Technical Note Incentive for better PPP Procurement 1 Background 1. Nigeria's ability to invest in physical and human capital is limited. Public financing capacity at both State and Federal is severely constrained by extremely low fiscal revenues (7.8 percent of GDP in 2018; among the lowest globally) as well as its capacity to implement capital projects on time. Nigeria’s Integrated Infrastructure Master Plan (NIIM) estimates a financing need of around US$3 trillion to address the infrastructure needs alone over the next 30 years. In 2017 the Office of the Auditor General reported capital expenditure (transport, aviation, power, works and housing) to be roughly 2% of the required US$100 billion per year. 2. At the federal level, multiple legislations apply to PPP transactions in Nigeria (chief among which are the Infrastructure Concession Regulatory Commission Act, 2005; the Privatization and Commercialization Act; the Public Private Partnership Manual of the Infrastructure Concession Regulatory Commission 2012 i.e. the “PPP Manual�; and the National Policy on Public Private Partnership 2008 i.e. the “PPP Policy�. In addition, State Governments have also enacted their own PPP legislation (e.g. Lagos State Public Private Partnership Law). 3. The World Bank Group organized a Policy Lab on January 14, 2020, in Lagos. The objective of the Policy Lab was to identify solutions that will reduce the risk to investors in infrastructure projects and attract more investment to the sector. The Policy Lab gathered practitioners, professional and technical service-providers, financiers, sponsors, and developers to discuss policy, regulatory, financial and implementation issues related to infrastructure investments, to raise specific issues and propose solutions that the World Bank Group could take forward in its policy dialogue with the Government of Nigeria. Key constraints raised at the Lab include the procurement process: a. Application of a transparent rules and due process; b. Political influence: increases probability of failure in participation; c. Legal rights and unclear public ownership and representation: increases uncertainty of the transaction; 4. The lack of capacity and experience has made it necessary for government to employ external experts to assist in the design, development, financing and implementation, given the current context. External experts, referred to as transaction advisors, are generally procured to conduct all project development activities, this includes feasibility studies and preparation of procurement documents on behalf of Governments before the project is tendered for a concession contract. In most cases, the tendering process follows a 1 to 2 year preparation process including the procurement of the private 1 The Technical Note was prepared by Rogati Kayani, Luiz Alcoforado, Elliot Rasmuson and Chiaki Yamamoto led by Michael Wong. -1- participant. The private participant would bid on the basis of the bidding documents and would include construction risk (in the case of greenfield project) and operation of the project. However, experience has shown in Nigeria that this process cannot substitute for weak incentive structure. A major perception by both politicians, civil servants and investors is that this process takes too long. This perception leads many Governments to attempt to find faster ways of completing pre-development and project preparation, aiming to shorten the period to financial close and construction. In many cases, this leads to unsolicited bids signed very early on without a transparent procurement process. The lack of confidence in the preparation process also leads to reduced interest among many investors, including international investors, resulting in few credible participants in the bidding process. Under such circumstances, it is difficult to realize best value for money. 5. The process of hiring external experts requires upfront funding to pay for the work of the advisers. This expenditure is covered by Government and normally not included as part of the financing cost of the project. It is often inefficiently used as there is no incentive for the teams to reach financial close of proposed projects; on the contrary, there is all the incentive to extend project preparation. This moral hazard leads to the long and lengthy preparation of projects, even if adequate capabilities are contracted to support Government. 6. In theory, such funding should be included as part of project preparation and included at financial close. Thus, while Government recognizes the need to employ transaction advisers to assist in the design development and procurement of PPP projects, it does not have the correct incentive framework to ensure value for money. 7. An incentive framework needs to ensure efficiency and efficacy, by reducing time and ensuring best use of resources, and by also leveraging the investment process. The purpose of this Note is to present the methodology/procedure that can be used to enable prospective investors to pay for the upfront costs of preparing, developing and procuring the project. PPP Procurement Methods and Procedures 8. There are a number of methods/procedures that are being deployed for procuring investors for PPP projects. These methods are normally enshrined in the PPP legislations of individual countries. The methods include the following: Competitive Bidding (Open Bidding or Restricted Bidding); Non- Competitive Bidding (Direct procurement or Unsolicited proposals). Within the above four procurement methods, there are two types of procedures that can be deployed in procurement: Competitive Dialogue and Swiss Challenge. This Note focuses on the little-known Competitive Dialogue. Choice of Method/Procedure 9. The method/procedure to be applied should be one that enables bidders to finance all upfront project activities in a competitive manner within the legal and regulatory framework of PPP procurement