introduction to construction procurement process...

INTRODUCTION TO CONSTRUCTION

PROCUREMENT PROCESS

Date : 06 November 2017

PM. Ir. Abdul Ghapar bin Ahmad

Universiti Malaysia Perlis (UniMAP)Department of Enviremontal Engineering

CONTENT

1. Construction Procurement

2. Framework of Construction Procurement Process

Procument System Used In Malaysia

Construction

Procument is comes from the word of procure which is mean “to

bring about” and “to Acquire”.

Method is abaout “organized method, techniqe, process or

procedure.

(Rosli Abdul Rashid 2006)

Procument method is an overall management structure and specific

management paractices used in the project such as house, office

building, road, bridge etc

CONSTRUCTION PROCUREMENT

SIMPLE THEORY:

Procurement- the process of obtaining goods and services

from another for some consideration

For this lecture, the term ‘Procurement’ is used in the

context of construction & refers to the processes of

acquiring construction project.


Procurement Triangle:

Cost Time

Quality

Cost

Quality

TimeCost

Quality

Time

Time

Where early completion is required

Time is Dominant

Time is money

Cost

Where Development Cost required

Quality

Where ultimate quality is required

Triangle Of TQC

The relative importanceof each objective must be given careful

consideration because decisions throughout the project will be based on

the balance between These objectives.

Cost Time

Quality


Definition:

A strategy to satisfy client’s development and/or operational needs

with respect to the provision of constructed facilities for a discrete

life cycle.

-making the contract (type of contract, conditions, terms)

-selecting the contractor

-establishing the contract price

-economic considerations (Labour, materials, plants, capital)

OVERVIEW OF TYPE OF CONTRACTS

BASED ON

PRICING/PAYMENT

BASED ON METHOD OF

PROCUREMENT

FIXED

PRICE

TYPE

COST

REIMBURSEMENT

TYPE

HYBRID

TYPEBUILD.

OPERATE &

TRANSFER

CONTRACT

MANAGEMENT

CONTRACT

PACKAGE

DEAL/TURNKEY/F

AST

PARTNERING

TYPE

TRADITIONAL

GENERAL

CONTRACT

‘Value’

Cost

Contract

‘Target’

Cost

Contract

Cost Plus

Percentage

Fee

Cost Plus

Fluctuation

Fee

Cost Plus

Fixed Fee

Based on

Approximate

BQ; or Such of

Rate

With BQ;

With

Drawing

& Specs

Measure

& Value

Contracts

Lump

Sum

aAPPROVAL DESIGNPROCUMENT

(MATERIAL/

LABOUR)

TECHONOLOGY

TRANSFER

aMAINTENANCECONSTRUCTION aEQUIPT/

FIT-OUT

TURNKEY CONTRACT

DESIGN AND TURNKEY CONTRACT

TRADITIONAL COTRACCT

ACTIVITIES OF CONTRACTOR

Conventional /Traditional Method

Familiarity among contractor and consultants-the roles and

responsibilities are well understood

The obligations under the contract conventional design, preparation of

tender documents, appointment of consultants, financial resources under the

responsibility of the employer. The contractor is carrying out construction

work only

Sequence of conventional contract activity in general is as follows:

1. The employer can appoint professional consultants to design, conduct

cost and estimated costs based on the requirements of the employer.

2. After the completion of the design process to the details, the tender

documents will be provided to the calling of tenders, acceptance of

tenders, evaluation of tenders and propose successful tenderer

3 The process of preparing the contract was entered into, the selected

contractor will have a site and perform the obligations under the contract

4. contractor obligations are met and the project was completed, it was

submitted to the employer

5. Contract expires when all defects repaired and final payment account is

closed

Conventional /Traditional Method

OVERVIEW OF CONTRACT

1. Based on Pricing/Payment

Lump Sum contract With BQ & Dwg & Spec

Bill of Quantities –Measure & Value contract(Provisional)

Cost plus Fixed/Fluaction/Percentage FeeLump Sum contract

2. Based on Method of Procument

Traditional General contract

Turnkey/Fast

Build operate & Transfer

Partnering Type (Private Finance Iniation)

Management Contract

BASE ON PRICING/PAYMENT

Lump Sum Contract

Contractor will implement the work based on the drawing contract and

specification at fixed price.

