The stages of a PPP – How things are supposed to flow
This outline is based on UK guidance documents for its Private Finance Initiative (PFI) programme. The experiences outlined on this website show that not all stages have been carried out in some PPPs, resulting in a high likelihood that the public authorities have failed to achieve good value for money.
The need for investments in a certain service sector needs to be critically assessed by the public authority to identify where improvements are needed and what project investments this will entail.
Outline Business Case
A ‘business plan’ needs to be prepared on behalf of the public authority, in which the project and procurement options are decided on. This should include assessments of:
- The affordability of the project.
- Which option offers best value for money: a ‘reference project’ is developed, which is the PPP option against which the future bids should be evaluated, and this should be compared with a publicly-financed variant of the project, called the Public Sector Comparator, to see whether a PPP option or public option offers better value for money.
- What outputs are needed from the project.
- Which risks are involved in the project and which party should bear them.
- The timeline for the implementation.
- Whether there is likely to be sufficient interest from private companies in the project and whether there are a sufficient number of private companies with the relevant skills to ensure that real competition takes place.
- Service requirements and standards.
- The payment mechanism that would be appropriate.
- Proposals for the monitoring of the project.
Publication of tender notice
After the tender notice has been published, an information pack about the project and pre-qualification questionnaire may be distributed to companies that respond. The questionnaire is aimed at establishing whether the company has the technical and financial capacity to deliver the project.
Pre-qualification of bidders
From the pre-qualification questionnaire, a list of the pre-qualified bidders is made, with an explanation of the reasoning behind the decisions.
Shortlisting of bidders
If there are still several pre-qualified bidders, further shortlisting may take place aimed at identifying which bidders are most suitable to undertake the project.
Issue of Invitation to Tender/Negotiate (ITN) and receipt of bids
The shortlisted bidders are sent the ITN, which is a more developed version of the information pack, including the output specification, payment mechanism (including performance standards) and model contract.
Evaluation of bids and best and final offers
After the bids submitted in response to the ITN, two bidders may be invited to submit a Best and Final Offer, or this stage may be omitted if the ITN bids allow the choice of a preferred bidder.
Approval of Final Business Case and preferred bidder
The preferred bidder is appointed, preferably along with a reserve bidder in case agreement cannot be reached with the preferred bidder. When the terms of the contract are more or less clear, a Final Business Case is prepared for approval by the relevant decision-makers.
Negotiations and contract award
The negotiations with the preferred bidder are not supposed to result in major changes to the project, yet in a number of cases this has happened, since the negotiations essentially take place under monopoly conditions. The signing of the contract is known as the commercial close of the project, and should happen as close as possible to the financial close, the stage at which financing contracts are signed.
Payments to the company implementing the project typically begin after the construction phase has ended and the infrastructure is ready to use. The PPP may take the form of a concession, in which the project company is entitled to charge users directly for the duration of the contract (e.g. for a highway, where the company collects tolls directly from users) or a unitary fee, in which the public authority pays the project company an amount defined in the contract (e.g. for hospitals). The unitary fee may be fixed, as for schools and hospitals, or may depend on the number of users of the infrastructure (e.g. shadow tolls for highways).