This article was published on mylaw.net on March 21, 2011. http://mylaw.net/Article/Competitive_dialogue_as_a_viable_method_for_PPP_projects/
Last week I had the privilege of speaking at the Indo-French Conference on Public Private Partnership(“the Conference”). The Conference was organised by the three French ministries of Ecology,Sustainable Development, and Transport and was intended to explore the relative experiences of India and France with respect to Public Private Partnership (“PPP”) and, in particular, consider whether India’s still fledgling PPP sector can benefit from French approaches and processes.
The Conference was evidence that some of France’s largest infrastructure players – and the country has some of the most sophisticated infrastructure and engineering companies in the world – are looking at Indian PPP with a great deal of interest.
My presentation was on the “Choice of the Contractual Model, Analysis, Allocation, and Risk Management.” I spoke along with Frederique Olivier, a Partner at DS Avocats, a Paris-headquartered international law firm with offices across Europe and Asia. Our intention was to identify some of the problems with the Indian legal and regulatory regime in relation to PPPs and identify the ways that the regime can benefit from the legal framework for PPP in France.
Other speakers on this panel, who addressed various aspects of risk allocation, included speakers fromMarsh, the insurance giant, Buoygues Construction, and SAUR, as well as a representative from theFrench Institute of Delegated Management.
An interesting aspect highlighted by the French speakers was the concept of “competitive dialogue” as used in several parts of the European Union.
The good and bad of Competitive Bidding
In India, most PPP projects and public procurement is done through a competitive bidding process (in fact the Ministry of Power in the National Tariff Policy, 2005 has controversially mandated that all future purchase of power by state entities should only be through competitive bids). Typically, the bidding process is what is called “restrictive bidding”, that is, there are two phases, a qualification phase (where interested participants qualify on the basis of pre-identified financial and technical qualifications) and a financial bid.
Competitive bids have several advantages: they provide a level playing field for all competitors, which is particularly important since Indian public authorities have fairness obligations under the Constitution; they promote transparency and eliminate corruption (and making the projects, in a sense, more politically sustainable); and in more cases than not, it allows for better price discovery.
However, competitive bidding does have several shortfalls, including:
1. The gestation period for competitively bid projects is long, and several postponements are par for course, increasing the time-to-market of the project.
2. The documentation for competitive bids are “pre-cooked”, which leaves little room for negotiation for the bidders, and often, bidders have to accept unreasonable conditions if they are keen on developing the projects.
3. Competitive bids often results in the lowest bidder sometimes underestimating the costs and undervaluing the risk, which results in default.
4. Competitive bidding is expensive and the cost of preparing a bid can be as high as two to ten per cent of the actual project cost, which can deter participation.
5. However, the most significant drawback is probably that competitive bids curb innovation. Since the basic criteria in a bid is to find the cheapest possible bid, it becomes necessary to specify exacting technical specifications and narrow parameters within which the bidders must operate. This means that bidders have little incentive to explore innovative solutions. Excessive standardisation typically eliminates new technology that would provide better quality.
Finally, of course, the cheapest solution is not always the best, and in most cases, is not the most innovative.
Enter Competitive Dialogue
After a European Union Directive of 2004, several European countries have selected “competitive dialogue” as the preferred route for developing complex PPP projects.
Competitive dialogue provides for a bidding framework that allows for interaction and discussion with interested candidates before actual bid submissions. This procedure recognises that it is very difficult for public authorities to determine the technical specifications and appropriate price levels for a project in advance and that the private sector is often best placed to come up with the smarter solution for a public infrastructure need.
Following the qualification procedure, the public authority would discuss the project with potential bidders initially, and allow them to come up with bespoke solutions for the project. The authority then has bilateral dialogue with the bidders before they are required to submit the bid.
Bidders are incentivised to come up with the most innovative solutions and the authorities can assess and compare different solutions to meet the needs of the project.
Bidders can also propose complementary activities in synergy with the main purpose of the procurement process, which can generate additional revenue or have socio-economic benefits or other benefits that the developer can retain to reduce costs, or share them with the authority.
Once the dialogue is completed, developers who have come up with the most complete solutions are then required to submit financial bids that are evaluated, and the project is awarded. Since more than one technical solution is on offer, the public authority has to frame the evaluation criteria carefully so that the different proposals can be compared.
To encourage private participants to freely discuss new ideas and innovative solutions, the competitive dialogue process has strict rules for protecting confidential information, whether it is proprietary technical information, know-how, or innovative ideas. The authorities cannot “cherry-pick”, that is, mix and match various solutions provided by different bidders. The idea is to encourage bidders to be as innovative as possible without the fear that the public authority will use their work for the benefit of another bidder.
Confidential information protection is key to the competitive dialogue process. Compare this to the typical clause in the Request for Proposal by the National Highways Authority of India (“the NHAI”), which states that all drawings and designs submitted as a part of the bid by a private party shall be the property of the NHAI.
Competitive Dialogue and India
The Planning Commission continues to advocate competitive bidding as the only viable method for allocation of PPP projects in India. However, for the more challenging and complex sectors, where the cash flows are not self-evident (waste management, rural education, rural healthcare) competitive dialogue would encourage a wider engagement with the private sector in coming up with financial solutions as well as meaningful discussion on the scope and extent of government support.
A key factor is of course that running a competitive dialogue needs a sophisticated government team who are able to compare and assess the different models. Given the lack of capacity in several government departments that handle PPP projects, the time for competitive dialogue may be far off.