The risk on the contractor, due to the cost estimate by the

drawing/specification, without the BOQ.

The tender price is fix, unless the scope of work change, or variation of

material cost.

The price in the tender form is fix, but the price in the tender summary

should be discuss and both party agree as a original cost price.

Estimation of variation is base on the price list or schedule rates in the

contract.

Suitable for small project or standard building work. If the drawing/spec is

ready, work will be faster/easier.

Problem: administration of the contract, not all the scope of work appear

in the contract. 11/21/2017

13

Lump Sum Contract

LS Contract is a fixed, firm price contract based on drawings,

details and spesification – not subject to remeasurement and

additional cost involved(VO).

form of contract PWD 203(Rev10/83) without Quantities-

Drawing and specification is a part of contracts.

The employer must pay the full amount of the contract and not

have to re-measurement


Lump Sum Contract

Content Articeles Of agreement

condition of contract and appendix

Special conditions to the Condition of contract

Form of Tender PWD203 rev 10/83

Letter of Acceptance

Drawings and Specification

Summary of tender

Schedule of Rates

Others Documentions.

Bill Of Quantities Contract

Bill of quantities is part of the contract, so it easier plus the contractor will

facing high risk of offer in term the cost of project.

Quantity of works is measure again after the completion of work. The

payment is based on quantities and rates.

Estimation of variation is based on the prices rated in the BOQ.

The rate of cost in BOQ need to be revised and mutually agreed to

represent the original price. However, the offering price is fixed.

Suitable for the project with precisely estimated.

Usually, this type of project doesn’t give any issues in terms the contract

administrative when compare to Lump Sum Contract, scope of work and

price rate is in details.

Details of contract is prepared by The Dep. of Work (JKR) based on the

proposed plan.

11/21/2017

16


Bill of Quantities contract

The employer must pay a fee based on the quantity that has

been priced at tender stage and it should be part of the contract

documents provided for in the contract

Form of contract JKR 203A(Rev 10/83) BQ is a part of contract

subject to measurement.

PAM 98(With Quantities)

Combination of two types :

fixed quantity(Firm)

Provisional quantities.


Bill of Quantities Contract

Fixed quantity(Firm)

Fixed quantity is the quantity placed is fixed can not be

changed unless there is a change of work is allowed. No re-

measurement performed on quantitative specified in the

contract

Provisional quantities

The quantity specified in the temporary /provisional

subject to measurement based on quantities on site


Bill of Quantities Contract

Content Articeles Of agreement

condition of contract and appendix

Special conditions to the Condition of contract

Form of Tender PWD203A rev 10/83

Letter of Acceptance

Drawings and Specification

Bill of Quantities

Summary of tender

Schedule of Rates

Other Documentations

Cost Plus Fee

Here in, contractor receives payment on the labor/manpower cost, materials,

tools, machines use in the project, plus profit payment and overhead. Therefore,

the contractor will not face -issues on the risk of manpower cost, and fluctuation

of materials prices.

Two types of cost plus contract:

Cost plus contract with fixed fees or fixed percentage

Original cost of construction is paid to the contractor with percentage of fees or

fixed fees agreed.

Disadvantage – contractor cant have any initiatives to reduce the project cost, and

increase the profit margin

Target cost with variable fees

The target cost is agreed by both contractor/developer based on BQ. After

completion of work, fees is paid based on the targeted cost

Bonus is paid to the contractor if there is saving in the cost project, but if there is

surplus on the targeted cost, penalties will be imposed.

Suitable to the complicated project, when the magnitude project is unknown at

certain time constrain.11/21/2017

20


Turnkey (Design and Build)A method of implementing a project whereby the design, build and supervision

activities are under the obligation of the contractor

BASE ON METHOD OF PROCUMENT

Design And Contract

The selected contractor will provide design and design agreed.

