Competition is still required

Contrary to what the name might suggest, an organ of state may only contract with a proponent submitting an USP if the stipulated constitutional principles of fairness, equitability, transparency, competitiveness, and cost-effectiveness are met. That is to say, that USPs must still be subjected to a competitive process before being accepted. This is not only good practice, as it prevents corruption and collusion, but also seeks to achieve cost-effectiveness for government.

Once a proponent submits its USP, the relevant department may evaluate the USP and decide on whether to accept the USP and register the development of the USP with the relevant treasury. For a USP to qualify it must be innovative and pursue a project in a strategic sectors or objectives related to an institutional function.

The following steps must be followed to procure the unsolicited PPP:

• Registration of the proposed USP PPP project with the relevant treasury and obtain written approval.
• The proponent must pay a review fee to enable the department to comply with its responsibilities in the development of the feasibility study for the proposed PPP project.
• Prepare the feasibility study and obtain Treasury Approval I as per Treasury Regulation.
• Procurement of the proposed PPP project as per Treasury Regulation.

The proponent prepares the feasibility study

Different jurisdictions have different preferences as to who drives the preparation of the feasibility study after a department receives a USP. In South Africa, like in many other emerging markets, due to limited capacity in project preparation, the responsibility to prepare the feasibility study lies with the proponent of the USP. 

The proponent to pay a review fee

While the proponent must develop the feasibility study at its cost, the receiving department also has a role to play in the feasibility study and may appoint a transaction adviser to assist in the development of the feasibility study. The regulations require the proponent to pay a review fee to the department to enable it to fulfil its responsibilities in the development of the feasibility study, include paying for the department’s transaction adviser’s services.

The review fee prevents a scope and analysis that is biased towards the proponent. Furthermore, a review fee can discourage private sector from submitting poor-quality or opportunistic proposals and prevent scarce public resources to be wasted on frivolous  proposals.

The incentives to submit a USP

Given that the project will still be competitively tendered (and the proponent might lose the tender) and the proponent must pay for the development of a feasibility study as well as a review fee, the question that will arise is: What is the incentive for the proponent to submit a USP?

The incentive under the draft regulations is that firstly the proponent will automatically be prequalified, should the procurement process follow a two-stage qualification (RFQ) and proposal (RFP) process, and secondly should the proponent lose the tender during the proposal phase, it will be compensated for the development costs, usually measured in the costs of preparing the feasibility study.  

Automatic prequalification

Regarding the first incentive of being automatically prequalified, it might not be good practice to give a proponent automatic prequalification at RFQ stage. As a matter of principle, all bidders that are prequalified to proceed to the RFP phase should be qualified on their own merit, in other words they should have the financial and technical means to implement the project, irrespective of whether they are the proponent or not. Passing a proponent who might not have the necessary qualifications phase could lead to delays or poor project delivery. A possible refinement of this incentive is to still require that the proponent meet the minimum qualifications and in cases where there are more prequalified bidders than the ideal number to ensure competition, then the proponent will be automatically included in that shorter list.

Compensation for development cost

While it is a small consolation for the proponent, it will be compensated for the development cost which is usually measured as the cost of preparing a feasibility study. It is noted though that there are conditions to this compensation. The first condition is that the proponent’s proposal must be a compliant bid and secondly, the project has to reach financial close, whereupon, presumable, the development cost can be recovered from the winning bidder.

Other mechanisms not used

For purposes of comparison, we also list some of the incentives that other jurisdictions have deployed. The first is the right-to-match (also known as the Swiss Challenge). Should the proponent not win in the RFP phase, it has the right to match the winning bidder’s price. This incentive has been criticised and is used less these days as it discourages other bidders from submitting bids if they think that the proponent will be allowed to match their bid.

Another incentive is a bonus point mechanism whereby the proponent is given additional bonus points during evaluation for coming up with the concept.

Only applicable to national and provincial departments

It is noted that the draft regulation, as with the previous regulations on PPPs (Treasury Regulations 16), is only applicable to national and provincial departments and does not apply to Schedule 2 entities such as Eskom and Transnet.

Project must still follow the PPP regulation

While the project is not generated by the traditional means (initiated by a department), it should be noted that the project still needs to follow the PPP process starting with the registration with National Treasury. Subsequent to this, NT approval on the feasibility study will also be required and a form of NT involvement in the subsequent steps, be it a NT approval or merely NT ‘views and recommendations’.