PROCUREMENT OF MANAGEMENT CONTRACTS and LEASES for OPERATION of UTILITIES – ECA EXPERIENCE (*).
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Preamble:This is a slightly more readable version of the “Power Point” slide presentation made by Salim Benouniche (**) at the Workshop on “ Management Contracts and PPPs” organized by Procurement Group in World Bank Fiduciary Forum 2008, National Conference Center, (Lansdowne Va).
(*) ECA:Europe and Central Asia Region
(**) Procurement specialist, Infrastructure & Energy , ECSPS
After a short description of the common scheme, world wide, the specific situation of utilities in ECA Region will be detailed, in terms of main difficulties, risks, issues, followed by mitigation measures in design and procurement:
I.2 A COMMON SCHEME, Bank-wide
To rehabilitate plants and networks, which are often in a poor initial condition, then operate and maintain them,
it is necessary:
to determine first as clearly as possible the BASELINE DATA.
Then to OPERATE for a few years to reorganize the utility and measure the real parameters: this is usually the purpose of partnerships with a private operator:
I.3 Specific ECA SITUATION:
THE MAIN DIFFICULTIES in ECA COUNTRIES:
In Yerevan, at start only 7% of the domestic consumers paid user fees. In some cases, the Bank waived part of its rules to finance operating costs at start.
companies are important to improve collection and billing revenues first, and performance later.
The Cycle of Underperformance (after Shugart)
Failure to pay
A “Guidance Note on Strategy” was issued to address the case where the first Management Contract incumbent competes for a subsequent Contract, Lease or Concession:
(see website: at the end of the “Consulting Services Manual”)
JOINT VENTURE ISSUES:
The Operator is in most cases a new locally incorporated company created after the award, its shareholders are usually the prequalified applicant Joint Venture Partners:
“GRAND PARENT” Holdings
॥_______ _______॥_ _ _ _ _ + _ _ _ _
I I I
Parent 1 (Oper.) Parent 2 (Tech.) Parent 3 (Local or Bank)
I______________I _ _ _ _ __ _ _ _I
New Locally Incorporated Subsidiary = PARTY to the CONTRACT
A PARENT/SHAREHOLDER COMPANY GUARANTEE, WHY?
To be pre-qualified, JOINT VENTURES often refer to financial capacity figures or technical expertise of the “Grand Parent(s).” T OPRC has ruled in 2002 on such a case that “Grand Parent Company (ies)” should, alternatively,
either ‘CO-SIGN” (i.e. be party to) the Contract (or put more Equity)
or provide aPARENT COMPANY GUARANTEE,
together with a letter of agreement stating the commitment to provide the Operator with Technical expertise and support.
This Guarantee comes in ADDITION to the PERFORMANCE SECURITY. It is similar in form: UNCONDITIONAL, payable UPON FIRST DEMAND.
EXTRACTS from ARMENIA II Management Contract RFP:
RFP 4.5.5. If the individual company or any of the Consortium partners constituting the Successful Bidder have submitted data, credentials, or any other information in their Technical Proposal Part VII (Information Forms of Annex E to this RFP) that are those of a parent company, the Company Management Board may, in its sole discretion, also require the relevant parent company or companies to be party to the contract. by co-signing the contract, or if it is not willing to co-sign the Contract, to provide an additional guarantee of the same kind as that mentioned in RFP section 4.5.4., for an amount calculated on the basis of six month of Management Fixed Fee.
(The Guarantee mentioned in RFP 4.5.4 is the Performance Guarantee)
WHAT IS THE RISK COVERED?
This guarantee is needed:
THE OTHER GUARANTEES:
. HOW IS THE AMOUNT CALCULATED?
In case of Bankruptcy, or Termination of the Contract due to Operator’s Default, the Grantor often needs 6 months or more to award a New Operator Contract following a competitive procedure. During this period, the services to end-users must be ensured at an acceptable level of performance, and this is financed by the total amount of the two (cumulative) Guarantee and Security:
Parent Guarantee + Performance Security >= 6 months of Operating Expenses
(see conflict of interest/level playing field guidance note)
(= 6 months of operator’s cost) – [see Clause slide]
[Georgia + 2 recent examples: ALBANIA 4 and ARMENIA 2 (MWWPP “out of Yerevan”)]
Note: 70% may be a redundant use of quality criterion with the first stage pass/fail requirement of 75 points in technical quality score, and may lead to a very high price
(example: Breakdown on six years Armenia 2 RFP: 23%, 21%, 14%, 14%, 14%, 14%, and on 4 years: 32%, 29%, 20%, 19%)