Including the cost of design and construction costs. it also means

that the contractor is responsible for the design and construction of

all work as specified in the contract

Standard Form of design and Build contract

PWD form DB (Rev 1/2010)

Main activities in design and build contracts are as

follows:uction

design

Procument material/labour

construction

maintenance


Turnkey Contract

A method of implementing a project whereby the design, build and supervision,

equip, and maintain activities are under the obligation of the contractor

Turnkey contract means a contract that is involved in providing the overall

resources required in the contract in terms of finance, design, build and

set up all the equipment. The appointment of the design team under this

contract is the responsibility of the contractor, but must be with the

consent of the employer

The main activities as follows:

1. Project funding

2. Approval processing

3. Design process

4. Procument material/labour

5. Construction process

6. Maintenance

7. Techonology transfer

8. Fittings (fit-out)


Turnkey contract

A type of project that is constructed so that it could be sold to any buyer as a

completed product. This is contrasted with build to order, where the constructor

builds an item to the buyer's exact specifications, or when an incomplete product is

sold with the assumption that the buyer would complete it.

The main contractor will be given responsibility to design, purchase the materials,

construct, commission the facility based on the agreed prices. The main con. also

conduct the monitoring works.

Example: Many government-owned public housing projects are turnkey projects. A

private developer undertakes all activities necessary to producing the project,

including land purchases, permits , plans, and construction, and sells the project to

the housing authority.

Developer (owner) only grant the needs of statement and the will propose the

overall project.

11/21/2017

24


http://en.wikipedia.org/wiki/Build_to_order

http://www.allbusiness.com/glossaries/permit/4955906-1.html

Design –Negotiate -Build

Similar to the Design-Bid-Build contract but only

ONE contractor involved in developing costs and

negotiating a contract to construct the project

Primary considerations are construction excellence

and time (project costs not subject to competitive

bidding process)

25


PRE-BID DOCUMENTS

CONTRACTUAL

REQUIREMENTS

TECHNICAL

REQUIREMENTS

-Instruction to tenderers

-Contractual & General

requirements

-Contract Conditions

-Appendices to Contract

Conditions

-Contracts Sum Analysis

-Addendums

-Special Conditions

-Form of Tender

-Scope of Works &

Description Technical

Requirements for :

