1. From Preferred Bidder to Financial Close
Iain Menzies
The World Bank
St. Petersburg - 24 May 2008

2. Bidder Selection Process
“ The Bidder Selection Process involves 5 key steps, and a clear Bid Management Structure needs to be established to implement these”
Market
Sounding
Notify +
Prequals.
Bidding
Bid
Evaluation
Negotiation

3. Negotiation
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.
There are several negotiation options:
No Negotiation
Contract can be signed immediately when all technical and financial issues are resolved
This provides greatest transparency and objectivity
Especially useful for two stage bidding, or when unmodified contracts signed with the bid:

4. Negotiation
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.
There are several negotiation options:
No Negotiation
Negotiate Preferred Bid
Or..
If issues still to be resolved, negotiations can start with the preferred bidder
Even if a reserved bidder is retained, the Contracting Authority has less competitive tension in the negotiation
The Contracting Authority has to have resources and capacity to maintain its position against a possibly more experienced negotiator
Bidders and Financiers may request major changes during negotiation, and the Contracting Authority has to be able to respond effectively to this

5. Negotiation
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
“ The Bid by the Bidder with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.
There are several negotiation options:
No Negotiation
Negotiations can be with two or more bidders, playing off one against the other
This may help to get a better deal than offered in the competitive bids
Disadvantage: Lacks transparency as has to be held in secret, and people may not be confident of an unbiased decision
Negotiate Preferred Bid
Or..
Competitive Negotiation
Or..

6. Negotiation
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
“ The Bid by the Operator with the highest evaluation can be accepted outright, or negotiations or another round of bidding can take place”
Another selection stage may be needed if (a) Issues remain to be agreed or (b) a better offer may be achieved.
There are several negotiation options:
No Negotiation
Negotiate Preferred Bid
Or..
Final option is a second round of formal bidding
This retains transparency, but allows bidders to improve financial offers, after seeing competitors bids.
Disadvantage: Not suitable for adjustment of non-price bid conditions
Competitive Negotiation
Or..
Additional Bid Round
Or..

7. Negotiation Process Negotiation is a process, not an event.
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
Negotiation is a process, not an event.
The City and the winning bidder will have different perspectives during negotiations:
Bidder to reduce risk and increase profits
City to reduce costs and maximise value
Output of negotiation will include PPP Agreement with all ancillary agreements, schedules and subcontracts

8. Negotiation Process
Bid
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
Negotiation process needs to be planned and resourced
The City must assign a negotiating team:
Qualified and experienced
Understands City’s position on key issues
Empowered to take decisions
Assisted by project team and local/international advisors
This could be a full-time job for the team
Manage and track evolving documentation
Record details of negotiated points and resolutions

9. Be Prepared – the Bidder will be!
Evaluation
Market
Sounding
Notify +
Prequals.
Negotiation
Bidding
The winning bidders will have formidable resources:
The winning bidder negotiation team will be supported by its financial, legal and technical advisors
The winning bidders lenders will be involved and have their own legal (and technical) advisors
They are all experts in their field
The winning bidder and the lenders (and their advisors) have negotiated many such deals before
BE PREPARED

10. What do we mean by “financial close”?
In international project finance transactions the common definition is:
When the project documentation has been executed and the conditions precedent have been satisfied or waived. Drawdowns are now permissible.
Conditions precedent (CPs) are conditions/matters that must be dealt with before the bidder is allowed to draw on the loans. They will be listed in the loan agreement and the PPP Agreement.

11. Financial Close – Conditions Precedent
Conditions Precedent (CP) are a challenge, especially in Russia
CPs are not recognized under Russian law – contract is effective when signed
Loan agreements with international lenders will contain CPs to their effectiveness
PPP Agreement will contain CPs, but they will all need to have been satisfied before PPPA signature

12. Financial Close – Project Documentation
Many project documents to be concluded to reach financial close:
Shareholders
Granting
Authority
Lenders /
Bondholders
Shareholder’s Agreement
PPP Agreement
Operator
Project
Company
Services
Purchaser
End-users
Operation & Maintenance Agreement (O&M)
Purchase Agreement (e.g., power purchase agreement)
Supply Agreement (e.g., gas supply agreement)
Construction Contracts
Construction
Contractor
Raw Material
Supplier

13. Financial Close – PPP Agreement
CPs in the PPP Agreement may include:
Required insurances obtained
City approval of construction manuals and Design Documents
Independent Engineer appointed
Land Plot Lease Agreements executed
Developer has been granted access to Land Plots
All Necessary Approvals for construction have been received
All Project Agreements approved by City and in effect
City has entered into Subcontractor Agreements
Performance Bond in place

14. Financial Close – Loan Agreements
CPs in the Loan Agreement may include:
PPP Agreement signed and effective
City resolution or equivalent approving execution of PPPA
Direct Agreement with City is signed and effective
Other security documents received (eg share pledge, assignment of project documents, guarantees)
All government consents, approvals and licenses have been obtained (eg State Expertisa, RFR, land plots, safety acceptance)
Projects insurances obtained
Legal opinions received (Russian Law compliance)
Construction/EPC contracts agreed
Other major procurement contracts (eg rolling stock for Nadex)
Initial equity subscription from Developer

15. Financial Close – Lenders Due Diligence
There may be many types of lender financing the project, each with different perspectives and risk appetite:
International lenders – financial risks and project fundamentals (City payment risk, cash flows, FX risk, interest rate risk, inflation risk etc)
IFIs – bureaucratic, environmental and social requirements
Russian lenders – not yet tested, usually fall in line with international lenders
They will not finance the project unless they are satisfied with the terms of the PPP Agreement (and the other project documents) and the associated risk allocation
If they are not satisfied they will seek to negotiate, directly or indirectly, or walk away

16. Financial Close – What Can Go Wrong?
Failure to agree on critical issues during negotiations:
Unrealistic expectations and deadlines
Change in political support (eg new Governor, government)
Political issues high-jacking negotiations
Grantor does not understand issues, intransigence, lack of consensus
Personality/cultural clashes
Fall-out between bidder consortium members on risk allocation (eg between EPC contractor and operator)
Failure to meet CPs:
Delays in government consents and approvals
Economic/Financial Crisis:
Project becomes un-afordable to City or un-bankable (credit crunch)
Social/Environmental Issues

17. From Preferred Bidder to Financial Close - Summary
Negotiation Process
Identify key issues, prepare negotiation positions
Appoint negotiation team – qualified, experienced, empowered, supported by international advisor teams
Do not underestimate time and resources required – this can be a full time job
Financial Close
Plan and prepare to meet all requirements in timely manner – this will require buy-in from many City Committees and some federal agencies (eg Expertisa, RFR)

18. From preferred bidder selection to financial close
THANK YOU !!!
Iain Menzies
The World Bank