257 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2003 Unsolicited Proposals MARCH John Hodges John Hodges The Issues for Private Infrastructure Projects (jhodges@worldbank.org) is a private sector Many of the world's most controversial private infrastructure projects development specialist at originated as unsolicited proposals to governments. This Note the World Bank. He currently works on issues explores critical questions for developing policies to deal with associated with the unsolicited proposals. For example, under what conditions should transparency of regulatory regimes. Before joining governments allow unsolicited proposals? And how can they add NETWORK the Bank, he worked with competition and transparency to the process? A companion Note the Small Enterprise reviews the methods used by the governments of Chile, the Republic Assistance Funds in Sofia, Bulgaria, and in of Korea, the Philippines, and South Africa to transform unsolicited Santiago, Chile, where he proposals into competitively tendered projects. INFRASTRUCTURE prepared financial models, bid price Governments worldwide have increasingly participation, a few have laws prohibiting the AND determination, and bid looked to the private sector to fill the growing acceptance of unsolicited proposals. A few oth- documents for Chile's gap between the demand for infrastructure ser- ers have laws requiring that unsolicited propos- largest private airport SECTOR vices and their supply. In developing countries als be thoroughly reviewed and market-tested operations. infrastructure projects with private participation before being approved. The vast majority of increased dramatically in the past decade, attract- countries, however, have no formal policies for PRIVATE ing more than US$750 billion in committed new handling unsolicited proposals. investment in 1990­2001.1 Many governments In theory, permitting unsolicited proposals began awarding infrastructure projects to private should encourage the private sector to bring firms in large part because of public funding con- governments beneficial ideas for project devel- GROUP straints, but some also recognized that involving opment that might otherwise have been over- the private sector could improve the perform- looked. In practice, some governments' BANK ance of infrastructure. In some cases private com- experiences with unsolicited proposals have panies even initiated the process by suggesting been unfavorable. Many of the world's most project concepts through unsolicited proposals, controversial private infrastructure projects often including detailed construction, opera- originated as unsolicited proposals, such as the WORLD tion, maintenance, and financing plans. Dabhol Power Plant in India and many inde- Among the many countries whose govern- pendent power generation plants in Indonesia. THE ments award infrastructure projects with private In some countries private companies submitting U N S O L I C I T E D P R O P O S A L S T H E I S S U E S F O R P R I V A T E I N F R A S T R U C T U R E P R O J E C T S unsolicited proposals often did so in an attempt tiations of their unsolicited proposals. Typical to avoid a competitive process to determine the arguments are that: project developer. If successful, they were then The project developer has intellectual prop- able to finalize project details with the govern- erty rights to the project concept or to nec- ment through exclusive negotiations behind essary engineering technologies. closed doors. The project is too small, is too remote, or involves too much political risk to attract pri- Competition and transparency vate sector interest. One way to reduce public sector corruption and Organizing a public tender may not be cost 2 opportunistic behavior by private proponents of efficient for the government or the bidders. projects is to forbid all unsolicited proposals. The project will be developed more rapidly While this may have advantages, it also deprives through negotiations, an important factor governments of the expertise of the private sec- because of an emergency or widespread tor in conceptualizing, designing, and develop- shortage (Kerf and others 1998). ing projects. Moreover, experience has shown While these conditions may exist in a few that when a government allows unsolicited pro- cases, they do not necessarily justify eliminating posals, projects that attract criticism usually do competitive mechanisms to determine the final so not because the project concept was devel- project developer. oped in the private sector, but because the project was awarded to the original private pro- Intellectual property rights ponent without adequate competition and Among the most common arguments for transparency. requesting exclusive rights to develop a project Competition by itself does not guarantee is that the idea belongs to the private propo- greater public welfare. But under normal con- nent, which has invested time and money in ditions a competitive process will probably drive developing it. Many countries acknowledge down the tariff requested by the private opera- intellectual property rights for project ideas and tor as long as it attracts more than one bidder. recognize them in the tender process by com- The winning participant's investment and pensating the original project proponent. In operating costs should be similar whether the Chile, for example, the government gives the project is awarded through competition or sole- original proponent an advantage in an open source negotiations. The main effect of sole- tender for the project and provides for reim- source negotiations is a potential increase in bursement of its project development costs. the developer's profit margin, which would Other governments may choose to simply pur- probably be passed on to consumers through a chase the project concept and then hold an higher tariff or lower quality (Laffont and open tender for the project. Tirole 1993). Many companies submitting unsolicited The amount of transparency provided dur- proposals claim that the project uses new tech- ing an open competitive tender is usually deter- nologies or techniques not available from mined by the government. When a government other sources--such as special engineering initiates a project, it can disclose information know-how for constructing more durable before, during, and after the award process. roads or providing cleaner water--and that When a project is unsolicited, private propo- exposing them in a competitive process would nents often argue that they have the right to therefore violate the companies' proprietary determine how much information is made pub- rights. The procurement laws of several coun- licly available. tries authorize