i) Architectural Works

ii) Civil & Structural Works

iii) Electrical Works

iv) ICT Works

-Requirements for equipping

and furniture

-Specialised requirements of

the client

Details of

assumptions

made

Design

ProposalsFabrication/

Construction

Proposals

Contract

Administration

details

Details on

qualification

and details

Financial

Proposals

Miscellaneous

Matters

Alternative

Proposals

TYPICAL

CONTENTS OF

CONTRACTORS

PROPOSAL

PRINCIPAL PURPOSE OF CONTRACT SUM ANALYSIS

TO PERMIT

VALUATION OF

VARIATION/

CHANGES

TO ASIST

CONTRACTOR

IN ARRIVE THE

TENDER SUM

FOR

PREPARATION

& ASSESSMENT

OF INTERIM

PAYMENTS

FOR FINANCIAL

MONITORING-

CASH FLOW

FOR ASSESMENT

& COMPARISON

OF TENDERS

DURING TENDER

EVALUATION

FOR VALUATION

OF WORK

INCLUDED AS

PROVISIONAL

SUM IN

CONTRACT

CONTRACT SUM ANALYSIS

Design & Build

IMPROVED

WORKING

RELATIONSHIP

SPEED OF

PROCURUMENT

BETTER

BUILDABILITY

SINGLE POINT

RESPONSIBILTY SIMPLIFIED

CONTRACTUAL

ARRANGEMENT

PERMITS PRICE

CERTAINTY

PRODUCT FIT

FOR PURPOSE

DESIGN

BENEFITS

DESIGN AND

BUILD /

TURNKEY

CONTRACT -

ADVANTAGES

ADVANTAGE OF DESIGN AND BUILD / TURNKEY CONTRACTS

DISADVANTAGE OF DESIGN AND BUILD / TURNKEY CONTRACTS

DESIGN AND

BUILD /

TURNKEY

CONTRACT -

DISADVANTAGES

UNFAMILIAR TP

PRACTITIONERS

PROBLEMS

WITH DESIGN

LIABILITY

LITTLE

FLEXIBILITY TO

CHANGE DIFFICULT TO

EVALUATE

UNECONOMIC

USE OF

RESOURCES

EMPLOYER’S

REQUIREMENT

S MUST BE

PREPARED

CAREFULLY

HIGHER

PROFESSIONAL

FEES OUTPLAY

MINIMUM

EMPLOYER’S

INVOLVEMENT

Management Contract

Described –Method of organising project team and

Operating the Construction Process

Acts in aprofesional capacity, providing the

management expertise and buildability requirement

to the overheads and profits involved in return for a

fee.

Contractors does not directly employ and of labour

and plant except posibble item involved setting up of

the site and preleminary works

The Management contractor assumes full resposibillity

for control of the work site.

33


Management Contract

Contractural Relationship- client and Management contractor-

a collateral agreement.

Management Relationship-manage construction for a

management fee that comprises a percentage for profit and

fixed overheads.

- Consltant Prepare Design

- MC determines construction/Management method. This

method popular used in UK

Construction manager is employed by the owner to oversee

and administer the project (may or may not actually perform

any of the construction work)

34


Management Contract

Advantages

independent management function

Reduction in project durations and cost

Design team able to concentrate on design

No conflict of interest between design and production

Benefits time and good quality

Disadvantages

Additional management cost

Erosion of Architect’s power and resposibilities.

35


Build, operate, Transfer contract (BOT)

BOT as form of Design and Build contract , the contractor provides a

wide range of services as compared to the traditional role.

Scope of works : A private agrees to builld like. Highway north South

Power Plant or the plant for a fixed period of time at a peviously agredd

Development Projekct.

The company then collect toll or Operatesreed the plant for fixed period of

time at a previously agreed price.

When the entrepreneur earn back the investment, plus profit, the project

turned over to the government at no cost

The private firm makes a good return on its – a very good : return if the

project is completed early.

Advantages

Ability to achieve better design, beter buildability , involment and input

from contractor at an early completion.

In this form of fixed price and fixed programme arrangment, the

contractor bears the risk of design and build.


Public Private Partnership (PPP)

The Private Finance Initiatives (PFI) Programme was announced in the Ninth

Malaysia Plan in March 2006,

Aimed at facilitating greater participation of the private sector to improve the

delivery of infrastructure facilities and public service.

It sets out m any of the key principles on how some of the public sector

infrastructure projects will be procured and implemented.

PFI will be undertaken as part of the new modes of procurement under the Public

Private Partnerships (PPP) to further enhance private sector participation in

economic development.

The terms PPP and PFI have often been used inter changeably throughout the

world though there are subtle differences between them. However, for Malaysia,

the PFI principles as announced in the Ninth Malaysia Plan form a subset of the

umbrella PPP principles .