in that country. As stated above, one of the challenges faced by governments in PPP procurement is the lack of sufficient private sector interest due to inadequate project documentation. Each prospective investor has its own expectation of the minimum standard of documentation that would attract its participation. This minimum standard differs from one investor to another, making preparation of -2- documentation that is acceptable to all prospective investors a real challenge. Thus, even though using transaction advisers enhances the confidence of prospective investors, it is also not a panacea because in practice, even when transaction advisers are employed, there is no guarantee that the resulting project documents would be acceptable to every prospective investor. Therefore, instead of the procuring entity (PE) incurring costs to prepare documentation that may not be acceptable to every prospective investor, one plausible option is to ask each prospective investor to prepare its own documentation of what it considers adequate for its participation. This is exactly what a prospective investor does for unsolicited proposal except: (a) the project would be selected by the PE; and (b) other prospective investors would also be invited to prepare project documentation for what each specifically considers adequate. Competitive Dialogue Procedure2 10. After careful review of available procurement methods/procedures in various countries, one appropriate method/procedure that could address the capacity challenge discussed above is the Competitive Dialogue procedure. Competitive Dialogue is an interactive, multistage selection arrangement that allows for dynamic engagement with bidders. It may be used only for complex or innovative procurement. 11. Competitive Dialogue may be appropriate: a. where a number of solutions that satisfy the PE’s requirements may be possible, and where the detailed technical and commercial arrangements required to support those solutions require discussion and development between the parties; b. where, due to the nature and complexity of the procurement, the PE is not objectively able to: i. adequately define the technical or performance specifications and scope to satisfy its requirements; and/or ii. fully specify the legal and/or financial arrangements of the procurement. 12. In Competitive Dialogue, the PE enters into dialogue with Initially Selected firms/joint ventures, with the aim of better identifying and defining the means best suited to satisfy the PE’s requirements before inviting the firms to submit their final Proposals. Competitive Dialogue Process 13. In this procedure, bids are simultaneously invited from prequalified applicants (normally 3 to 6) without any detailed requirements. The bidding document only contains conceptual design or performance specifications. The conceptual design may include the problem definition or statement of need or business requirements. There are no detailed technical specifications included. The prospective bidders will be required to undertake all the pre-bid activities at their own cost including feasibility study, detailed technical specifications and detailed economic/financial requirements. The Competitive Dialogue 2 The World Bank Regulations for IPF Borrowers -3- procurement process normally includes several successive phases. Details of this procedure are presented in Table 1. Cost of Participation 14. It is evident that participation in this bidding procedure will be unusually costly to the bidder, considering that the bidder will have to carry out pre-bid activities including: feasibility study; detailed technical specifications; and detailed economic/financial requirements/analysis. Each bidder will have to incur these costs, but at the end of the dialogue process, only one bidder will win. Since these costs are expected to be high, it may discourage prospective bidders from participating unless there is a mechanism of compensating unsuccessful bidders. The PE may consider reimbursing these bidders for all or part of their expenses. The formula and mechanism for reimbursement would be included in the Request for Bids. Instead of direct reimbursement, another option for compensation could be to assign a score in the financial evaluation criteria that rewards each bidder in an inverse proportion to the cost of participation proposed by a bidder, with the lowest cost as the base and assigned full score. -4- Table 1 – Competitive Dialogue Procedure3 S/N Activity Duration Remarks Step 1: Issue Invitation to prequalify for Prequalification shall be based entirely on the capability and resources of the bidding Applicant (i.e. prospective bidders) to perform the contract satisfactorily including: (a) experience in similar contracts; (b) capabilities with respect to personnel, equipment and construction; and (c) financial position Prequalification Step 2: Receive and open Applications 4 weeks Applications to be opened in public from prospective bidders after Step 1 Phase 1 Step 3: Evaluate Applications to identify 3 Weeks The list of Initially Selected firms/joint ventures shall include a sufficient number, the firms/joint ventures to be initially normally not less than three (3) and not exceeding six(6) (i.e. a range of 3 to 6). The selected and invited to participate in the minimum of 3 ensures effective competition and the maximum of 6 is set to dialogue phase of the process. encourage participation of serious investors who would be discouraged by too many contestants. The list of prequalified applicants (firms/joint ventures) shall be published in a widely circulating local newspaper, the PE’s website and the PPP Regulator’s website Step 4: Issue bidding documents to the 7 weeks A one-envelope process is used at this Phase. The bidding document only contains prequalified firms/joint ventures (bidders) after Step 3 conceptual design or performance specifications. The conceptual design may Request