Download water utilities management contracts – eca

PROCUREMENT OF MANAGEMENT CONTRACTS and
LEASES for OPERATION of UTILITIES – ECA
EXPERIENCE (*)
Preamble:This is a slightly more readable version of the “Power Point”
slide presentation made by Salim Benouniche (**) at the Workshop
on “ Management Contracts and PPPs” organized by Procurement
Group in World Bank Fiduciary Forum 2008, National Conference
Center, (Lansdowne Va).
(*) ECA:Europe and Central Asia Region
(**) Procurement specialist, Infrastructure & Energy , ECSPS
Part I. Typical ECA Utilities Situation and Risks
Involved
I.1 INTRODUCTION:
After a short description of the common scheme, world wide, the
specific situation of utilities in ECA Region will be detailed, in
terms of main difficulties, risks, issues, followed by mitigation
measures in design and procurement:
I.2 A COMMON SCHEME, Bank-wide
To rehabilitate plants and networks, which are often in a poor
initial condition, then operate and maintain them,
it is necessary:
to determine first as clearly as possible the BASELINE DATA.
Then to OPERATE for a few years to reorganize the utility and
measure the real parameters: this is usually the purpose of
partnerships with a private operator:
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There may be two phases:
a first MANAGEMENT CONTRACT with a private Operator
lasting 2 to 6 years normally comes as a transition before
launching the Procurement of
a second phase: 2nd Management Contract, LEASE or
CONCESSION (8 to 25 years)
PPPs In ECA: more Management Contracts
I.3 Specific ECA SITUATION:
In ECA we currently find mainly MANAGEMENT Contracts
(Albania, Armenia, Kosovo, Uzbekistan), a few LEASE Contracts
(Armenia, Turkey, Georgia), very few examples of
CONCESSIONS (Former Yugoslavia and Bulgaria).
The MANAGEMENT CONTRACT is the most frequent type in
ECA due to the difficulties encountered in ECA (TRANSITION)
COUNTRIES; the management contract is a TRANSITION
CONTRACT because it is a mixed contract, only partly
performance-based,with an important fixed fee component
similar to a Technical Assistance contract (70% to 80%) and a
smaller performance based fee component (20% to 30%)
MANAGEMENT CONTRACTS tend to last longer in ECA, either by
extension or by repetition (from 3 to 8 years).
The procurement procedure is usually “one stage bidding” after
prequalification, It is based on a technical proposal and a financial
proposal submitted in two envelopes by each bidder. The technical
evaluation includes a minimum pass/fail score that must be secured
before the financial proposal can be opened. Then , the criterion is
generally only price.
One exceptional case (Armenia 2, QCBS procedure) was based on post
qualification.
THE MAIN DIFFICULTIES in ECA COUNTRIES:
BASELINE Data are very difficult to establish (no bookkeeping, no
reliability, etc.);
LOW REVENUES do not cover costs for maintenance, refurbishment
and extension of the public services; it comes from low tariffs, poor
billing and collection (Central asian countries in particular face a “quasi
fiscal debt” case)
In Yerevan, at start only 7% of the domestic consumers paid user fees.
In some cases, the Bank waived part of its rules to finance operating
costs at start.
POLITICAL commitment and new LEGAL and REGULATORY frame are key
(independence of contract monitoring unit and of Management Board too).
TECHNICAL LOSSES (e.g. high percentage of “Non Revenue Water”) reflect
the poor technical conditions of the plants and networks;
PERSONNEL management, and RESTRUCTURING of former public
companies are important to improve collection and billing revenues
first, and performance later.
Who is responsible for Procurement execution is not clear:
Operator should be and execution of the INVESTMENT PLAN in due
time should bind the client.
Lack of Competition in some Sectors, increasing risk aversion: few
Bidders Water Operators “World-size”: only 5 major companies (=> ,only
one bidder in Tbilisi: negos failed); concentration in Power Sector also.
Few Left Bidders tend to negotiate amount/wording of Guarantees,
Contract
Underbidding sometimes leads to sustainability problem, early contract
crisis
Parent Companies (JV shareholders) walk away from ailing local
company
The Cycle of Underperformance (after Shugart)
Low tariff
Low incomes
Low customer
satisfaction
Failure to pay
Inefficient
operations
Lack of
funds
Poor
commercial
discipline
Water-shortages,
low pressure,
poor quality
Poor
Maintenance
Leakage
Lack of
investment
Waste
A “Guidance Note on Strategy” was issued to address the case
where the first Management Contract incumbent competes for a
subsequent Contract, Lease or Concession:
difficult to establish a “level playing field” for other competitors
solution adopted: waiver of conflict of interest provisions to allow the
incumbent to compete, based on the provision of a maximum of
information to all competitors.