MALAYSIAPUBLIC PRIVATE PARTNERSHIP (PPP)GUIDELINEPublic-Private Partnership UnitPrime Minister DepartmentPUTRAJAYAPPPGuidelinesTABLE OF CONTENTSPage1.0INTRODUCTION32.0CONCEPTUAL FRAMEWORK2.1Principles in Adopting PPP Approach2.2Key Features/Characteristics2.3Differences Between PPP and Other Procurement Methods34453.0DEVELOPING A PPP PROJECT3.1Submission of PPP Proposals3.2General Criteria 3.3Structure of PPP Project3.4Roles and Responsibilities of the Private and Public Sectors in PPP667894.0PROCESS FLOW105.0ENQUIRIES11PPPGuidelinesScope and PurposeThis PPP Guideline does not aim at providing a detailed guide but set out to elucidate the key principles of Malaysia’s PPP programmeas embodied in the Malaysian Ninth Plan, and addresses some of the key attributes of anequitablePPP structure to serve as guidanceto interested parties intending to understand or participate in the PPP programmein Malaysia.This guidelinewill be revised from time to time depending on requirements as necessary. PPPGuidelines1.0INTRODUCTIONThe Private Finance Initiatives (PFI) Programme was announced in the Ninth Malaysia Plan in March 2006, aimed at facilitating greater participation of the private sector to improve the delivery of infrastructure facilities and public service. It sets out many of the key principles on how some of the public sector infrastructure projects will be procured and implemented. PFI will be undertaken as part of the new modes of procurementunder the Public Private Partnerships (PPP) to further enhance private sector participation in economic development.The terms PPP and PFI have often been used inter-changeably throughout the world though there are subtle differences between them. However, for Malaysia, the PFI principles as announced in the Ninth Malaysia Plan form a subset of the umbrella PPP principles. For consistency purpose, the general term PPP will be used throughout this document.2.0CONCEPTUAL FRAMEWORKPPPinvolves the transfer to the private sector the responsibility to finance and manage a package of capital investment and services including the construction, management, maintenance, refurbishmentand replacement of public sector assets such as buildings,infrastructure, equipment and other facilities, which creates a standalone business. In these PPPprojects, there is a contract for the private party to deliver public infrastructure-based services over a long period of time. The private party will raiseits own funds to finance the whole or part of the assets that will deliver the services based on agreed performances. The public sector, in turn, will compensatethe private party for these services. In some PPPprojects, part of the payments may flowfrom the public usersdirectly.Though ownership of assets plays a less important role in PPPs, nevertheless many of the modalities see a transfer of the assets to the public sector (revertible) as a matter of course. There are some PPPprojects where the assets are not transferred to the public sector at the end of the concession period. These usually relate to facilities or projects that have little value at the end of the period due to their technologicalobsolescence. PPPGuidelines2.1Principles in Adopting PPP ApproachA PPP proposal will only be considered if there is a needon the part of the Government for the project after taking into account the benefits/probity as a whole in terms of, inter-alia: i.socio-economic impactsii.value for money and cost savings to the Governmentiii.quick delivery of the project and service enhancementiv.increased level of accountability, efficiency and effectiveness2.2Key Features/CharacteristicsPPP is a public procurement model in which the value for money as shown in Box 1 is optimised through efficient allocation of risks, whole life service approach, private sector innovation and management skills as well as synergies from inter-linking the design, finance, construction and operations. Some of the key features/characteristics of PPP projects are as follows:i.Relationship between public and private sectors is based on partnership;ii.Public sector procures specified outputs or outcomes of a service for a concession period;iii.Private sector determines the required inputs to achieve the specified output and the private sector is given latitude to introduce innovation into their designs and development to reduce overall costs;iv.Paymentfor services is based on pre-determined standards and performance;v.Promotes ‘maintenance culture’ where the concessionaires will be responsible for the long term maintenanceof the assets throughout the operational tenure agreed upon;vi.Integrationof design, construction, finance, maintenance and operation –total package;vii.Transfer of assetsat the end of the concession period becomes an option to the Government;viii.Optimal sharing of riskswhereby risk is allocated to the party who isbest able to manage it; andPPPGuidelinesix.Whole Life Cycle Costing (‘WLCC’)whereby PPPprojects are usually awarded based on lowest total cost over the concession period compared to lowest construction costs under thetraditional procurement method-a paradigm shift in the form of procurement objectives.Box 1: Value for Money The main driver of the PPP Programme is Value for Money (VfM), defined as ‘the optimal combination of whole life cost and quality to meet the users’ requirements’. Generally, VfM is achieved through:risk transfer which allocates risks optimally between the public and