From Preferred Bidder to
Financial Close
Iain Menzies
The World Bank
St. Petersburg - 24 May 2008
Bidder Selection Process
“ The Bidder Selection Process involves 5 key steps, and a clear Bid
Management Structure needs to be established to implement these”
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
Negotiation
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
“ The Bid by the Bidder with the highest evaluation can be accepted
outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or
(b) a better offer may be achieved.
There are several negotiation options:
No
Negotiation
Contract can be signed immediately when all technical and financial
issues are resolved
This provides greatest transparency and objectivity
Especially useful for two stage bidding, or when unmodified
contracts signed with the bid:
Negotiation
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
“ The Bid by the Bidder with the highest evaluation can be accepted
outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b)
a better offer may be achieved.
There are several negotiation options:
No
Negotiation
Or..
Negotiate
Preferred Bid
If issues still to be resolved, negotiations can start with
the preferred bidder
Even if a reserved bidder is retained, the Contracting
Authority has less competitive tension in the negotiation
The Contracting Authority has to have resources and
capacity to maintain its position against a possibly more
experienced negotiator
Bidders and Financiers may request major changes
during negotiation, and the Contracting Authority has to be
able to respond effectively to this
Negotiation
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
“ The Bid by the Bidder with the highest evaluation can be accepted
outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or
(b) a better offer may be achieved.
There are several negotiation options:
No
Negotiation
Or..
Or..
Negotiate
Preferred Bid
Competitive
Negotiation
Negotiations can be with two or more bidders,
playing off one against the other
This may help to get a better deal than offered in
the competitive bids
Disadvantage: Lacks transparency as has to be
held in secret, and people may not be confident of an
unbiased decision
Negotiation
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
“ The Bid by the Operator with the highest evaluation can be accepted
outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b)
a better offer may be achieved.
There are several negotiation options:
No
Negotiation
Or..
Negotiate
Preferred Bid
Or..
Or..
Competitive
Negotiation
Additional Bid
Round
Final option is a second round of formal bidding
This retains transparency, but allows bidders to
improve financial offers, after seeing competitors bids.
Disadvantage: Not suitable for adjustment of nonprice bid conditions
Negotiation Process
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
•
Negotiation is a process, not an event.
•
The City and the winning bidder will have different perspectives
during negotiations:
– Bidder to reduce risk and increase profits
– City to reduce costs and maximise value
•
Output of negotiation will include PPP Agreement with all ancillary
agreements, schedules and subcontracts
Negotiation Process
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
Negotiation process needs to be planned and resourced
•
The City must assign a negotiating team:
–
–
–
–
–
Qualified and experienced
Understands City’s position on key issues
Empowered to take decisions
Assisted by project team and local/international advisors
This could be a full-time job for the team
•
Manage and track evolving documentation
•
Record details of negotiated points and resolutions
Be Prepared – the Bidder will be!
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation
The winning bidders will have formidable resources:
• The winning bidder negotiation team will be supported by its
financial, legal and technical advisors
• The winning bidders lenders will be involved and have their
own legal (and technical) advisors
• They are all experts in their field
• The winning bidder and the lenders (and their advisors) have
negotiated many such deals before
BE PREPARED
Financial Close
What do we mean by “financial close”?
• In international project finance transactions the common
definition is:
 When the project documentation has been executed and the
conditions precedent have been satisfied or waived.
Drawdowns are now permissible.
• Conditions precedent (CPs) are conditions/matters that
must be dealt with before the bidder is allowed to draw on
the loans. They will be listed in the loan agreement and the
PPP Agreement.
Financial Close – Conditions Precedent
Conditions Precedent (CP) are a challenge, especially in
Russia
•
CPs are not recognized under Russian law – contract is effective
when signed
•
Loan agreements with international lenders will contain CPs to
their effectiveness
•
PPP Agreement will contain CPs, but they will all need to have
been satisfied before PPPA signature
Financial Close – Project Documentation
Many project documents to be concluded to reach financial close:
Shareholders
Lenders /
Bondholders
PPP
Agreement
Operator
Operation &
Maintenance
Agreement (O&M)
Construction
Contractor
Granting
Authority
Shareholder’s
Agreement
Construction
Contracts
Project
Company
Supply Agreement
(e.g., gas supply
agreement)
Services
Purchaser
Purchase Agreement
(e.g., power purchase
agreement)
Raw Material
Supplier
End-users
Financial Close – PPP Agreement
CPs in the PPP Agreement may include:
•
•
•
•
•
•
•
•
•
Required insurances obtained
City approval of construction manuals and Design Documents
Independent Engineer appointed
Land Plot Lease Agreements executed
Developer has been granted access to Land Plots
All Necessary Approvals for construction have been received
All Project Agreements approved by City and in effect
City has entered into Subcontractor Agreements
Performance Bond in place
Financial Close – Loan Agreements
CPs in the Loan Agreement may include:
•
•
•
•
•
•
•
•
•
•
PPP Agreement signed and effective
City resolution or equivalent approving execution of PPPA
Direct Agreement with City is signed and effective
Other security documents received (eg share pledge, assignment of project
documents, guarantees)
All government consents, approvals and licenses have been obtained (eg
State Expertisa, RFR, land plots, safety acceptance)
Projects insurances obtained
Legal opinions received (Russian Law compliance)
Construction/EPC contracts agreed
Other major procurement contracts (eg rolling stock for Nadex)
Initial equity subscription from Developer
Financial Close – Lenders Due Diligence
• There may be many types of lender financing the project,
each with different perspectives and risk appetite:
 International lenders – financial risks and project fundamentals (City
payment risk, cash flows, FX risk, interest rate risk, inflation risk etc)
 IFIs – bureaucratic, environmental and social requirements
 Russian lenders – not yet tested, usually fall in line with international
lenders
• They will not finance the project unless they are satisfied
with the terms of the PPP Agreement (and the other project
documents) and the associated risk allocation
• If they are not satisfied they will seek to negotiate, directly or
indirectly, or walk away
Financial Close – What Can Go Wrong?
• Failure to agree on critical issues during negotiations:






Unrealistic expectations and deadlines
Change in political support (eg new Governor, government)
Political issues high-jacking negotiations
Grantor does not understand issues, intransigence, lack of consensus
Personality/cultural clashes
Fall-out between bidder consortium members on risk allocation (eg
between EPC contractor and operator)
• Failure to meet CPs:
 Delays in government consents and approvals
• Economic/Financial Crisis:
 Project becomes un-afordable to City or un-bankable (credit crunch)
• Social/Environmental Issues
From Preferred Bidder to Financial Close Summary
• Negotiation Process
 Identify key issues, prepare negotiation positions
 Appoint negotiation team – qualified, experienced, empowered, supported
by international advisor teams
 Do not underestimate time and resources required – this can be a full time
job
• Financial Close
 Plan and prepare to meet all requirements in timely manner – this will
require buy-in from many City Committees and some federal agencies (eg
Expertisa, RFR)
From preferred bidder selection to financial
close
THANK YOU !!!
Iain Menzies
The World Bank
[email protected]