Negotiating the Deal for Governance Closure

Technical Notes

Nov 24, 2009 — Neil Boyle

The missing ingredients in PPP projects are the following: (i) pricing out of unrelieved contract hazards; (ii)agreements that signal confidence and continuity intentions of the parties; (iii) agreement and protocol to cost share unanticipated risks; and (iv) investments by government in transaction-specific assets at the forward stage to signal: (a) more favorable demand projections, and (b) biltateral trading conditions with the winning bidder.

Negotiating the deal is divided into separate negotiations: the first is financial closure; the second is governance closure; and they are implemented in that order. Division is justified for two reasons: first, each negotiation involves the application of a special body of knowledge by specialized personnel; and second, each negotiation requires credibly committed agreements to be reached with several and generally different administrative and autonomous government units located throughout various government departments and sectors.

Negotiations generally start after a properly conducted international competitive bidding (ICB) procurement process wherein government issues a request for proposal (RFP) for a build-operate-transfer/public private partnership (BOT/PPP) investment. Bid prices for RFPs include total cost estimates with appropriate terms and conditions for land, and on- and off-site infrastructure for a newly built, commissioned and operationally-ready facility. ICB procurement ideally involves prequalified bidders bidding to the same specifications against pre-specified quantitative evaluation criteria. These bids are then evaluated by pre-selected and trained evaluation committees. After bid evaluation, government selects the three top-ranked bidders based on technical responsiveness. To determine final award, these three short-listed bidders will be required to undergo training in the methods and procedures of governance closure.

Negotiations for financial closure needs no explanation as its purpose and effect remain unchanged from what it has always been. Negotiations for governance closure, however, include four other dimensions aimed at reducing the price of financial closure:

  1. pricing out the unrelieved contract hazards;
  2. attaining credibly committed agreements that signal confidence and continuity intentions;
  3. agreeing to terms and conditions for cost sharing unanticipated risks/hazards; and
  4. agreeing to terms and conditions for bilateral governance, that is, bilateral trading on the basis of mutuality of interests, including the addressing of expropriation hazards of equity.

At the completion of training, the technically top ranked bidder is asked to open his financial bid for review and to negotiate on the basis of the new information provided at training.  If the financial bid is within the range previously set and reported in the RFP, the top ranked bidder is awarded the contract.  If the financial bid is beyond the range previously set, Government moves on to the second highest technically ranked bidder and repeats the process until the right match is found.  

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