By Angshukana Datta,*
Alumnus NIILM CMS batch of 2011
(This article was published in the ICAI Student Journal May 2013
Public Private Partnership (PPP)’s are instruments for government bodies to deliver desired outcomes to the public sector, by making use of private sector capital to finance the necessary assets or infrastructure. The private sector partner is rewarded for its investment in the form of either service charges from the public body, revenues from the project, or a combination of the projects that might not otherwise have been feasible, because the public body was unwilling or unable to provide the requisite capital.
PPPs allow the private sector to play a greater role in planning, finance, design, operation and maintenance of public infrastructure and services than under traditional public procurement models. Moreover, where traditional procurement models begin with the question of what assets the public body has as its disposal and how these might be used to deliver required services, PPP arrangements place the emphasis on the desired service or outcome as identified by the public organization and how the private sector might help to make this happen.
Generally, all nations use a competitive procurement process for the selection of PPP contractors. The principal difference between the countries is the extent of negotiation that occurs during procurement.
The basic objective of the public procurement of public-private partnership is to obtain a fair, competitive, transparent and non-discriminatory procurement. Procurement usually involves a bidding process in which the bidders or sellers quote their prices and the buyer accepts the lowest possible bid.
The most efficient and cost effective method of procuring goods or services is on the basis that quality of the goods meets the buyers’ requirement.
Examples of Global Best Practices of PPP Procurement process
The Portuguese Procurement Process involves a two stage competitive procurement to select its preferred bidder. The bids are evaluated based on technical quality, government’s contribution, risk allocation and management plan. They evaluate the bids and short- list two bidders. They negotiate and select the preferred bidder. A contract award is then made which is followed by financial closure.
The Spanish Procurement Process involves an open competition model for procurement. The criteria’s involved for bid evaluation are technical qualities and economic conditions for the proposal. They receive binding bids and select the winner. The competitive and efficient approach clearly states its expectations as well as the terms and conditions of the project. It attracts too many bidders and saves transaction costs. The United Kingdom’s Procurement Process involves negotiated procurement. Multi-stage competitive process takes place. The various stages of the process includes prequalification, tender, negotiation and contract award. Then they negotiate and select the preferred bidder from the short listed ones.
The Australian Procurement Process involves multi-stage competitive procurement. The criteria involved are tolling structure, concession length, design features, etc. They negotiate and select preferred bidder from the short list. The State requests a conforming proposal along with non-conforming proposal. This allows private sector to bring new projects.
The Indian Procurement Process consists of the qualifying Expression Of Interest (EOI) process, covering the Request For Qualification (RFQ) and short listing takes place which includes the final drafting of the key bidding documents as well as the contents of the Request for Proposal (RFP). The requirements and process for the Readiness check and the application for Final Approval take place. The bidding process covers RFP and bid evaluation which is followed by contract finalization and awards
Procurement Challenges of PPP in India
Strategies used in countries that have improved procurement efficiency costs are:
· Greater standardization of contracts, with contracts being rolled forward to subsequent projects without substantive amendment.
· Architectural design and design innovation were given less emphasis.
· The substantial contributions towards bid costs.
· Avoidance of further bid stages and rigorous adherence to the project timetables.
· More reliance on the preferred bidder who is developing its proposal (both before and after commercial close) as well as on the protections within the project contract.
The source of value for money can be through less focus on third party income or development gains.
By and large, the procurement process in the countries covered under this discussion is transparent and auditable. It is streamlined but flexible in nature. However, in the case of India, model documents of RFQ, RFP and contract/bidding documents are used. This leads to an element of rigidity in procurement practice and, at times, detracts the private sector and delays the process.
The degree of commitment to the PPP procurement process and expertise of government project teams directly impacts decision-making efficiency and the overall time-frame taken to complete procurement processes.
Although process inefficiencies and bid costs are in themselves a barrier to competition, the key issue in PPP market is the irregular availability of information pertaining to project pipeline and the current inability of existing and potential new market participants to undertake an informed assessment of the likely opportunity in respect of PPP projects.
Way Forward Barriers to Competition
To develop an effective PPP procurement process through providing opportunity to potential new market participants to undertake an informed assessment of the likely opportunity in respect of PPP projects, it is suggested that:
· early announcement of potential future PPP projects more consistent and rigorous application of the National PPP Guidelines on the criteria for determining whether PPP procurement is appropriate for a project
· continued commitment and leadership from politicians and senior bureaucrats and each of the various jurisdictions in support of the use of PPPs inappropriate circumstances
· where possible, continued focus on improving co-ordination of the release of projects to the market by greater liaison between jurisdictions, acknowledging the difficulties in achieving this.
Efficiency of the PPP Process and Reduced Bid Costs
Bid costs would become less of an issue with a stronger and more certain PPP project pipeline, but inefficient processes continue to impact the value for money outcomes achieved by governments, irrespective of the pipeline. Accordingly, the following initiatives may be considered to improve efficiency and reduce bid costs (as well as government transaction costs) that remain a key priority:
· rationalizing information requested that is neither required to evaluate bids nor required for certainty at contractual close, particularly that relating to some aspects of design and to general corporate processes.
· recruitment, development and retention of high quality Government project team members, in particular the project director and key team members responsible for managing each of the various disciplines.
· ensuring governance structures empower the project team to deliver the project while enabling effective and efficient decision making so as to prevent unnecessarily protracted and uncertain time frames.
· only using more than one bid stage where absolutely necessary, either because of changed market conditions or where no bidder has made an acceptable proposal.
PPP procurement and implementation can be lengthy and costly, making it unsuitable for some projects.
The inefficiency in the procurement process negatively impacts value for money outcomes, as these costs are included within the overall tender price which continues to add to government’s internal transaction costs. The average procurement timeline for infrastructure projects plays an important role for successful completion of PPP projects. An efficient procurement helps PPP construction projects to focus on their delivery at the expected time, price and quality.
Abadie Richard and Howcraft Adrian, “Developing PPP in New Europe”, PricewaterhouseCoopers Report on PPP in Europe, 2004.
G. Gopala Krishna Murthy, “Text and Cases on Infrastructure Financing: Trends, Challenges and Experiences”. Murthy Gopala Krishna published by ICFAI University Press, 2010.
Infrastructure Australia- PPP Procurement, KPMG Corporate Finance (Aust.) Pty. Ltd., May 2010.
Public Private Partnership (PPP) Handbook, Asian Development Bank, Sep 2008.
Angshukana is a Research Analyst at Intercontinental Consultants and Technocrats(ICT), an Engineering Consultancy Firm in New Delhi