(see website: at the end of the “Consulting Services Manual”)
JOINT VENTURE ISSUES:
The Operator is in most cases a new locally incorporated company
created after the award, its shareholders are usually the prequalified
applicant Joint Venture Partners:
Typically, depending on the size of the contract (e.g. >= 1 mln $/year),
one or two subsidiaries of a major company of the sector (Parent
Company having financial capacity, technical expertise), or developed
country Operator and a Technical Consulting Firm, with or without a
Local Partner.
When the locally incorporated Operator is created, the Major
Company(ies) becomes often a “GRAND PARENT” of the Operator:
“GRAND PARENT” Holdings
॥_______ _______॥_ _ _ _ _ + _ _ _ _
I
I
I
Parent 1 (Oper.) Parent 2 (Tech.) Parent 3 (Local or Bank)
I______________I _ _ _ _ __ _ _ _I
॥
ll
New Locally Incorporated Subsidiary = PARTY to the CONTRACT
A PARENT/SHAREHOLDER COMPANY GUARANTEE, WHY?
To be pre-qualified, JOINT VENTURES often refer to financial
capacity figures or technical expertise of the “Grand Parent(s).” T
OPRC has ruled in 2002 on such a case that “Grand Parent Company
(ies)” should, alternatively,
 either ‘CO-SIGN” (i.e. be party to) the Contract (or put more
Equity)
 or provide a PARENT COMPANY GUARANTEE,
together with a letter of agreement stating the commitment to
provide the Operator with Technical expertise and support.
This Guarantee comes in ADDITION to the PERFORMANCE
SECURITY. It is similar in form: UNCONDITIONAL, payable UPON
FIRST DEMAND.
EXTRACTS from ARMENIA II Management Contract RFP:
RFP 4.5.5. If the individual company or any of the Consortium
partners constituting the Successful Bidder have submitted
data, credentials, or any other information in their Technical
Proposal Part VII (Information Forms of Annex E to this RFP)
that are those of a parent company, the Company Management
Board may, in its sole discretion, also require the relevant
parent company or companies to be party to the contract. by cosigning the contract, or if it is not willing to co-sign the
Contract, to provide an additional guarantee of the same kind as
that mentioned in RFP section 4.5.4., for an amount calculated on
the basis of six month of Management Fixed Fee.
(The Guarantee mentioned in RFP 4.5.4 is the Performance
Guarantee)
WHAT IS THE RISK COVERED?
This guarantee is needed:
to ensure that the capacity (financial & technical) taken into
account at prequalification stage is really backing the Operator
during execution.
to cover the risk of J.V. partners stepping out of the
Operator’s Contract, either by selling their shares, or by stopping
their (financial/technical) support: the Operator would then
become an empty shell unable to reach performance standards.
THE OTHER GUARANTEES:
The GENERAL PERFORMANCE SECURITY is triggered by lack
of performance or not meeting the main Levels of Service;
The PAYMENT GUARANTEE ,for leases only, covers the
payment of the Operator’s Monthly repayment [of the Grantor’s
part] of the total Customer Tariff Collections, especially in the
case of Bankruptcy of the Operator (annually maintained).
.
HOW IS THE AMOUNT CALCULATED?
In case of Bankruptcy, or Termination of the Contract due to
Operator’s Default, the Grantor often needs 6 months or more to
award a New Operator Contract following a competitive
procedure. During this period, the services to end-users must be
ensured at an acceptable level of performance, and this is financed
by the total amount of the two (cumulative) Guarantee and
Security:
Parent Guarantee + Performance Security >= 6 months of Operating Expenses
Part II. Procurement Issues
A) Procurement procedure launch: Timing and Issues
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FINANCING should be reasonably known to avoid uncertainties in
the Design of Contract – example: Contract designed for 6 years,
financing available only for 4 years. Result: 4 years firm tranche +
conditional tranche of 2 years (+1 year possible extension)
Borrowers should explore in advance funding availability from various
sources not to affect or delay contract signing.
Participation in competition may be an issue – example: previous
incumbent allowed to compete for a subsequent contract?