private sectorslong term nature of contracts (which embodies whole life costing)the use of output specification which allows bidders to innovatecompetition that provides fair value of the projectperformance-based payment mechanism private sector management expertise and skills2.3Differences Between PPP and Other Procurement MethodsGenerally through the PPP approach, emphasis is given on delivery of services (output driven) and private sector innovation and skills in maintaining the assets/facilities throughout the concession period. Other main characteristics that differentiate PPP with other procurement methods are shown in Table 1.PPPGuidelinesTable 1:Differences Between Conventional, PPP and PrivatisationApproachConventionalPPPPrivatisationProcurements are funded directly via public budget.Funding via private financial resources without public sector’s explicit guarantee.Funding via private financial resources without implicit or explicit public sector guarantee.Immediate impact on public sector financial position.Impact on public budget spreads over the duration of the concession.No impact on the level of public sector expenditure.Risks are entirely borne by public sector.Risks are allocated to parties which can manage them most efficientlyRisks are entirely borne by the private sector.Extensive public sector involvement at all stages of project life.Public sector’s involvement is through enforcement of pre-agreed KPIs.Government acts as regulator.Relationship with private contractor is short term.Long duration of relationship with private contractors.Long duration of relationship with private contractors.Applicable for projects with high socio-economic returns and those justified on strategic considerations.Applicable for projects with commercial viability.Applicable for projects with high commercial viability.3.0DEVELOPING A PPP PROJECT3.1Submission of PPP ProposalsAll PPP proposals should be submitted directly to the relevant Ministries/agencies.The typical information required for submission of PPP proposals should include, inter alia, the justification for the proposal, business and financial plans, evidence of financial stability and capability, proposed payment mechanism and risk matrix. Elaboration on some of the information needed is shown in Box 2.PPPGuidelinesBox 2: Typical Information Required for PPP ProposalsAn executive summary of the submission An evidence of financial stability and statement of financial capability, including access to capital (debt and equity), and Letters of Support from potential lendersA statement of performance capability that includes an overview of overall experience, experience in similar projects, senior management expertise, expertise of those staff members who will work on the project, ability to obtain necessary resourcesand referencesResults of economic, financial and engineering feasibility studies, including SCBA (socio-economic cost benefit analysis)A business plan, including: partnership structure; duration of the proposed partnership; ownership (present and future); terms of payment; maintenance costs; reserves that need to be kept by the private partner; risk management, including that of force majeure; risk transfer from the government to the private sector partner;economic benefits to the government A financial plan, including: detailed cost schedule; financial structure; potential partner’s sources of funding; how improvements, upgrades and modifications will be financed; pro forma financial statements (include in the submission a softcopy of the financial models)The PPP modality options and the preferred option,concession period, risk analysis and allocation andfinancing scheme The proposed payment mechanism based on service-delivery output specifications and KPIs. For infrastructure or service delivery partnerships where public user fees will be a source of revenue, a detailed year-by-year description of future user fees and their justifications. Include results of public interest surveys, if any(Additional information requiredwill be available in the specific tender document of the project)3.2General CriteriaThe selection for PPP projects involves a ‘filtering process’whereby certain general criteria should be met as follows:Output specification can be clearly identified and quantifiedEconomic life of the asset or service should be at least 20 yearsProjects with technological obsolescence risk (technology used will be superseded in short term) will not be considered Project sponsor must be financially strongwith a paid up capital of the special purpose vehicle (SPV) to be at least 10% of the project valuePPPGuidelines3.3Structure of PPP ProjectStructuring a PPPproject involves bringing together relevant private sector parties with clearly defined tasks and risks of the project. The main parties would include:the SPV created specifically for the projectfinanciersconstruction contractorfacilities management operatorthe public sector (procuring authority)The typical PPP project structure as shown in Diagram 1 ensurescommitment from the relevant parties and also better control, management and supervisionof the project.MALAYSIAPUBLIC PRIVATE PARTNERSHIP (PPP)GUIDELINEPublic-Private Partnership UnitPrime Minister DepartmentPUTRAJAYAPPPGuidelinesTABLE OF CONTENTSPage1.0INTRODUCTION32.0CONCEPTUAL FRAMEWORK2.1Principles in Adopting PPP Approach2.2Key Features/Characteristics2.3Differences Between PPP and Other Procurement