The Project Finance Law Review: Government Procurement
This chapter provides a broad overview of the general principles that underpin most government procurement processes. Section II sets out the general procurement principles that governments commonly apply to procurement processes. Section III deals with localisation, and discusses the tools commonly employed by governments to try and achieve local participation and preference in procurement processes. Section IV deals with the different types of procurement processes used by governments and the types of qualification criteria usually employed in competitive procurement processes.
II general procurement principles
It should be noted that most states will have in place a specific legal framework that either sets out general procurement principles that their governments are bound by when procuring goods and services, or prescribes the precise type of procurement process that must be undertaken. While each state will have its own unique procurement framework, and there is variation in terms of which procurement principles states prioritise, it is possible to discern a broad thread of general procurement principles that usually underlie most procurement processes. We have extracted a list of these procurement principles, and discuss each in turn in this Section. It is important to note that these principles are non-exhaustive, and should not be read in isolation as they are mutually related and reinforcing.
The principle of fairness requires that interested parties must be given sufficient time and a reasonable opportunity to participate in the procurement process. Where a tender process is engaged in, this requires that timely notice of the tender, and a reasonable opportunity to submit bids, should be afforded to interested parties.
Fairness further requires that both in the lead up to and during the procurement process, potential suppliers must be treated fairly and equally in relation to each other. No supplier must be given an unfair advantage as regards the other potential suppliers. All suppliers must, therefore, be provided with the same information and the same opportunity to submit bids, and be evaluated against the same criteria. In broad terms, fairness requires that the procurement process must take into account and balance the interests of all parties, including but not limited to the interests of the potential suppliers and their business considerations; the interests of government and its obligations and objectives; and the rights of users to services that are of good quality and are efficiently priced.
Equitability is closely related to fairness, but goes further in that it requires that the procurement process must, in addition to being procedurally fair, also be substantively fair. In some jurisdictions, this principle requires more than mere procedural and substantive fairness, but also embraces the notion of substantive equality. In these jurisdictions, the principle of equitability is put to the transformative task of ensuring that procurement processes are cognisant of historical injustices, and are inclusive of persons who have been disadvantaged by these historical injustices. Measures such as affirmative action and indigenisation in procurement processes are therefore seen, in these jurisdictions, as being important aspects of equitability and fairness, as opposed to being exceptions to them.
This principle is based on the underlying values of openness and accountability. It is closely related to the principle of fairness in that it requires all information regarding the procurement process and the rules applicable to be widely published and readily accessible. The administrative procedures involved in the procurement process must also be open and accessible, to allow for predictability and ease of cost and risk estimation for potential suppliers.
Transparency often also requires that decision makers in the procurement process give reasons for their decisions and make those decisions available for public scrutiny. This ensures not only that fairness is observed in the decision-making process, but also that decisions are justified, and are not tempered by arbitrary or improper actions.
The principle of competitiveness is strongly linked to the principle of cost-effectiveness, which is discussed below, in that the former should almost always lead to the latter. Competitiveness implies the participation of two or more parties, who put their best offer forward and compete against each other for the procurement contract – thereby allowing the state to shop around for the most suitably priced and cost-efficient offer, considering its budget. By giving the state a basket of alternative offers to choose from, the requirement of competitiveness ensures that the state attains the best value for its money. This is perhaps the main reason, among others, that the principle of competitiveness is often emphasised in states with limited fiscal resources.
The most common competitive process employed by states is that of tendering, where the relevant organ of state will issue an invitation to tender that is open to the public. We discuss open tendering procurement processes in Section IV of this chapter.
Some aspects of this principle have already been touched on in the discussion on competitiveness and do not bear repeating here. Ultimately, this principle entails, when procuring goods or services, seeking to attain the best value for money, while not compromising quality and delivery. Broadly speaking, therefore, this principle is about ensuring that states engage in efficient public finance management in their procurement practices.
vi Long-term sustainability
This principle takes cognisance of the fact that governments often procure for the long-term provision of services, which often involves the development of new infrastructure, and that this needs to be done in a sustainable manner. In particular, the principle emphasises that the efficient and cost-effective provision of quality services to users requires ongoing maintenance of infrastructure for sustained periods. Further, the principle has recently become important in the light of the growing global commitment to environmental sustainability, and the idea that the development of infrastructure and the provision of services in an environmentally damaging manner is futile and unsustainable as it is, if unchecked, ultimately destructive of the human species.
