From Preferred Bidder to Financial Close

1. From Preferred Bidder to Financial Close Iain Menzies The World Bank St. Petersburg - 24 May 2008

2. Negotiation Bidding Bid Evaluation Market Sounding Notify + Prequals. Bidder Selection Process “ The Bidder Selection Process involves 5 key steps, and a clear Bid Management Structure needs to be established to implement these”

3. No Negotiation Negotiation Bidding Bid Evaluation Market Sounding Notify + Prequals. 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: • 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:

4. No Negotiation Negotiate Preferred Bid Negotiation Bidding Or.. Bid Evaluation Market Sounding Notify + Prequals. 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: • 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

5. No Negotiation Negotiate Preferred Bid Negotiation Bidding Or.. Competitive Negotiation Or.. Bid Evaluation Market Sounding Notify + Prequals. 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: • 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

6. No Negotiation Negotiate Preferred Bid Negotiation Bidding Or.. Competitive Negotiation Or.. Notify + Prequals. Market Sounding Bid Evaluation Additional Bid Round Or.. 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: • 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 non-price bid conditions

7. Negotiation Bidding Bid Evaluation Market Sounding Notify + Prequals. Negotiation Process • 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

8. Negotiation Bidding Bid Evaluation Market Sounding Notify + Prequals. Negotiation Process 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

9. Negotiation Bidding Bid Evaluation Market Sounding Notify + Prequals. Be Prepared – the Bidder will be! 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

10. 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.

11. 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

12. Financial Close – Project Documentation Many project documents to be concluded to reach financial close: Shareholders Granting Authority Lenders / Bondholders Shareholder’s Agreement PPP Agreement Operator Project Company Services Purchaser End-users Operation & Maintenance Agreement (O&M) Purchase Agreement (e.g., power purchase agreement) Supply Agreement (e.g., gas supply agreement) Construction Contracts Construction Contractor Raw Material Supplier

13. 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

14. 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

15. 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

16. 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

17. 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)

18. From preferred bidder selection to financial close THANK YOU !!! Iain Menzies The World Bank Imenzies@worldbank.org