Methods34453.0DEVELOPING A PPP PROJECT3.1Submission of PPP Proposals3.2General Criteria 3.3Structure of PPP Project3.4Roles and Responsibilities of the Private and Public Sectors in PPP667894.0PROCESS FLOW105.0ENQUIRIES11PPPGuidelinesScope and PurposeThis PPP Guideline does not aim at providing a detailed guide but set out to elucidate the key principles of Malaysia’s PPP programmeas embodied in the Malaysian Ninth Plan, and addresses some of the key attributes of anequitablePPP structure to serve as guidanceto interested parties intending to understand or participate in the PPP programmein Malaysia.This guidelinewill be revised from time to time depending on requirements as necessary. PPPGuidelines1.0INTRODUCTIONThe Private Finance Initiatives (PFI) Programme was announced in the Ninth Malaysia Plan in March 2006, aimed at facilitating greater participation of the private sector to improve the delivery of infrastructure facilities and public service. It sets out many of the key principles on how some of the public sector infrastructure projects will be procured and implemented. PFI will be undertaken as part of the new modes of procurementunder the Public Private Partnerships (PPP) to further enhance private sector participation in economic development.The terms PPP and PFI have often been used inter-changeably throughout the world though there are subtle differences between them. However, for Malaysia, the PFI principles as announced in the Ninth Malaysia Plan form a subset of the umbrella PPP principles. For consistency purpose, the general term PPP will be used throughout this document.2.0CONCEPTUAL FRAMEWORKPPPinvolves the transfer to the private sector the responsibility to finance and manage a package of capital investment and services including the construction, management, maintenance, refurbishmentand replacement of public sector assets such as buildings,infrastructure, equipment and other facilities, which creates a standalone business. In these PPPprojects, there is a contract for the private party to deliver public infrastructure-based services over a long period of time. The private party will raiseits own funds to finance the whole or part of the assets that will deliver the services based on agreed performances. The public sector, in turn, will compensatethe private party for these services. In some PPPprojects, part of the payments may flowfrom the public usersdirectly.Though ownership of assets plays a less important role in PPPs, nevertheless many of the modalities see a transfer of the assets to the public sector (revertible) as a matter of course. There are some PPPprojects where the assets are not transferred to the public sector at the end of the concession period. These usually relate to facilities or projects that have little value at the end of the period due to their technologicalobsolescence. PPPGuidelines2.1Principles in Adopting PPP ApproachA PPP proposal will only be considered if there is a needon the part of the Government for the project after taking into account the benefits/probity as a whole in terms of, inter-alia: i.socio-economic impactsii.value for money and cost savings to the Governmentiii.quick delivery of the project and service enhancementiv.increased level of accountability, efficiency and effectiveness2.2Key Features/CharacteristicsPPP is a public procurement model in which the value for money as shown in Box 1 is optimised through efficient allocation of risks, whole life service approach, private sector innovation and management skills as well as synergies from inter-linking the design, finance, construction and operations. Some of the key features/characteristics of PPP projects are as follows:i.Relationship between public and private sectors is based on partnership;ii.Public sector procures specified outputs or outcomes of a service for a concession period;iii.Private sector determines the required inputs to achieve the specified output and the private sector is given latitude to introduce innovation into their designs and development to reduce overall costs;iv.Paymentfor services is based on pre-determined standards and performance;v.Promotes ‘maintenance culture’ where the concessionaires will be responsible for the long term maintenanceof the assets throughout the operational tenure agreed upon;vi.Integrationof design, construction, finance, maintenance and operation –total package;vii.Transfer of assetsat the end of the concession period becomes an option to the Government;viii.Optimal sharing of riskswhereby risk is allocated to the party who isbest able to manage it; andPPPGuidelinesix.Whole Life Cycle Costing (‘WLCC’)whereby PPPprojects are usually awarded based on lowest total cost over the concession period compared to lowest construction costs under thetraditional procurement method-a paradigm shift in the form of procurement objectives.Box 1: Value for Money The main driver of the PPP Programme is Value for Money (VfM), defined as ‘the optimal combination of whole life cost and quality to meet the users’ requirements’. Generally, VfM is achieved through:risk transfer which allocates risks optimally between the public and private sectorslong term nature of contracts (which embodies whole life costing)the use of output specification which allows bidders to innovatecompetition that provides fair value of the projectperformance-based payment mechanism private sector management expertise and skills2.3Differences Between PPP and Other Procurement