IBLJ March 2016: Small Cities- Picking the right bidder to take on PPP project risks.
Soumya Kanti De Mallik (HSA Advocates)
The first list of 20 smart cities, selected to receive financial assistance from the government, was announced in January. A number of smart city projects – group housing, solar power, community toilet, etc. – have been identified for implementation under the public-private partnership (PPP) mode.
Risk allocation is a key consideration while deciding the right bidding process for a project and selecting the right bidder. Authorities generally pass all risks to the private sector. This approach has been detrimental to the success and efficacy of PPP projects, as evidenced by the fact that only a few states in India have leaned towards using PPP for developing infrastructure, and for limited sectors such as roads, ports and airports.
Risk identification, allocation and management are crucial in PPP projects, as inefficient and inequitable risk allocation may lead to abandoning of projects. Ideally, for risk allocation to be balanced between the authority and the private sector, risks should be allocated to the party best placed to manage the risk. A robust PPP structure will address the issue of risk allocation. In the smart cities context, some of the key risks and their allocation are outlined below.
Land : The entire land and at least 90% of the associated right of way should be provided and granted by the authority on or before the appointed date. This is a condition precedent to the grant of concession, as the concessionaire will be unable to carry out retrofitting, redevelopment or greenfield development without access and rights to the site.
Significant approvals : Significant statutory clearances – environmental, forest, etc. – and utility clearances should be the obligation of the authority. However, the operational clearances, to be obtained during the construction stage, should be the responsibility of the concessionaire. The clearances should be obtained within a specified time period, with consequences for delay.
Authority obligations : These have to be clearly set out and carried out in a coordinated manner, as any miscommunication or gap may result in the asset being built, but underutilized.
Other risks : Regulatory and political risks relate to changes in law and regulatory framework including taxation policies, and political changes, which could affect site availability or lead to expropriation. These risks should be retained by the authority. Commercial risks (arising from construction, operation and maintenance activities) should be passed on to the private sector.
While government agencies need to appropriately identify and allocate risks to efficiently manage PPP projects, it is also imperative for authorities to select a partner that not only contributes economically and technically to the project but also has the wherewithal to assume the risks associated with the project.
Selecting the “right” bidding procedure is key to selecting the “right” private participant. Bidding procedures can be divided into: (a) single stage; (b) two stage; and (c) Swiss challenge.
(a) Under the single-stage process, comprising only the request for proposal (RFP), evaluation is a two-phase process. The first phase involves checking compliance with the RFP’s requirements (the responsiveness test), clearance from conflict of interest, technical and financial capability, and eligibility of key personnel for the project. Proposals that qualify are selected for the second phase, which involves evaluation of financial proposals of the selected bidders.
(b) Under the two-stage process, the request for qualification (RFQ) stage aims to identify experienced bidders that have the right technical and financial capacity to undertake the project, so as to shortlist/pre-qualify them for submission of financial bids at the RFP stage.
In the RFP stage, financial proposals from shortlisted bidders are evaluated. A report is submitted to the evaluation committee, to decide on deviations from RFQ/RFP, call for bidders’ clarifications (if any) and finally, bid acceptance or rejection. What is, or is not, an essential condition is at the discretion of the authority, and here lies the scope for arbitrariness or preferences to creep in.
(c) Swiss challenge involves the authority seeking competing proposals to better an original proposal, with the proponent having an opportunity to match the competing proposal.
The right approach has to be project specific – no consistent, common formula can run across all projects. However, the key lies in recognizing, defining and allocating risks before commencement of the bidding process, and then formulating the RFQ and other project parameters, which may further be pre-defined into “essential” and “dispensable” qualifications. Pre-defining will not only reduce the scope for arbitrariness and distortion of the process, but will also assist in selecting the most appropriate bidder for the project. A well-designed and efficient PPP procurement process may also help in avoiding delays and unwanted disputes, reduce costs and ensure higher value for the taxpayer’s money.
In the course of risk identification and allocation in project documents, authorities should involve technical and legal consultants for every stage of the PPP project, including structuring of the PPP, documentation and development of processes and guidelines, as they have skill sets that the government is missing.
Soumya Kanti De Mallik is an associate partner at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai and Kolkata, and with a correspondent relationship in Bangalore.