A practical outworking of this principle may be criteria relating to adherence with, for example, the Equator Principles.2
vii Other common principles
As indicated above, the list of general procurement principles is not exhaustive, and many general principles other than the ones already discussed frequently appear in the procurement laws and processes of different states. We mention some of these and what they broadly entail briefly here. The principle of integrity often appears in state procurement frameworks, particularly in relation to unsolicited proposals (which we discuss in Section IV), and to selection processes generally. This principle entrenches the values of honesty and freedom from external interference in the decision-making process. This is particularly common and important in states where the laws relating to administrative justice do not clearly cover these issues.
Other jurisdictions refer to principles of economy and efficiency. These two principles, together, concern the need for competition and the making of decisions within a reasonable time and with minimal administrative burdens. They are basically synonymous with the principles of competitiveness and cost-effectiveness.
States often make provision for the preferential treatment of domestic entities participating in procurement processes, or make special provision for bidders that undertake to use national goods or employ local labour (or both). While these regimes are not monolithic, and their precise content and extent often depends on the history, and developmental and economic priorities of the particular state, it is possible to group the types of preferential regimes into some broad categories. In this Section, we provide an overview of preferential procurement, and then consider the broad categories that instances of preferential procurement usually fall into.
i General discussion on preferential procurement
As discussed above, preferential procurement in favour of local entities can take place in multiple ways. It can be in the form of domestic procurement, where the procurement process is limited to domestic suppliers or contractors (as discussed below). Owing to the fact that domestic preferences are sometimes not permitted under the guidelines of some international financial institutions, and may in some cases be inconsistent with states' international obligations pursuant to regional economic integration or trade facilitation agreements, the blanket exclusion of foreign entities is sometimes neither possible nor viable. States are also usually dissuaded from blanket foreign exclusion by the reality that such exclusion may cause lower levels of competitiveness and cost-effectiveness.
The most common way in which states ensure domestic participation (while having the advantage of international competition) is through requiring a minimum percentage of national participation as a prerequisite for qualification at the elementary request for proposal (RFP) stage. This is particularly common in large projects where procurement opportunities are to be pursued via consortia.
ii Promoting inclusivity and addressing structural disadvantage
In some states, preferential procurement provisions are a constitutional obligation aimed at addressing structural disadvantage caused by historical injustices, and promoting inclusivity in previously exclusionary economies. Thus, where people have been structurally excluded from economic participation on the basis of race, gender, disability and many other grounds, preferential procurement is seen as a fundamental part of ensuring the empowerment of those previously excluded persons and their integration into the national economy. This is sometimes pursued through a point system where bidders are awarded preference points for complying with empowerment targets as regards the inclusion of the identified categories of previously disadvantaged persons in the bidders' structures (through ownership, management, subcontracting or otherwise). Those targets are often set out in the state's empowerment legislation or in the procurement documentation (e.g., the RFP).
As mentioned earlier, in the states in which preferential procurement provisions are deployed to address structural disadvantage caused by historical injustices, those provisions are seen as important aspects of the principles of fairness and equitability rather than contrary thereto, as the integration of excluded persons into the procurement economy in those states is seen not as as an infringement of fairness and equitability but as promoting those principles.
iii State participation
In some states, preferential procurement takes the form of provisions that prescribe the involvement of state-owned entities in the procurement. This is often done through requiring bidders to set aside a stipulated percentage of equity for state-owned entities or awarding preferential points for bidders who display evidence of such equity provision, or both. In addition to ensuring local participation in the procurement process, these kinds of preferential procurement provisions are seen as central to ensuring that procurement takes place within broader government objectives to facilitate national planning and coordination, and to drive the direction of the relevant state's economic development.