MethodsGenerally through the PPP approach, emphasis is given on delivery of services (output driven) and private sector innovation and skills in maintaining the assets/facilities throughout the concession period. Other main characteristics that differentiate PPP with other procurement methods are shown in Table 1.PPPGuidelinesTable 1:Differences Between Conventional, PPP and PrivatisationApproachConventionalPPPPrivatisationProcurements are funded directly via public budget.Funding via private financial resources without public sector’s explicit guarantee.Funding via private financial resources without implicit or explicit public sector guarantee.Immediate impact on public sector financial position.Impact on public budget spreads over the duration of the concession.No impact on the level of public sector expenditure.Risks are entirely borne by public sector.Risks are allocated to parties which can manage them most efficientlyRisks are entirely borne by the private sector.Extensive public sector involvement at all stages of project life.Public sector’s involvement is through enforcement of pre-agreed KPIs.Government acts as regulator.Relationship with private contractor is short term.Long duration of relationship with private contractors.Long duration of relationship with private contractors.Applicable for projects with high socio-economic returns and those justified on strategic considerations.Applicable for projects with commercial viability.Applicable for projects with high commercial viability.3.0DEVELOPING A PPP PROJECT3.1Submission of PPP ProposalsAll PPP proposals should be submitted directly to the relevant Ministries/agencies.The typical information required for submission of PPP proposals should include, inter alia, the justification for the proposal, business and financial plans, evidence of financial stability and capability, proposed payment mechanism and risk matrix. Elaboration on some of the information needed is shown in Box 2.PPPGuidelinesBox 2: Typical Information Required for PPP ProposalsAn executive summary of the submission An evidence of financial stability and statement of financial capability, including access to capital (debt and equity), and Letters of Support from potential lendersA statement of performance capability that includes an overview of overall experience, experience in similar projects, senior management expertise, expertise of those staff members who will work on the project, ability to obtain necessary resourcesand referencesResults of economic, financial and engineering feasibility studies, including SCBA (socio-economic cost benefit analysis)A business plan, including: partnership structure; duration of the proposed partnership; ownership (present and future); terms of payment; maintenance costs; reserves that need to be kept by the private partner; risk management, including that of force majeure; risk transfer from the government to the private sector partner;economic benefits to the government A financial plan, including: detailed cost schedule; financial structure; potential partner’s sources of funding; how improvements, upgrades and modifications will be financed; pro forma financial statements (include in the submission a softcopy of the financial models)The PPP modality options and the preferred option,concession period, risk analysis and allocation andfinancing scheme The proposed payment mechanism based on service-delivery output specifications and KPIs. For infrastructure or service delivery partnerships where public user fees will be a source of revenue, a detailed year-by-year description of future user fees and their justifications. Include results of public interest surveys, if any(Additional information requiredwill be available in the specific tender document of the project)3.2General CriteriaThe selection for PPP projects involves a ‘filtering process’whereby certain general criteria should be met as follows:Output specification can be clearly identified and quantifiedEconomic life of the asset or service should be at least 20 yearsProjects with technological obsolescence risk (technology used will be superseded in short term) will not be considered Project sponsor must be financially strongwith a paid up capital of the special purpose vehicle (SPV) to be at least 10% of the project valuePPPGuidelines3.3Structure of PPP ProjectStructuring a PPPproject involves bringing together relevant private sector parties with clearly defined tasks and risks of the project. The main parties would include:the SPV created specifically for the projectfinanciersconstruction contractorfacilities management operatorthe public sector (procuring authority)The typical PPP project structure as shown in Diagram 1 ensurescommitment from the relevant parties and also better control, management and supervisionof the project.

Structure of PPP Project

Structuring a PPP project involves bringing together relevant private sector

parties with clearly defined tasks and risks of the project. The main parties

would include:

The SPV created specifically for the project

Financiers construction contractor

facilities management operator

the public sector (procuring authority)

The typical PPP project structure as shown in Diagram 1

Ensure scommitment from the relevant parties and also better control,

management and supervision of the project.


introduction to construction procurement process...

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