the validity period of the proposal (that is, the time during which the proposal is binding on the bidder), and so on.
Section 8 provides guidelines, intelligence, and reflections in this respect.
3.13. Drafting the Contract and Packaging the Tender Documents
The structure of the contract (the main commercial terms definition, including risk allocation, financial structure, compensation mechanisms, and other relevant commercial related matters — including the control and monitoring of performance, dispute resolution mechanisms, and other contract governance matters) must be largely defined before the contract agreement is drafted. However, inevitably discussions on some structuring issues will continue during drafting, and some decisions will have to be made regarding different options to develop or refine a particular key commercial issue.
Drafting a contract is about documenting the structure in legal and accurate terms. Accuracy and clarity are paramount drivers in this task. The decision regarding the allocation of one particular risk event is useless if the contract does not provide a clear understanding of when and how the event has occurred and how to implement the potential compensation mechanisms.
The technical specifications and performance requirements (defined previously – see step 3 above) are also defined in detail within the contract drafting, normally in the form of appendixes or schedules annexed to the main body of the contract.
It should be noted that for an open tender with no prequalification, the contract drafting must be completed in time for the project launch. However, it may be finalized later in dialogue processes, or prior to release of the final RFP in two-stage processes.
3.14. Pre-Tender Interaction. Sharing Information with Bidders and Data Rooms
Once the RFP and contract are drafted, including all relevant annexes, some jurisdictions publish the information in draft format and open a period for consultation. During such periods, potential bidders submit questions and suggestions in writing. This process usually includes one or more meetings in which the administration provides answers and explanations before issuing formal responses and reporting on potential changes. In some other jurisdictions, this only takes place after the official launch.
When the tender process includes structured dialogue before the invitation, offering this interaction naturally occurs during the dialogue phase.
In addition to the tender documents, there may be a large amount of information (reference information, not necessarily binding contractually) that should be provided to bidders. Much of this information (particularly information that is considered confidential or not for public disclosure) is usually provided through a data room. This may be physical (a room with restricted access for authorized bidders in which there are hard copies of the documents) or more frequently — which is more efficient — electronic (a secure website through which bidders can view electronic copies of the documents). There should be clear protocols for access to and use of the data room (including Non-Disclosure Agreements, “NDAs”), and bidders should be required to agree to these.
Setting up a data room and developing the protocols takes time, and therefore should be thought about early in the Structuring Phase.
Where possible, it is preferable to make this information available to prospective bidders before the launch of the tender, as this will give them additional time for due diligence.
3.15. Control Check, Approvals and Authorizations. The tender package of documents will finally be approved and the launching of the tender will be authorized
A check should be run to confirm that all documents are in place, duly approved, and that all tests and exercises have been duly conducted.
The tender process should be carefully planned, programming the work to be done. The roles and responsibilities of the project team should be adapted to the tasks relating to the management of the process, from launching to contract signature (which is the subject of chapter 6).
This process is explained in section 10.
 Using similar precedent contracts may be useful but should always be done with caution. There is no single structure valid for any project even in the same sector and project type, and there is no perfect structure as all of them will have their own strengths and weaknesses. The World Bank Group provides intelligence on real precedent contract and tender regulations in the PPP Infrastructure Resource Centre (PPPIRC, at http://ppp.worldbank.org).
 As described in chapter 0, in some jurisdictions the same scope (e.g. DBFOM) may be granted and contracted out under more than one particular contract figure according to the legal framework for procurement, one being more or less appropriate than another for the particular project scope and project objectives.
 Under the process in this PPP Guide, the financial /commercial feasibility, VfM, and affordability tests take place in the Appraisal Phase. Some countries may carry out some of these feasibility exercises in the Structuring Phase, or they may simply be refined for approval purposes when the authorization/ investment decision is deferred to this phase.
 For the purpose of this PPP Guide, the term finance structure, in the context of appraisal and structuring, refers to the definition of the types of public compensation or payments to the private partner and their conditions, as well as to the resulting fiscal profile of such payments in terms of NPV and yearly expenditure. Therefore, the term financial structure does not include or refer to the financial strategy of the bidder, as this should generally not be prescribed by the government.