Many developers, but by no means all, prefer to issue unsolicited proposals to a ceding authority rather than participate in a formal tender. Unsolicited proposals are not only less costly to prepare but provide more scope to participate in defining the technical and commercial outlines of the project. For this reason, an unsolicited proposal is said to shift the bargaining ad- vantage from the ceding authority to the private party.
Nevertheless, there exist situations where government may be relatively receptive to unsolicited proposals from private firms. The following are some examples of this:
The ceding authority is prepared to compromise on because a formal tender would take too and the consequences of not get- ting the facility in place quickly are likely t o lead to much greater loss. For example, the Philippines in 1993 experienced a severe national short- age of power generation. The eight-hour brownouts adversely affected gross national product and exports. The situation was overcome by awarding 13 fast-track unsolicited proposals from the private sector to build needed generation.
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PROJECT DEVELOPMENTThere are, of course, dangers involved in doing this too quickly or hastily. Pakistan, a t about the same time, awarded more than 4,000 MW of capacity over a short period in anticipation of generation short- falls that never materialized. For this, and other reasons, the country a t the time of this writing is involved in the painful process of renegotiat- ing the tariffs with the private generators.
Costs of preparing a formal bidding package are too high and the ced- ing authority does not have access to the financial resources to fund this expense. This type of problem occurs frequently within government, particularly in the case of those ministries that are cash poor o r operate with government subsidies (water, rail, mass transport, etc.). Technical assistance to prepare a bid package is sometimes, but not always, pro- vided by one or more donors. Nevertheless, if the ceding authority is able to find "bridge" money, it is possible to structure the bidding in such a way that costs of preparation are subsequently recovered from the bidders at the time of tendering. Lack of familiarity in conducting specialized tenders is widespread within government and the tempta- tion is therefore great to entertain unsolicited proposals.
The project, although highly desirable, is not viable and innovation of a proprietary nature will be needed to resolve its technical and commer- cial justification. Manila's South Super Highway and Sydney's Harbour Tunnel are both examples of unsolicited proposals that depended on innovative design or unique technology to ensure commercial viability. Neither project might have been built by the private sector if the ceding authority had followed conventional bidding rules.
The project has great development impact but falls between the pur- view of two ceding authorities, neither of which is likely to take the sole initiative to forward its implementation on any basis. An example of this is a project that has two objectives, (a) to generate hydropower from a dam or large reservoir; and (b) to provide irrigation water to an underserved, but important, agricultural area. The first project would normally be viable; the second might not be sustainable without the first. Normally, water and power would fall under different ministries. In some countries, the project would not get done if an unsolicited proposal did not jar both ministries into action.
Selecting the "Right" Advocacy
Project development is sometimes done more efficiently when
uses one or more forms of local advocacy to assist in the process. Factors to consider are as follows:
For a solicited or unsolicited proposal, what relative advantages are there in using a local partner, agent or advocate?
If the is seriously considering the pursuit of the project with local interests on a joint venture basis, the following questions must be considered:
Will the host country look more favourably on awarding project or expediting the process of approvals and consents if the project is pursued jointly with local interests?
If so, is the local firm experienced in project development? What development costs will it be responsible for? Does it have the stay- ing power to contribute funds during an uncertain development period? What role will it play during the development period? How does it rank in size relative to other potential competitors that would pursue the same project? Does the local firm have significant de- tractors politically? Does it have detractors within the sector?
Conducting a Technical Feasibility Study
Technical feasibility studies are done using inhouse staff of the
hiring technical consultants conducting informal discussions with a handful of short-listed turnkey engineering, procurement and construction (EPC) contractors. The objective of a technical feasibility study is to con- sider the appropriateness of the design relative to the needs to be served; capacity and phasing; cost under current or projected market con- ditions at one or more sites; construction schedule; and price, availability and transportation requirements of major inputs. Additional factors in- clude the potential for unanticipated as well as the facility's operat- ing characteristics, including useful life, reliability, efficiency, required main- tenance, and vulnerability of its technology to innovation. Such a feasibil- ity focuses on "hard" construction costs. It does not include broad financ- ing costs, or for that matter, development (transaction) costs.
A preliminary technical feasibility study has a margin of error of plus or minus 30% while a very complex project could have a larger margin of error. If the developer thinks his project costs will fall within the 30% mar- gin, it will be more to propose a more aggressive (lower) tariff in a solicited or unsolicited context. Conversely, if uncertainties are great in respect of construction-cost economies, the sponsor's proposed tariff will be higher, fully reflective of the uncertainties.
Judgements related to the project's technical, financing and develop- ment costs continue to he very critical throughout the project development period. At any time during the development process, may
don a project development if costs begin to mount and are considered sustainable.