for Interim Proposals and requesting interim proposals. include the problem definition or statement of need or business requirements. commencement of dialogue There are no detailed technical specifications included. The bidder will be required to carry out a feasibility study to obtain the necessary data for preparing detailed technical specifications and economic/financial requirements. Bidders may request Phase 2 clarifications on procurement documents issued by the PE. A PE’s response to a request for clarification shall not divulge information that might give an unfair advantage to any bidder. Step 5: Receive and open interim 12 Weeks Bidders submit Interim Proposals which provide technical solutions to the PE’s proposals. after Step 4 problem definition or statement of need or business requirements as defined in the bidding document. Interim Proposals are opened at a public opening. Step 6: Evaluate the interim proposals 2 Weeks The PE makes an initial assessment of the Interim Proposals against the evaluation criteria described in the bidding document 3 The World Bank Procurement Regulations for IPF Borrowers 5 S/N Activity Duration Remarks Step 7: CA and Bidder (parties) enter into 1 Week Dialogue involves the PE holding separate, confidential bilateral dialogue meetings dialogue. after Step 6 (rounds) with each bidder to discuss all aspects of its Proposal. The dialogue meeting may focus on the solution, the commercial deal, the legal aspects and such other features the PE considers relevant. The rounds of bilateral dialogue meetings can be repeated until the CA is satisfied that discussions have been exhausted. The PE should indicate in the bidding document the number of rounds of dialogue planned to take place. A progressive elimination of bidders may take place on the basis of the review of the initial solutions, and by applying the criteria and methodology specified in the bidding document. The number of Proposals at the close of the dialogue phase should normally be not less than three (3). Each bidder shall be given an equal opportunity to participate in each dialogue round, unless they are eliminated from the process (as above). Step 8: Request Draft Final Bid 3 Weeks The PE may test the readiness of bidders to submit compliant Final Proposals by after Step 7 requesting and assessing a ‘Draft Final Proposal’. This is an initial version of the final Proposal. Once the Borrower is satisfied that at least one compliant final Proposal will be received, dialogue can be closed. Dialogue should continue if further work is required to produce at least one compliant final Proposal Step 9: Formally Close the Dialogue Phase 2 Weeks The PE declares that the dialogue is closed and no further discussions are allowed after Step 8 after this closure. The PE refines the problem definition or statement of need or business requirements and prepares addenda to the request for proposals document to convert it into the Phase 3 request for proposals document. Step 10: Issue updated bidding document 2 Weeks A two-envelope process is normally used at this Phase: Technical and Financial Request for Final Proposals to compliant bidders in Phase 2 after Step 9 Step 11: Receive and open Final Proposal 4 Weeks Only the technical Proposals are opened at this time. Financial Proposals remain in public after Step sealed. Phase 3: 10 Step 12: Evaluate Technical Proposals 1 Week PE evaluates the technical Proposals against the evaluation criteria described in the updated bidding document. There should be no need to seek clarification with a bidder because the dialogue phase has closed discussions Step 13: Open and Evaluate Financial 1 Week The financial Proposals are opened in the presence of the Process Auditor. This is t Proposals normally done in public. The CA evaluates financial Proposals against the evaluation criteria described in the request for final proposals document 6 S/N Activity Duration Remarks Step 14: Select the Most Economically 2 Weeks Once evaluation is completed, the PE selects the Most Economically Advantageous Advantageous Proposal for contract award after Proposal for contract award according to the criteria specified in the updated activity 13 bidding document Step 15: Finalize details of the winning 2 Weeks Once the Most Economically Advantageous Proposal has been selected, the CA and Proposal the winning bidder will finalize details of the solution. This process only allows for clarification and confirmation and does not permit any material deviation from the final Proposal that formed the basis of the PE’s decision Step 16: Prepare Evaluation Report and 1 Week At this step in the process the Process Auditor shall prepare a probity report and Recommendation for contract award provide it to the PE. To ensure transparency and accountability the Process Auditor’s report shall be sent by the PE to all Proposers, who were involved in the dialogue stages, (after excluding all confidential information), and published on the PE’s website. This shall be done at the same time as transmission of the Notice of Intention to Award the contract. Step 17: Notify bidders of intention to 4 Weeks The PE transmits its Notice of Intention to Award the Contract to the bidders. award and commence Standstill period after step Where applicable, the PE provides debriefs and manages any complaints received 16 that relate to the decision to award the contract Step 18: Sign Contract and obtain 3 Weeks Contract should be signed after addressing any complaints Performance Security after step 17 Step 19: Publish Contract Award Notice 1 Week The PE shall publish the Contract Award Notice following expiry of the Standstill after step Period 18 7 Conclusion The Competitive Dialogue method/procedure is only applicable in those countries where the PPP Policy/Law mandates this method of selection. Nigeria has the opportunity to include this specific PPP procurement method in a new PPP law. 8