iv Local community participation
Local community participation is generally seen as important in a lot of procurement processes because communities are the end users of the services in respect of which procurement takes place. At its lowest, local community participation is ensured through the general requirement that procurement processes be available for public scrutiny and comment, as discussed in Section II. At a moderate level, states often apply socio-economic policies that require suppliers or contractors to employ local community labour or materials, and which include strict corporate social responsibility measures towards the local community as part of qualification criteria. At the most onerous end of the scale, local community participation can be required in the form of free-carry equity participation in the project in question.
v Socio-economic development and job creation
The projects being procured will often have, as an aim, improving the lives of communities, or the delivery of services, or both. Consequently, it is often the case that states pursue procurement as part of a broader socio-economic development plan. It is not uncommon, therefore, for states to require bidders to identify the needs of surrounding communities where the project site will be located, and to formulate strategies on how such needs could be met, as part of their proposals. Further, bidders are sometimes required to show how much of their resources, in revenue percentage, they aim to dedicate to contributing to the socio-economic development of the local community or communities. In addition to job creation, this could include investing in local small business enterprises and other development measures aimed at uplifting the local community.
vi Domestic suppliers or contractors, and domestically produced goods
As already mentioned, preferential procurement provisions can sometimes be as stringent as to limit procurement processes to domestic suppliers or contractors. This is not uncommon in contexts where the value of the subject matter of the procurement is relatively low or the goods or services concerned are commoditised and readily available locally. As discussed above, however, the blanket exclusion of foreign entities is often otherwise impermissible or undesirable. The common way to impose national participation in these circumstances is through a requirement that bidders will, in addition to using domestic suppliers for their services, use domestically produced goods.
To allow states to impose the use of domestic suppliers and domestically produced goods, the margin of preference is often invoked, which refers to special evaluation criteria establishing margins of preference for national bidders or bidders who offer to procure supplies, services and products in the local market.
IV procurement processes and qualification criteria
The Sections above identify the principles that generally inform government procurement processes, including both the philosophical basis for public procurement processes and the specific policy considerations. Against this backdrop, Section IV will set out a high-level description of the different types of procurement processes that would typically be utilised by the state in a project finance context.
i Competitive bids
The value and complexity of the services or goods being procured and the skills required by the bidder will often determine the procurement method used by a government. If the transaction value of a project is equal to or exceeds a legislated threshold, a public tender process or open tender will be used. Owing to the high capital cost of the projects that are project financed, a competitive process is usually utilised by the procuring authority. Open tenders are invitations to the greater public to tender for the goods or services. This form of procurement is also most likely to align with the procurement principles, outlined in Section II.
Under a competitive procurement process, the procuring entity has two options, it can either employ a two- or one-stage approach. The two-stage approach encompasses the procuring entity carrying out a pre-qualification exercise in terms of which it will issue a request for qualification (RFQ), which will be followed by an RFP. In a two-stage bidding process the RFQ and RFP are two integral parts, whereas, in a single-stage bidding process, there is only one part, the RFP, in the bidding process.
The objective of the RFQ is to select a limited number of bidders that are qualified based on their technical experience, credentials and, often, their level of localisation. The bidders must be able to prove that they have sufficient experience and commitment to prepare the proposal and execute the project. Only pre-qualified bidders are permitted to respond to the RFP in the second stage.
The objective of this pre-qualification is to narrow down the field to a select few serious bidders capable of implementing such a project. This approach can save the procuring entity time and money as it only evaluates a limited number of detailed bid responses at RFP stage.
The procuring entity will establish a minimum qualifying technical and financial capability criteria to evaluate the bidders and determine the shortlist of bidders that are pre-qualified. Minimum qualifying technical experience criteria test the experience and suitability of the bidder in undertaking the project and usually require the bidder to prove its experience in similar projects, track record in project implementation, technical skills, manpower and operating experience.