(see conflict of interest/level playing field guidance note)
Preparation costs can be very high for the Borrower, (e.g. for an
aborted lease contract more than $ 1 million)
B) Prequalification (PQ)
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“criteria” or requirements should be balanced: if excessive in number
or level, risk to reduce access and competition, on the other hand: risk
for the client => foresee the real needs/data over the period
(population to be served, etc.)
Main criteria: (i) population served, (ii) operator’s experience, (iii)
financial capacity, (iv) joint venture leadership, (v) ability to provide
qualified staff.
Whose qualifications form basis for prequalification? The entities
seeking PQ should have adequate qualification and experience (parent
or “sister” company data issue)
Withdrawal of partners (or change) should be avoided
C) Selection Process (incl. RFP) up to signing
(1 stage, 2 envelopes bidding)
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Criteria for each phase (quality vs. price): Least Cost or QCBS
method? (If QCBS, respective weights in combined evaluation: 70/30
or 50/50?)
Fine tuning the RFP (amending RFP is possible): after pre-bid
conference and “questions and answers”, but not later
Withdrawal/Changes in JV partners or parent companies support
“LOW BIDDING?” Bidder choice, Client risk: Bidder should remain
responsible for consequences of low bidding => Bidding documents can
be made more specific about minimum standards of quality and quantity
of inputs required (e.g. minimum number of staff months)
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Performance Indicators should be realistic, easy to measure,
and their number tends to be reduced
Conditional Bids and inappropriate assumptions made by
bidders in their bid are a problem
Contract negotiation delays: some Bidders try to “re-write”
all clauses (this may lead to abortion)
D) Implementation problems and issues
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Inappropriate staff/ early changes of key staff
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Investment fund delayed, delays in procurement by operator
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Inappropriate Financial Model: Tariffs and Regulation issues
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Political, red tape, delays: If authorities or local party do no comply
with assumptions/obligations in time (impact on performance indicators,
role of Independent Auditor)
Control on Personnel: conflicts or lack of operator leverage
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Withdrawal by Operator or sale of shares of locally
incorporated Company (“empty shell” problem may be the
consequence of low bidding)
Attempts to re-negotiate, or to sell expensive proprietary
software should be avoided
Confusion of roles: Bank/Independent Auditor or Dispute
Resolution Board
Part III. Innovations or experiments in the
Procurement and Design of ECA Management
Contracts ( nuts & bolts )
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(i) Previous incumbent allowed to compete with full disclosure
of information to others in the case of a second PerformanceBased contract (after conflict of interest/level playing field
discussion: see OPCPR Guidance Note at the end of the
Consulting Services Manual)
(ii) Parent Companies or Partners of JV can choose: either to
co-sign or to provide an additional Parent Company Guarantee
(= 6 months of operator’s cost) – [see Clause slide]
[Georgia + 2 recent examples: ALBANIA 4 and ARMENIA 2
(MWWPP “out of Yerevan”)]
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(iii) Method of Selection and Criteria: One Management
Contract has been selected under Quality and Cost Based
selection method (QCBS usually applied to Consultant’s
contracts) with 70% weight on Quality, and 30% on price)
Note: 70% may be a redundant use of quality criterion with the
first stage pass/fail requirement of 75 points in technical
quality score, and may lead to a very high price
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(iv) The yearly percentages of fixed fee payment are no more
equal, but partly “front loaded” to take into account the wish of
the operators to reflect the higher level of needs in the first
years of a Management Contract.
(example: Breakdown on six years Armenia 2 RFP: 23%, 21%,
14%, 14%, 14%, 14%, and on 4 years: 32%, 29%, 20%, 19%)
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(v) RFPs and draft contracts are updated and fine tuned after
pre-bid conference and series of questions and answers, and an
amendment to RFP is issued.
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(vi) To take into account and mitigate the “perceived risk” of
undue unilateral encashment of the unconditional Performance
Security, a clause has also been added to have an assessment
by the Independent Auditor of the Breach of Contract
before encashment. (Turkey lease, Armenia 2)
(vii) Performance Guarantee amount can now be reduced on a
yearly basis.
(viii) In Albania, RFP allowed, in case of Joint Venture, a
consultant to take the lead of the J.V .
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(ix) New wording in RFP was used (Armenia 2) to avoid Partners
in joint venture using the references of sister companies
belonging to the same group (not members of JV)
(x) In a re-bidding case, the Bank has suggested to decrease
the minimum figures of population served required for
prequalification, to keep them at the present real level.
(xi) To avoid underbidding, the Bank is considering to suggest a
borrower to try indicating in the RFP a required minimum
number of man-months for key staff.