40911 noTE no. 19 ­ Mar. 2007GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Unsolicited infrastructure proposals How some countries introduce competition and transparency John T. Hodges and Georgina Dellacha U nsolicited proposals for infrastructure Managing unsolicited proposals projects from private investors can introduce innovative ideas--but also Most countries with formal systems for managing risks, such as opportunities for corruption. unsolicited proposals follow a similar process. Some countries disallow unsolicited proposals. Others manage them in ways that introduce The two main stages competition and transparency. Governments' The system generally involves two main stages: decision to allow unsolicited proposals should the first focuses on the government's internal depend on individual circumstances and overall project approval process, and the second on a development policies, but when they do allow competitive tender to determine the final project them, governments will have several important developer and operator. issues to consider. Many governments have recognized that the Stage 1: approval. Unsolicited proposals are ap- proved in a four-step process: private sector can be an important source of technical and managerial expertise as well as · Step 1. The private proponent first submits a financing. Sometimes private companies directly preliminary description of the project to the approach governments with new project ideas, appropriate government agency or ministry. typically called unsolicited proposals. In some countries this description contains only general concepts (Argentina, Chile, Costa Opposition to unsolicited proposals rarely stems Rica); in others it provides detailed information from the project concept originating in the private (Republic of Korea, South Africa). sector. Instead, there are often perceptions that the projects serve special interests or are associ- · Step 2. After a stipulated review period, the ated with corruption. Unsolicited proposals often responsible agency or ministry gives a prelimi- become controversial when--or if--governments nary response, usually assessing whether the negotiate the project rights directly with the origi- project serves a "public interest" or fits in the nal proponent without sufficient transparency or strategic infrastructure plan. competing proposals. · Step 3. If the initial project description receives Some countries have developed effective systems preliminary acceptance, the proponent is usually to channel unsolicited proposals into processes given formal recognition for the concept and a that incorporate transparency and competition. set period to present a full, detailed proposal. These systems attempt to provide incentives for the private sector to come forward with innova- tive infrastructure solutions while retaining the John T. Hodges is an infrastructure specialist who worked in benefits associated with awarding the project FEU and ECSSD at the World Bank" (johnthomashodges@ through a transparent and competitive tender. hotmail.com), and Georgina Dellacha is an external consul- PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY tant for the World Bank at the Finance, Economics and Urban Department (georginadellacha@yahoo.com.ar). Table source: Authors. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY TaBle 1 Unsolicited proposals and results in selected countries, various periods Under Tendered or Country Period Presented accepted review Rejected completed Chile 1995­March2006 200+ 26 38 140+ 12 Korea,Rep.of July1999­April2006 141 101 7 33 65 SouthAfrica 1999­2006 4 0 3 1 0 Taiwan,China March2002­May2006 193 29 22 142 29 · Step 4. The detailed proposal is reviewed and proponent receives a bonus of 10 percent. If the may be approved for a competitive process or firm bidding the lowest tariff per kilometer offers rejected. If accepted, the project is awarded US$0.19 a kilometer, the original proponent through an open competitive tender (stage 2). would be awarded the project if it bid US$0.20, If rejected, the project is not necessarily dead; because its bid would be within 10 percent of the the proponent may submit a modified version in lowest one. some countries, or the government may use the concept in a public bid after a stipulated period Swiss challenge system (three years in Chile). The Swiss challenge system--most common in the Philippines and also used in Guam, India, Italy, Stage 2: competitive tender. The project is competi- and Taiwan--is similar to the bonus system in that tively bid, typically under one of three systems: it uses competitive tendering to determine the bonus, Swiss challenge, or best and final offer. project developer. But