Minimum qualifying financial parameters usually test the net worth and turnover of the sponsors, the profitability of the project, and the bidder's track record of successful and sizeable fundraisings equivalent to the total project cost of the project. These criteria help judge the ability of the bidder to raise the finances required for the project.
Some RFQs have 'must meet criteria', which essentially means that the bidder must meet the functionality threshold and a failure to do so immediately disqualifies them from further evaluation. As set out in Section II above, these criteria usually centre around preferential procurement. In other instances, the procuring entity will allow minor deviations that do not materially undermine the substance of the bid.
Depending on how the criteria are formulated, there is sometimes a risk that there may only be one or two qualifying bidders and this decreases the chances of a competitive bidding process at RFP stage and may result in the need for a second pre-qualification exercise.
In more complex or innovative projects, the pre-qualified bidders may also be involved in assisting the procuring entity with the RFP. The procuring entity would share the draft RFP and allow the pre-qualified bidders to give oral and written feedback on the RFP. To ensure maximum benefit from this process, the interaction with pre-qualified bidders must be well structured so that each pre-qualified bidder is treated equally and the confidentiality of the bidders must not be compromised.
An RFP will usually set out the bid conditions, technical threshold criteria and evaluation criteria. The procuring entity should provide all the information necessary to enable the bidders to submit a bid that meets the criteria. Against the background of the procurement principles, the procuring entity should not use valuation methods that could potentially limit competition or prejudice bidders.
Different states will use different evaluation systems depending on their public procurement regulations or legislation. The evaluation methodology of the procuring entity should be clearly disclosed to all the bidders in the RFP.
The qualification criteria in the RFP can broadly be divided into the following categories: administrative responsiveness; technical qualification criteria; and price or localisation (discussed in detail above), or both. Save for administrative responsiveness, which is usually evaluated on a pass-or-fail basis, each criterion is given a weighting according to its relative importance. The weighting determines a bidder's overall score. It is important that the RFP clearly discloses the weighting attached to each category of criteria and the allocation of points related to each criterion. A ranking is usually obtained by cumulating the scores on the technical criteria evaluation (which includes financial criteria) and the price bid. Alternatively, the ranking can also be based solely on the best price bid among bidders that have achieved a minimum threshold score on technical and financial parameters. This selection procedure should be specified upfront in the RFP and will be known to all the bidders before bid submission.
ii Administrative responsiveness
It is essential for a proposal to meet certain minimum requirements. The satisfaction of these requirements constitutes what is often referred to as a 'compliant bid'. Bids that fail to meet the minimum requirements will be rejected and will not be subject to further evaluation. However, these requirements should not stand in the way of innovative ideas and projects and should not be unnecessarily onerous. Examples of these minimum requirements would be whether the bid is in the correct form, all returnable documents have been enclosed, the bidder has accepted the bid validity period, the bidder has provided a tax clearance certificate, etc.
iii Technical qualification criteria
In the technical section of the RFP, the bidder's proposal will be evaluated against all factors that are relevant to the project. Technical evaluation is an evaluation of the technical, operational, environmental and financial viability of the bidder's proposal in terms of the specifications prescribed in the RFP. These criteria should be objective and clearly quantifiable to ensure that proposals can be evaluated objectively. These are some of the factors that are generally looked at when evaluating the technical aspects of the bid:
- Qualifications: if a one-stage evaluation approach was followed and there was no RFQ stage, the procuring entity will test that the bidders are qualified and have sufficient experience.
- Legal: bidders will be required to confirm the composition of the bidder and their commitment to the project by the submission of a consortium agreement or shareholders' agreement. The bidders will be required to either confirm their acceptance of the terms of certain non-negotiable project agreements to be entered into with the procuring authority or submit a mark-up of the project agreements disclosing the risk allocation that they are not willing to accept along with an explanation for the mark-up.
- Technical soundness: the minimum engineering design and conformance with the performance specifications or standards set in the RFP.
- Operational feasibility: the proposed methods and procedures for operating and maintaining the proposed project.
- Quality of service: the manner in which the bidder proposes to maintain and expand their services, including any performance guarantees to secure proper performance.
