PPP norms revisited: only serious bidders welcome

By Dinesh Pardasani and Varun Nair, Trilegal
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The existing norms governing the pre-qualification of bidders for infrastructure projects that are proposed to be built under the public–private partnership (PPP) model have been widely debated. They are generally criticized by prospective bidders as hindering private initiative in infrastructure projects. In an attempt to address some of the concerns of bidders regarding the pre-qualification norms for PPP projects – most particularly, the Request for Qualification (RFQ) norms – the Ministry of Finance in a notification dated 18 May revised and revamped the RFQ guidelines, removing many of the bottlenecks that have long plagued the award of infrastructure projects.

Dinesh Pardasani Counsel Trilegal
Dinesh Pardasani
Counsel
Trilegal

RFQ is the first stage in the bidder selection process in relation to an infrastructure project. It is conducted in order to arrive at a short list of prequalified applicants, which are then asked to submit bids for the proposed project. Through this process the government identifies credible and serious bidders which possess the appropriate financial and technical qualifications to undertake the proposed project.

The old order and the new look

The earlier bidding norms placed several impediments in the way of private players wishing to participate in infrastructure projects. The RFQ guidelines did not permit any one member of a bidding consortium to hold a more than 1% interest (directly or indirectly) in any member of the other bidding consortiums. Intended to forestall conflicts of interest, this restriction was much criticized as it severely limited the number of eligible bidders for a particular infrastructure project. As a result, many projects could not attract the minimum number of bids required by the tender process and were therefore stalled indefinitely. Moreover, many bidders were often not even aware of the interest or common shareholding of a group company in another bidder.

Another problem was that the cap on the number of pre-qualified applicants, and the short-listing of candidates based on a points system, further curtailed the number of bidders for a particular project.

The new guidelines have substantially revised the old bidding norms, introducing significant changes: 1) the limit of cross-holdings relating to conflict of interest has been increased from 1% to 5%; 2) the threshold capacity to qualify for bidding has been raised to twice the estimated cost of the proposed project; and 3) each consortium member is now required to hold equity of at least 5% of the total project cost for a period of two years after the commissioning of the project. This is in addition to the previous requirement for each consortium member to hold 26% equity in the special purpose vehicle.

Varun Nair Associate Trilegal
Varun Nair
Associate
Trilegal

An amendment likely to be welcomed by prospective bidders is an incremental increase in the number of shortlisted bidders from 5 to 6 (7 in the case of projects costing less than Rs5 billion ( US$104 million). Another notable change is that the commitment of the O&M partner has been reduced from 26% to 10%.

Under the revised guidelines the definition of “core sectors” has been altered to include logistics parks and metro rail, and exclude petroleum and natural gas. This means that petroleum and natural gas companies which do not have the experience in sectors such as telecom, power, airports and railways will not be able to compete for PPP projects. Further, provision has been made in the revised guidelines for a “reserve” list of prospective bidders to be prepared, from which a substitute bidder can be drawn if a shortlisted bidder withdraws.

Going forward

The tightening of pre-qualification norms for bidders for PPP projects should be welcomed by bidders, as it is geared towards eliminating frivolous bids and restricting the bidding process to those consortiums which have the requisite technical and financial capacity to successfully execute the proposed project. The increase in the cross-holding limit from 1% to 5 % should be particularly well received by bidders, as it is sure to remove a great deal of apprehension and uncertainty surrounding the eligibility criteria for bidding for infrastructure projects, and to pave the way for greater investment in such projects.

However, the new guidelines have neither removed all hurdles facing private players in the award of infrastructure projects, nor addressed all of the typical concerns of bidders. While the number of bidders for proposed projects has been increased, the number of applicants is still restricted. Revision of the threshold capacity criteria makes such a restriction meaningless and may defeat the desired purpose of attracting qualified and experienced bidders. Nonetheless the recent amendments are certainly a step in the right direction and will surely boost private investment in infrastructure projects.

Dinesh Pardasani is a counsel in the Delhi office of Trilegal, where Varun Nair is an associate. Trilegal is a full service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.. The firm has over 100 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.

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