instead of a predetermined advantage, this system gives the original propo- Bonus system nent the right to countermatch any better offers. Chile and Korea use a system to promote unsolic- ited proposals that awards a bonus in the tendering In the Philippines and Guam, for example, once a procedure to the original project proponent. This lower-priced proposal is submitted and approved, bonus can take many forms, but most commonly the original proponent has 30 days to match the The challenge it is an additional theoretical value applied to the price (in some countries, such as India, the govern- original proponent's technical or financial offer for ment determines the time frame case by case). If is to promote bidding purposes only. the original proponent does not match the better innovation price, the project is awarded to the third party. In Take the hypothetical example of an unsolic- the Philippines the project is immediately awarded while ited proposal for a toll road where the original to the original proponent if it matches the price. preserving competition TaBle 2 and Considerations in balancing incentives for potential proponents and challengers transparency Influencing factor Issues Valueofbonus ·Largebonuseswilldiscourageschallengers;smalloneswilldiscourage (bonussystem) unsolicitedproposals ·Bonusmaybeusedfortechnical(Korea)orfinancialscore(Argentina,Chile) Abilitytomatchprice ·Challengersreluctanttoallocateresourcesforcounterproposalsthatcan (Swisschallenge) bematched ·Developingcounterproposalstakestime Amountandtimingof ·Informationontheoriginalproponent'sfinancialoffermayenticechallengers informationdisclosed tooffercounterproposals,especiallyifthetariffisveryhigh ·Iforiginalproponent'sbidnotdisclosed,challengersmorelikelytopresentbest offers.Thesoonervitalinformationisavailabletochallengers,thesmallerthe advantagetotheoriginalproponentinprojectpreparation Processtransparency ·Challengerslesslikelytobidiftheyfeelthatinformationiswithheldorthatthe processiscorrupt ·Transparencywillaidchallengerstoraiseinternationalfinancingandpartners Revival of private participation in developing country infrastructure TaBle 3 advantages and disadvantages of offering reimbursement for development costs advantages Disadvantages · Legalrespectforintellectualpropertyrightsessential ·Numberoffrivolousprojectsmayincreaseas tosustainableprivatesectordevelopment developersmightintendonlytoprofitfromaproject · Reimbursementmaintainsprivatesectorinterestinthe conceptwithoutactuallybidding. projectdevelopmentphase ·Originalprojectproponentsmayexaggerateproject Managing · Ideasforprojectsnotlimitedtolargecompaniesor developmentcoststodiscouragechallengers developerswithdeeppockets ·Challengersareatafinancialdisadvantagebecause unsolicited · Financialcompensationforprojectdevelopmentcosts reimbursementaddsextraprojectfinanceexpenses proposals determinedthroughtheproject'sestimatedmarket intothetariffcalculation valueoranindependentaudit ·Thegovernmentmustallocateadditionalresources requires · Developerswillallocateneededresourcestoensure todetermineaccuracyofrequestedreimbursement professionaldevelopmentoftheproject dealing · Reimbursementencouragesinnovation with many tradeoffs In Guam, if the original proponent matches the if the difference between the best bid and the better price, the government awards the project original proponent's offer is more than 5 percent on the basis of technical merit. but less than 20 percent, the two bidders will be invited to submit their best and final offers in a Best and final offer system second round. In all cases the final round is an In the best and final offer system the key element open competition during which the preferred bid is multiple rounds of tendering, in which the will be selected with no bonuses or advantages original proponent is given the advantage of auto- given. matically participating in the final round. In South Africa the two most advantageous bids Weighing policy choices are selected for a final bidding round. If the origi- nal proponent is not one of these two, it will still Unless a government disallows unsolicited propos- automatically be allowed to compete in the final als by law, it should expect that the private sector round. In Argentina, if the original proponent's will come forward with its own ideas. In many offer is within 5 percent of the best offer, the countries unsolicited proposals are even quite original proponent will immediately win. But common (table 1). TaBle 4 Time allocation for approval and bidding Call for Preliminary Final open Challenge additional Total Country approval approval tenders or counter time time Argentina 90days 60days Undetermined n.a. n.a. Chile 45days 12months 12months