- Land and environmental considerations: If the bidder is responsible for procuring and securing the project site for the term of the agreement with the procuring authority, proof that the bidder has obtained secured rights to the project site and the relevant environmental consents relating to the project or that it has made the requisite applications.
- Enhancements or innovation: this includes any extras that the bidder may propose to make their proposal more attractive, such as profit-sharing with the government, the exclusion of government guarantees, lower levels of government support, etc.
- Promoting inclusivity: any benefits for local business, domestic investment and the encouragement of employment in the jurisdiction of the procuring authority.
The second leg of the technical evaluation focuses on financial and commercial considerations. This is a more complex evaluation and requires a complete understanding of the project costs, funding and value for money. The following criteria are usually considered:
- certainty of the project costs;
- certainty, nature and costs of funding;
- equity participants and funding structure;
- preparation of a financial model based on parameters provided in the RFP;
- value for money; and
- project bankability.
In some jurisdictions the evaluation of price is a separate element in the assessment of the bid that is carried out only if the bidder has met the threshold point allocation in respect of the technical qualification criteria. However, the price being offered by the bidder will be scrutinised alongside the financial considerations discussed above.
v Evaluating the bids
An evaluation committee will usually be established to evaluate and adjudicate the bids and thereafter award the tender to the highest ranking bidder. If the determining criterion is based on the price, the successful bidder will be the one with the lowest price. If the criterion is based on the price and other requirements, such as localisation, the successful bidder will be the one that has the highest combined score for these aspects.
On very complicated projects, a procuring entity may seek to hold the second-ranked bidder in reserve in case the preferred bidder is unable to achieve financial close.
If there is no clear winner after the evaluation of the bids, the procurement may have to go into a best and final offer (BAFO) process. The main reasons that the bidding process may be extended and a BAFO process conducted would be that there is a minimal difference in the score of the highest ranking bidders, the bids are identical or too similar to choose from, or no single bid meets the procuring entity's prescribed objectives.
Well-structured and communicated RFPs should not require a BAFO. Bidders should not assume that there will be a BAFO stage and should not use BAFO to complete incomplete bids.
There can be variations to the typical structure of an open-tender process. For example, reverse auctions, where the procuring entity sets the price that it will pay for the good or service that is being procured and all the bidders that are able to develop the project based on that price are eligible to be selected subject to certain gatekeeper criteria.
vi Unsolicited proposals
Unsolicited proposals are a deviation from an open procurement process and involve direct negotiation by the procuring entity with a proponent for the provision of goods or services without the proponent being selected through an open-tender process. This mechanism of procurement is not used often as it undermines the principles of transparency and fairness.
In most jurisdictions the requirements for unsolicited proposals are much more stringent compared to other procurement methods. States would generally consider such bids if they are innovative, have a clear business case and the proponent can prove that the project is feasible.
In addition, an unsolicited proposal will usually have to satisfy the below criteria:
- the product or service is unique; and
- the product or service must be exceptionally beneficial to, or have a cost advantage for the state; or
- the service provider must be the sole provider for the product or service required by the state; or
- the need for the service or product is urgent or there is an emergency (this would usually mean that an event has occurred where there is a need for the goods, services or works, it would be impracticable to use other methods of procurement, and the circumstances that give rise to this event were not foreseeable or due to the fault of the procuring entity).
Notwithstanding the above, governments may still require that the proponent prepare bid documentation to be tested in the market to ensure that there is no other service provider or entity that is able to provide the product or service, essentially to try to ensure that the procurement principles are maintained.
1 Alexandra Felekis and Mzukisi Kota are partners, Tina Terblanche is a senior associate, Nonkululeko Nojoko is a trainee attorney, and Ntokozo Qwabe is a candidate attorney at Webber Wentzel.
2 The Equator Principles (EPs) are a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and are primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. The EPs apply globally, to all industry sectors and have been adopted by 96 financial institutions in 37 countries, covering the majority of international project finance debt within developed and emerging markets.