UNSOLICITED PROPOSALS: NEW CHAPTER IN PPPs

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Introduction

Unsolicited proposals have been on the top of PPP policy makers’ and practitioners’ agendas for the past 10 years. Even though no unified approach has been formed as to the acceptability and risks associated with such modality for implementation of PPP projects, many countries have found these very useful, while some consider these as a major risk incompatible with their policy rationale.

 

What are Unsolicited Proposals?

Government participation in infrastructure projects is typically structured through a public planning process in which the government initiates, develops, and procures the project. Unsolicited proposals (USPs) act as an alternative to the traditional project initiation method.  In the case of USPs, the private sector takes the role of identifying and developing a project without a direct request from the government to do so.  

International approaches to managing USPs vary widely. USPs have raised questions about transparency, governance, and lack of competition. Governments have sought best practices for:

  1. ensuring value for money from a USP project,
  2. appropriately evaluating and integrating USPs into infrastructure plans, and
  3. improving the policy environment for USPs, particularly concerning transparency and fairness.

There is no perfect one-size-fits-all USP policy. Governments introduce different levels of competition during a procurement procedure, starting from directly negotiating the contract to organizing a competitive tender with no advantage for the USP proponent. Another mechanism is to provide the USP proponent with an incentive (the right to match[1], or automatic shortlisting) to reward the initiative.

Furthermore, some governments strongly discourage USPs or do not allow them. These governments seek other ways to generate private-sector innovation, ranging from “idea competitions” at an early stage to output specifications and multi-stage procurement processes. Some governments allow USPs and either publicly develop the project or allow the USP proponent to develop specific studies. At the same time, the public agency maintains a strong supervisory role. Some other governments approve only innovative USPs that show unique public benefits and the exceptional ability of the USP proponent to deliver the project.

Governments’ motivations for allowing or encouraging USPs are typically based on perceptions that USPs will allow them to solve particular structural concerns. These concerns may cover the slow implementation of publicly initiated projects or address identified gaps in already developed projects such as lack of innovation. These are institutional motivations that may be formalized in USP frameworks or acknowledged by governments. The personal motivations of public officials and political-office holders also invariably impact the approach toward USPs. It essentially caters to vested interests but is often camouflaged as one of the above two motivations. To summarize, the key motivations for governments to consider USPs include:

  1. overcoming lack of public-sector capacity,
  2. harnessing private-sector innovation and creativity,
  3. enabling corruption and nepotism by avoiding competition (in negative scenarios).

Multiple studies also show that:

  1. lack of technical and financial capacity to identify, develop and implement projects is a strong motivation to consider USPs (the primary reason in the case of Armenia);
  2. USPs are not necessarily more accessible or more convenient to implement than publicly initiated projects. Bypassing regular procurement regulations to implement USP projects risks causing public controversies that can delay the project and/or result in renegotiations several years later;
  3. some governments believe USPs provide them with access to finance. There are, however, no indications that USPs provide access to finance that would not have been available under a well-structured publicly initiated project;
  4. most USPs do not represent real innovations but are projects not in the government’s pipeline, and
  5. some public officials misuse the USP instrument to engage in corrupt and nepotistic practices, especially through avoiding competition. Although often unproven, many USPs are subject to corruption allegations that show that USPs are highly sensitive to public-perception issues and vulnerable to being challenged in the future.

 

How does it work in Armenia?

On March 18, 2021, the Armenian Government approved Draft Amendments to the Law of the Republic of Armenia on Public-Private Partnership adopted by the Parliament on June 30, 2021. With this amendment, the Government introduced two significant policy changes (together with other amendments), one of which was introducing unsolicited bids.

The amended law stipulates (Article 10 (5) of the Law) that a legal entity (private initiator) may submit a proposal for the implementation of a possible project (PPP project on a private initiative). This proposal shall be subject to evaluation by a competent authority if it meets specific criteria as follows:

  1. the private has experience of entrepreneurial activity in a relevant area, established by the PPP procedure;
  2. the proposal includes information on the project and a preliminary feasibility study, the minimum requirements of which are set out in the PPP procedure;
  3. The minimum internal rate of financial profitability of the project is ensured without direct impact on state and (or) community budgets and alienation of state and (or) community property at below market price or gratuitous use, and
  4. The private initiator has undertaken a public and irrevocable obligation to participate in the selection process of a private partner.

Article 10 (11) also stipulates that the Government can provide the private initiator with one of the below benefits upon a governmental decree:

  1. reimbursement of costs estimated and accepted by the competent authority in connection with the preparation of the project by a winning bidder who is not a private initiator, or
  2. the right to match the financial proposal to an applicant who is not a private initiator. Moreover, the advantage can be provided only in case of simultaneous existence of all the following circumstances:
  3. the provision of such public services or infrastructure has not been implemented in Armenia, or the scope of the envisaged program exceeds the total volume of such public services and infrastructure provided in Armenia in monetary terms, and
  4. in this sector, the private initiator has a high rating provided by the PPP procedure.

The reading of the proposed amendments suggests that a series of secondary acts shall have to be passed to regulate various aspects of private partner selection via unsolicited proposals. This legislation will shed light on several questions that arise both related to the substance and procedure. We will keep you posted on the progress.

 

How can we help?

Our team has extensive experience in advising large and reputable international investors and operators active in the PPP universe. Moreover, many of our team members are actual authors of some of the segments of the Armenian PPP legislations. So please, do get in touch when you want to get more detailed sophisticated advice.

 

[1] In some jurisdictions, the right to match, or right of first refusal, is known as the “Swiss Challenge.”