Approx. n.a. 27.5­29.5 2­4months months CostaRica 45days 4months 12months n.a. n.a. 17+months Guam (U.S.territory) Undetermined Undetermined Undetermined 60days n.a. n.a. Italy 4months 2months 3months n.a. n.a. n.a. Korea,Rep.of 15days 4months Undetermined Approx. n.a. 6.5­8.5+ 2­4months months Philippines 2months 3months Undetermined 2months 1monthto 8+months countermatch SouthAfrica 1month 9months 3months 2months 2monthsto 17months evaluate n.a.Notapplicable. TaBle 5 Considerations for time allocation Process Issues Approve ·Governmentstypicallyuseashortinitialperiodtoscreenoutunnecessaryproposals preliminary ·Processallowsproponentstotestconceptswithoutputtinglargeresourcesintoproject proposal development Negotiateand ·Governmentmayrequirenewinformationandoutsideexpertstoimprovetheproject finalizeproject ·Timeisrequiredtorepackageanunsolicitedproposalasagovernment-managed,solicited publictender(Chile,CostaRica) ·Withnofinalprojectapprovaltimesspecified,someprojectsarenegotiatedoverseveralyears withoutthreatofaloomingdeadline ·Aproponentoftenneedstoobtainpermitsorlicensesfromotherdepartments Putproject ·Delaysallowtheoriginalproponentadditionalpreparationtime,notpermittedtochallengers outtobid ·Withanunspecifieddeadline,someprojectsremaininactiveforindefiniteperiods ·Governmentinactivitymaylockupaproponent'sfinancing,i.e.,guaranteesandbidbonds Submit ·Thechallengeperiod(60daysinthePhilippines)notalwayssufficienttoconducttechnical counterproposals duediligenceandtodevelopthebusinessplan,financialmodel,andfinancialbid ·Challengersmayneedsubstantialtimetoraisefinancing Developing an effective system to manage unsolic- establishing time constraints ited proposals is not easy, however. Governments To make the process move forward, governments are faced with many tradeoffs. Policy makers often set deadlines for completing certain stages must determine the appropriate incentives for the of the approval and bidding phases. Infrastruc- private sector to initiate projects, the amount of ture laws usually limit the number of months reimbursement (if any) to the original proponent allowed for issuing preliminary project approval, for project development costs, and time constraints completing a final proposal, putting the project during the approval and challenge processes. out to public bid, and specify a closing date for challengers to submit counterproposals (table 4). Finding appropriate incentives Many issues arise regarding how much time to There are many issues to consider when attempt- give potential challengers to present counterpro- ing to strike the right balance between incentives posals. The original proponent has an obvious for the private sector to propose beneficial projects competitive advantage because it has spent much and enough chance of success for third-party chal- time and effort preparing the project (table 5). lenges (table 2). Reimbursing project development costs Conclusion If unsuccessful in the bidding process, the origi- nal proponent might expect reimbursement of Unsolicited proposals may contribute to the over- its development costs from the government, all infrastructure goals of countries, particularly the winning bidder, or both. Proponents where governments have limited technical and GRIDLINES invest time and money in the projects financial capacity to develop projects. However, and expect to be compensated for unsolicited proposals also pose challenges and Gridlines share emerging knowledge their efforts. However, determin- risks, particularly when projects are negotiated on public-private partnership and give an ing the true value of the project with the original proponent without sufficient overview of a wide selection of projects from concept and development is not transparency or competition. Channeling all unso- various regions of the world. Past notes can be easy, and there are several issues licited proposals into a transparent, competitive found at www.ppiaf.org/gridlines. Gridlines are a to consider when deciding the process that gives other companies a fair chance publication of PPIAF (Public-Private Infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Advisory Facility), a multidonor technical assistance amount (table 3). of winning the tender can reduce the risks while facility. Through technical assistance and knowledge preserving the potential for innovative solutions. dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA views are those of the authors and do not necessarily PhOne(+1) 202 458 5588 FaX(+1) 202 522 7466 reflect the views or the policy of PPIAF, the World Bank, GeneRal eMaIlppiaf@ppiaf.orgWeB www.ppiaf.org or any other affiliated organization. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY