You are here

Share:

Structuring and Drafting the Tender and Contract

57.3 Technical Capacity or Experience

The technical capacity or experience criteria are essential for project success. Many projects fail because the successful bidder lacks the skills and experience required to manage the challenges and complexities of the particular infrastructure project. Failure can also occur if the successful bidder does not have experience and capacity in all of the required areas of the contract cycle. For example, there is a high risk of failure if the successful bidder is an experienced contractor but has neither the experience nor the appetite to run the business of managing the asset through its life and/or act as a long-term investor. Technical criteria for qualification sets out the profile of private partners that the authority is willing to have as a long-term partner, and it must cover all of the functions that will be undertaken by the private partner.

The “Channel Tunnel Rail Link” is an example of a project that went wrong because — to a significant extent — of a failure to require the right skills and capacity for the bidders (according to the EU commission report on PPPs[67]).

Experience is probably the most challenging criteria or set of criteria in terms of the strategic and procurement decisions. Technical capacity or experience should be demonstrated/evidenced on several fronts.

  • Construction experience: The candidate (individual or consortium) will be required to provide evidence of previous or ongoing[68] successful experience in constructing a similar project (that is, in the same sector and, commonly, having similar features of the project in terms of size and complexity).
  • Operation and maintenance: The candidate (individual or a consortium) will be requested to provide evidence of previous or ongoing experience in operating and/or maintaining similar infrastructure in the same sector and with similar features as the project in terms of size and complexity and/or volume or number of users.
  • PPP management, PPP investment and financial close: Experience of the consortium in successfully developing similar projects, including successfully reaching financial close and/or successful development through the Operational Phase.

Generally speaking, there is no need for the investor and future owner of the SPV to be a contractor or to have qualifications related to construction, operations, or maintenance. Therefore, it is sometimes considered sufficient to rely on the technical experience or capability of third parties within the consortium[69]. In other words, the named contractor who will contribute to the construction, operations, or maintenance experience required for qualification is not required to be a future shareholder of the project company. But it is necessary to request evidence of the commitment of the named contractor to deliver the project with the future equity holder. This is common in many countries with mature PPP programs.

However, when evaluating qualifications in some jurisdictions, it is common practice to only consider the experience of contractors that commit a minimum equity stake in the SPV (the minimum level required being set out in the RFQ requirements). See table 5.6.

In these cases (that is, when there is an intention to require equity participation from contractors) it is essential to balance this requirement for the following reasons.

  • Contractors may be companies that do not necessarily have the appetite or resources available to invest. However, they are willing to assume risks under turnkey conditions and back-to-back schemes in their respective downstream contracts[70]. Requiring contractors to invest significant equity may discourage them from joining a consortium and bidding for the project.
  • In the case of EMDE countries, and particularly in markets in which local contractors lack PPP experience, limiting contractors’ investment in equity will facilitate joint ventures between local contractors and specialist investors so as to boost the development of a national PPP industry.

 

TABLE 5.6: Pros and Cons of Requiring Contractors to also be Equity Investors

 

Government requires contractors to also be equity investors

Government does not require contractors to also be equity investors

Pros

· Gives the contractor (through its equity investment) an interest in the overall success of the project (“skin in the game”).

· Can facilitate the development of the PPP industry by encouraging local contractors to develop PPP investment capability.

· Enables contractors that do not have an appetite or capability for equity investment to join bidding consortia.

· Prevents one party taking on the sometimes conflicting roles of contractor and equity investor.

· Enables PPP developers to form bidding consortia with contractors when they do not have an appetite for co-investing with contractors.

Cons

· May discourage contractors from joining/forming bidding consortia if they do not have an appetite or capability for equity investment.

· May create conflicting roles for contractors with consequent undesirable behaviours. For example, a construction contractor that is required to contribute equity may regard the equity as the price of “buying” the construction contract, and the contractor may not perform the SPV oversight role expected of an equity investor.

· May discourage PPP developers from bidding when they do not have their own contracting capability or an appetite for co-investing with contractors.

· The contractor will only be interested in its role as contractor and will not have an interest in the overall success of the project (no “skin in the game”).

· May hold back the development of the PPP industry by discouraging local contractors from acquiring PPP investment capability.

 

If it is decided to include such a requirement, the level of equity involvement requested from the contractor should be prudently assessed (for example, equity participation between 15 to 30 percent is commonly seen in many projects).

 

Technical capacity/experience indicators

Indicators for the technical capacity and experience field are quite diverse depending on the sector and project type or technology demanded for the specific project. A common sub-classification or sub-criteria list will usually include the following:

  • The overall amount of revenue related to the specific business (construction, O&M, or PPP ownership/management).
  • Overall Capex for construction and/or number of projects developed.
  • The overall amount of debt raised in the PPP portfolio of the consortium.
  • Number of relevant or similar projects within the PPP portfolio (qualifying projects). It is usual practice to only consider projects of a minimum size or meeting some other minimum threshold. This depends on the sector (for example, it could include cubic meters in water, demand/volume or population served, number of kilometres, or number of beds in a hospital, and so on).
  • In addition to the number of qualifying projects, the aggregated number (counting all projects together) of users or population served in the PPP contracts within the experience portfolio (transportation, water, education, health, or number of beds (hospitals), and so on).

Some considerations regarding good practice when implementing the provisions to regulate qualifications are as follows.

  • Match the criteria to the profile of partner that the procuring authority is looking for.
  • Provide sufficient time to submit qualifications (in any two-stage process). Although preparing a SoQ is not as demanding as a proposal, finding partners and agreeing to terms for a consortium takes significant time.
  • Avoid tailor-made requirements that only very few companies (and consortia) can match. This is specifically relevant when dealing with technology issues. When the procuring authority has a clear objective of using one particular technology and the number of consortia is likely to be limited because only a small number of companies can provide that technology (for example, experience in constructing and supply rolling stock with certain specific features not widely tested or used), the procuring authority should consider options such as the following to make effective use of competition:
  • run a short-listing process
  • allow and even encourage the technology company to participate (as a nominee contractor) in several bidding consortia
  • conduct the process to select the specialized supplier separately.
  • It is necessary to assess carefully how realistic and achievable the threshold values or levels of experience are. Using similar and successful precedents is helpful but also requires expert advice, and it may be necessary to investigate the appropriate thresholds through market sounding prior to the qualification process.
  • Describe the features to be met for a project to qualify as evidence of experience (that is, in order to be counted in the evaluation).
  • Avoid duplication in the criteria so as to avoid double counting certain types of experience (which may result in an overweighting). However, care needs to be taken in deciding what is or is not duplication. For example, aggregated volumes (total number of passengers handled in transportation PPPs) as against the number of qualifying projects (including a condition of more than x passengers for each specific project experience submitted) is not necessarily redundancy duplication because the two criteria demonstrate different forms of experience: experience managing a specific number of similar projects and aggregated experience in transportation.
  • It is customary to provide templates for the bidders to describe their experience, including specific fields to be filled in with the characteristics that confirm the experience as valid for the purpose of the qualification. Templates are also used for the characteristics that will be used in the evaluation for short listing. For example, the templates may have specific fields for the Capex size of each project (above the minimum threshold of size for a project to be regarded as a valid experience), the number of passengers per year served with the referenced infrastructure experience, and so on.
  • The RFQ must be clear as to how recent an experience/project must be in order to be counted for the process of qualification (this is settled in the legal framework in some jurisdictions), and to what extent projects undergoing construction will be counted (for example, only when construction is more than 50 percent complete).
  • The evidence that will be requested to confirm the existence of the experience claimed will have to be validated or be capable of validation. This can be done in a variety of ways, such as requiring certificates from the government/client for past projects, or simply requiring contact details for a key person with the relevant government/client so that the accuracy of the information can be checked.
  • Significance level thresholds. It is often appropriate to only count experience if the relevant member of the consortium commits a certain minimum percentage of the equity in the project. For instance, project experience will only count if a member of the consortium invested more than a specific percentage of the equity in that project. This means that the involvement of the consortium member in that project provided it with substantial experience that is relevant to the project currently in the tender process.
  • When it has been decided to request equity participation by the construction contractors as a prerequisite to assessing the capacity of the respective company, care must be taken with the minimum percentage of equity that is requested in order to leave enough room for the contractors to team up with experienced PPP developers.
  • Criteria should be as objective as possible to minimize the need for judgment and qualitative evaluation. However, this may be necessary in very complex projects so as to evaluate how valid or valuable a particular experience is vis-a-vis the required experience for the project being tendered. The same applies to projects in which bidders will be short-listed and qualitative judgment is required to rank the bidders for the purposes of short listing. This room for qualitative judgment should be limited to a minimum and avoided if possible.
  • Some processes include a purely qualitative criteria in the form of a requirement that bidders describe how they see the process and the project (for example, what they consider to be the key risks), and how they would approach certain challenges. In such cases, it is also good practice to describe clearly when the response to this criterion will be regarded as unresponsive (which should be only when there is a very clear sign of a lack of interest and complete absence of valuable information).

It should be noted that more competition is not necessarily better competition. If there are a large number of bidders in a two-stage process, each bidder’s individual chance of success is lower, and hence bidders will be less willing to spend funds on bidding for the project. It also means that when eventually successful in winning a project, bidders will have to recover their costs lost on a larger number of unsuccessful bids. For these reasons, having a large number of pre-qualified bidders may compromise outcomes. Therefore, in two-stage processes, to the extent permitted by the applicable legal framework, the qualification criteria should be structured so as to provide an optimal number of pre-qualified bidders rather than a large number.

 

[67] See Resource Book on Case Studies (European Commission, 2004) for further explanation on the project and other lessons extracted from that case study.

[68] Current uncompleted projects are often valid as experience, as long as the experience/project claimed is materially advanced. For example, in the case of construction, many tenders request that the construction be at least 50 percent completed or, regarding operations that the Operational Phase has already passed the first two years of its life.

[69] Not all members of a consortium will necessarily become equity investors in the private partner (SPV).

[70] See chapter 1.6 about the typical PPP contract structure and downstream contract considerations.

Add new comment

By submitting this form, you accept the Mollom privacy policy.