or Concession Contract
Appendix 10.1 General
1. Both the Guidelines for the selection of consult-ants and the Guidelines for the procurement of goods and works include policy provisions stating that under certain circumstances, firms partici-pating in upstream phases of a project are prohib-ited from supplying subsequent services, goods, or works under the same project (para. 1.9 [a] of the Consultant Guidelines and para. 1.8 [b] of the Procurement Guidelines). A similar provision is included in the Standard Forms of Contract. The intention of the provisions is (i) to promote transparency, (ii) to protect the interests of the Bank’s Borrowers, and (iii) to maintain a level playing field for all other bidders. The particular fiduciary challenge for the Bank is how to balance these safeguards against the development needs and economic constraints of Borrowers wanting to privatize utilities.
2. As indicated above, Borrowers have shown a pref-erence for privatizing utilities in stages and in concert with evolving economic, political, and social circumstances or the condition of the utility company (or both). For example, a three- to five-year MC may be initially the only feasible approach to private sector involvement or for an extremely run-down utility with a negligible rev-enue base in a very poor or high-risk country; it would be expected that following improvements in the management of the utility under this initial MC and availability of evolving data from this initial phase, a lease or concession contract may later on be given more-favorable consideration by decision makers and the public. A similar but less frequent scenario could involve the transi-tion from an MC awarded in response to an emergency situation to a new MC to be bid competitively.
3. Inflexible enforcement of the COI provisions would result in a blanket exclusion of all MC incumbents from subsequent lease or concession contracts. This decision would be unacceptable to many Borrowers, because it would severely limit the interest of the best potential candidate firms to take part in bidding for the short-term MC contract and thereby sacrifice future chances to bid on the long-term lease or concession contract.
Consequently, the field of competitors would shrink, contrary to the general objective of all Bank-financed procurement to maximize com-petition. The result would create a critical disad-vantage for Borrowers and development work in general. Furthermore, in cases where the initial MC was not Bank-financed, there may be no equivalent COI provision in that contract barring the incumbent from bidding on a subsequent contract. It would be difficult for the Bank to insist that this bidder be denied the right to com-pete for the lease or concession contract involving Bank financing because it was not subject to such constraints when it accepted the MC. Hence, a more reasonable course of action would be to grant a waiver of the normal COI provision in the Guidelines by giving the Bank’s “no objection” to the participation of an MC incumbent in bidding on a subsequent lease or concession contract.
The prerequisites for this waiver should include, among others, a prudent analysis of local circum-stances, a strategy for neutralizing the incum-bent’s acquired competitive advantages through full disclosure of information on utility opera-tions to all bidders, and safeguards for maintain-ing a level playmaintain-ing field in the biddmaintain-ing process.
GUIDANCE NOTES 159
Appendix 10
Appendix 10.2 Conflict of Interest Provision in Bank Guidelines
and Level Playing Field
1. Early planning is critical to an orderly process and to timely processing of procurement. It should be part of project preparation. Along with procure-ment planning, the availability and interest of potential bidders should be investigated by the Borrower, with guidance from the Bank, to the point of proactively canvassing the “market.”
Under certain circumstances, this investigation of the market may have to look closely at market dominance by a particular firm. A firm that is already active in a utility operation in one part of the country may have significant advantages in local knowledge and contacts and the ability to accept financial risks in another part of the coun-try, even without involvement in the initial MC contract. If a particular firm is clearly dominant in the existing utility systems market of a country and already holds a controlling share of it, the Borrower’s ability to obtain competitive pricing and favorable contract terms will be significantly compromised. In these cases, specific limits on the incumbent’s future participation should be considered from the start and articulated in the prequalification and bidding documents. Bank project teams should emphasize to Borrowers the importance of early consideration of longer-term options for the privatization process and the
transaction costs involved. If a country’s circum-stances permit it, choices such as the privatization of operations (leases) or the privatization of oper-ations and sale of assets (concessions) or partial/
progressive private sector participation (technical assistance, management, or operations contracts and so forth) should be decided in favor of the longest possible term. While MCs are a “low-powered” form of private sector participation, they usually place no private equity at risk and cover a relatively short duration, which is not conducive to aligning the incentives of the op-erator with the long-term health of the utility.
Certain questions typically arise in this context:
•
Can the incumbent’s performance under the MC have a negative impact on the value of the subsequent concession contract or the assets to the detriment of the Borrower?•
Can this risk be mitigated?•
Will the participation of a firm with dominant market share effectively preclude competition unless other bidders can be convinced that the playing field is indeed level?•
What additional measures should be taken in this case?160 GUIDANCE NOTES
Appendix 10
Appendix 10.3 Early Strategy Formulation Is Critical
1. A key aspect of the privatization strategy should focus on practical ways and means to neutralize the acquired competitive advantage of the MC incumbent as an antidote to the reluctance of other prospective bidders to take part in the com-petitive bidding process. From the start, the initial MC should include provisions to eliminate the information asymmetry for the subsequent contract. All competitors for the second-phase contract should have equal access to all relevant data and other information that are necessary to prepare a responsive technical and financial bid.
Although it may be impossible to be absolutely certain that the incumbent does not have more-intimate knowledge of the utility and its organization—particularly with regard to conditions and performance of the system—
than other bidders, the first-phase contract should contain provisions requiring the incum-bent to reveal all critical parameters of the opera-tion in periodic reports and to have them audited by an independent auditor. There should be an explicit understanding that these reports will eventually be shared with other bidders when the second-phase contract is bid. Typical provisions in the first-phase contract should include the following:
(a) Reports from the incumbents identifying key data on system condition, outages, losses, repair history, consumer census, financial reports, assets, warranties, remaining life cycle, hydraulic models, maintenance man-agement systems, health and safety require-ments, GIS, and so forth
(b) Inspection and verification of these reports by independent engineers before they are made available in the data room, which is open to bidders during the bid preparation period for the second-phase contract
(c) Absolute prohibition against any participation of the incumbent in the modeling of the future structure or restructuring of the utility past the initial phase covered by its contract, or in preparing bidding documents for the second-phase contract
(d) Obligation to allow competitors unencum-bered access to the utility facilities during the bid preparation period for the second-phase contract to observe its operations
It is anticipated that these provisions will ulti-mately be formalized in standard bidding docu-ments for MCs, to be made available to all Regions.
2. For new projects, a detailed description of the pri-vatization and its integral procurement strategy should be included in the Project Appraisal Document (PAD), giving full details of the con-tracting approach, the safeguard provisions to be included in the bidding documents, and how the other prerequisites mentioned in this Guidance Note would be addressed. If these issues arise dur-ing the implementation of existdur-ing projects, a detailed description of the proposed approach, with references to this Guidance Note, should be sent to the Regional Procurement Manager (RPM) for clearance. The RPM will decide, in consultation with LEGPR, whether (a) the pro-posed arrangements meet the requirements of the Loan or Credit Agreement; (b) a waiver of the COI provisions in the Guidelines should be granted, in accordance with this Guidance Note;
and (c) the regional vice president (RVP) and the executive director (ED) need to be informed of any resulting changes. Cases that require further consultations (for example, if certain prerequi-sites have not been fully met) will be referred to the Operational Procurement Review Committee (OPRC) for review and final determination.
GUIDANCE NOTES 161
Appendix 10
Appendix 10.4 Dealing with the Selection of the Operator
or Manager under the MC
Contents
Appendix 11.1 Statement of Integrity 164 A P P E N D I X