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Sector: State Highway  |  Module 2: Work through the PPP process

Choosing the best-suited procurement method

Procurement strategies

The objective of this section is to guide the project team in their selection of a transparent and objective procurement strategy which is suitable to the PPP mode selected for the project.

The diagram below presents the range of methods that may be used to procure a project as a PPP. The following section describes each generic procurement strategy and its suitability to specific PPP contract arrangement.

Generic procurement strategies

Competitive Procurement

Competitive procurement strategies are the most efficient strategy for large contracts and for when a large number of prospective bidders is expected. Competitive bidding is usually preferred for PPP projects.

There are several alternative competitive bidding strategies available to suit the circumstances of the particular project. The approaches differ according to the breadth of bidders that they target. They include:

Each of these is briefly described below.

International Competitive Bidding (ICB)

International competitive bidding (ICB) opens the procurement process to the widest potential market of bidders. Firms from around the world are invited to bid with equal opportunity.

Procuring internationally involves greater administrative and advertising cost than more local bidding strategies, such as those at the national level. For this reason, ICB tends to be the best suited procurement strategies when:

  • The contract value is large, and
  • The project requires specialised technical inputs which might only be available from leading firms internationally.

Because the benefits of ICB increase with project scale it is common for a threshold contract value to be set as a decision criterion. In this case ICB would typically only be used when the contract value is greater than this threshold.

National Competitive Bidding (NCB)

National bidding is less intensive than ICB. National bidding is suited to procurement of PPPs which, by their nature or scope, are unlikely to be attractive to foreign firms. This would tend to be the case where:

  • The contract values are small
  • The project is scattered geographically or spread over time
  • The project is labour intensive

These factors imply the project can be developed locally at prices below the international market, and this would tend to give an advantage to domestic firms. In these cases the advantages of ICB are reduced and they are likely to be outweighed by the extra administrative and financial burden, making procurement at the national level more appropriate. It should be noted that national firms may still choose to include international expertise in their bid if they see fit.

Limited Competitive Bidding (International and Domestic)

Limited International Bidding (LIB) is essentially ICB by direct invitation to a pre-qualified panel of firms without open advertisement. It may be an appropriate strategy for procurement where:

  • The contract values are small
  • There are only a limited number of developers
  • Other exceptional reasons may justify departure from full ICB procedures.

Under LIB, the procurer seeks bids from a select list of known potential developers broad enough to assure competitive prices. Domestic preferences are not applicable in the evaluation of bids under LIB. In all respects, other than advertisements and preferences, ICB procedures would still apply.

Suo Moto / Unsolicited bids

In some cases, a potential PPP project might be brought to the public sector’s attention through an unsolicited proposal from a private sector developer. Such proposals reduce the competitive process completely and expose the public sponsor to the risks associated with uncompetitive procurement. In these cases alternate procurement options based on ‘induced competition’ are often used to try to reintroduce some competitive pressure to the process. However, these approaches, known as the Swiss Challenge or Margin of Preference strategies, are still not strictly competitive.

Some of the Indian States, such as Andhra Pradesh, Bihar, Punjab, Gujarat and Karnataka permit unsolicited proposals under specific circumstances. Specific circumstances may be referred to the individual PPP legislations / policies of the respective states.

The VGF guidelines, however, explicitly state that a private sector company shall be eligible for VGF only if it selected on the basis of open competitive bidding.

Swiss Challenge

Swiss Challenge is a procurement strategy used specifically when the government authority receives an unsolicited proposal for a project. The private entity submitting the unsolicited proposal is termed as the Original Project Proponent (OPP). The government evaluates the proposal submitted by the OPP and, if it finds merit in the proposal, it invites other parties to submit competing proposals. The other parties are expected to match or better the terms of the OPP’s proposal. In turn, and to compensate for its effort in bringing the original proposal, the OPP is given a chance to match or better any competing proposal at par with the original.

The Swiss Challenge system enables the public sector to introduce some competitive pressure, thereby avoiding some of the non-competitive concerns raised by unsolicited proposals. The private sector is invited to match or better the OPP’s proposal through innovation, quality and efficiency. Despite this, the system is not entirely competitive since it is difficult to avoid a bias in the evaluation towards the OPP. Moreover, there could be some reluctance by competitors to make their best effort since they would expect the OPP to have an advantage. This could be because the OPP has more information than its competitors.  Swiss Challenge might also not meet the conditions for procurement prescribed by relevant legislations.  Both the World Bank and the Asian Development Bank, for instance, while recognizing the importance of likely innovation through the encouragement of unsolicited proposals, do not allow such procedures under their published procurement guidelines.

Margin of Preference

Margin of preference is also a procurement strategy used in response to unsolicited proposals. Under this approach the OPP is given a theoretical benefit during the bid evaluation, compensating him for the effort it has put in for developing the project. In this approach after the OPP has submitted its proposal, the government authority invites bids from competing suppliers. During the bid evaluation process, the OPP is evaluated with a theoretical margin of preference. This strategy has been prevalent in South Korea and Chile.

 

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