exclusive negotiation if a supe- rior good or service is available from only one Common arguments for exclusive supplier or if no alternative exists (UNCITRAL negotiations 2001, p. 93). Some private proponents claim that special cir- While some companies may have innovative cumstances dictate a need for sole-source nego- solutions, substitute technologies are often avail- able even when original proponents claim that there is only one interested bidder rather than theyarenot.Andevenifacompanydoeshavespe- leaving this to speculation. cial techniques, project objectives can often still be met through lower-cost alternatives. To assess Cost efficiency the need for the proposed technique, some gov- Private proponents argue that a government ernments define a selection process that empha- can save money by skipping the tender process sizes the expected output of the project and allows when it is confident that the original proponent each bidder to propose its own process or will win. Putting together a simple tender method.Thoseproposalsarethencomparedwith process may help reduce other costs down the 3 theunsolicitedproposalwhileprotectingtheorig- road, however, especially if the project is to be inal proponent's proprietary rights (UNCITRAL concessioned for several decades. 2001, p. 92). If a project does require the original A competitive bidding process enables a gov- proponent's proprietary techniques, another pos- ernment to define sector development objec- sibilityistosetupalicensingarrangementforonly tives by establishing conditions in the tender the products or services needed. documents for the long term. By contrast, with negotiated unsolicited proposals, the private Lack of private sector interest proponent establishes the initial criteria without Another common reason for allowing exclusive taking into account the government's long-term negotiations of an unsolicited proposal is the strategy. As a result, the project may lead to long- belief that the characteristics of the project will term bottlenecks in overall infrastructure not attract enough bidders. Many unsolicited development. proposals target remote areas where the gov- A competitive process may also provide finan- ernment has neglected infrastructure. In these cial benefits to the government even if the origi- areas, proponents argue, a competition will only nal proponent wins with the original conditions. delay the project because it is unlikely to attract The participation of other bidders gives the gov- other bidders. ernment more leverage because it provides a fall- A government can test this claim by calling back option in case the original proponent fails for expressions of interest. If there is indeed to complete the project or violates agreed upon insufficient interest, the government might be terms (Klein 1998b, p. 1). That reduces the like- able to make the project more attractive to draw lihood that the original proponent will partially in other potential bidders. One option is to pool complete the project and then demand a higher smaller projects (as done for some French water tariff or longer concession period because of cost concessions) or to include other services in the overruns--a common outcome in infrastructure tender. Another option is to allow bidders to projects. compete on the minimum subsidy required, Still, there is a chance that other bidders will especially if the original proponent requested a be unwilling to risk money on preparing a bid subsidy. when the original proponent has already invested Even with only one bidder, staging a tender so much time and effort. One solution is to have process may still provide benefits. Awarding a the public share the bidding costs up front. The project to the original proponent without com- original proponent would probably pass the proj- petitive bidding often creates public doubts ect development costs on to consumers indirectly about the project's legitimacy, because the during the operational phase anyway. Some process makes it easier to conceal corruption. countries have experimented with pooling the Even where no corruption exists, the lack of total bid costs and offering partial or full reim- transparency will make current administrations bursement once the project is operational. vulnerable to accusations of corruption from political opponents. Having an open tender, Rapid project development even with only the original proponent, can For some governments, urgent needs may justify demonstrate a government's commitment to exclusive negotiations of unsolicited proposals. transparency and process. And it can show that For example, after receiving an unsolicited U N S O L I C I T E D P R O P O S A L S T H E I S S U E S F O R P R I V A T E I N F R A S T R U C T U R E P R O J E C T S proposal during a short-term energy crisis, the References government of Côte d'Ivoire negotiated a lease Bulow, Jeremy, and Paul Klemperer. 1994. Auctions vs. contract to operate and maintain the country's Negotiations. NBER Working Paper 4608. Cambridge, main power generation, transmission, and dis- Mass.: National Bureau of Economic Research. tribution systems. But the experience of several Hodges, John. 2003. "Unsolicited Proposals: viewpoint countries shows that sole-source negotiations Competitive Solutions for Private Infrastructure." usually take much more time than originally Viewpoint 258. World Bank, Private Sector and expected and often end up delaying the project Infrastructure Network, Washington, D.C. is an open forum to several years. Kerf, Michel, David R. Gray, Timothy Irwin, Céline encourage dissemination of The initial design and implementation of a Lévesque, and Robert R. Taylor. 1998. Concessions for public policy innovations for well-organized competitive bidding process may Infrastructure: A Guide to Their Design. Washington, D.C.: private sector­led and take some time. But once the process is in place, World Bank. market-based solutions for future projects may move through the system Klein, Michael. 1998a. "Bidding for Concessions." development. The views more quickly and efficiently. Over time both Viewpoint 158. World Bank, Private Sector and published are those of the infrastructure companies and financiers will Infrastructure Network, Washington, D.C. authors and should not be also become more familiar with the govern- ------. 1998b. "To Auction or Not to Auction?" attributed to the World ment's conditions and expectations. Viewpoint 159. World Bank, Private Sector and Bank or any other affiliated Infrastructure Network, Washington, D.C. organizations. Nor do any of Conclusion Laffont, Jean-Jacques, and Jean Tirole. 1993. A Theory the conclusions represent The many negative experiences with unsolicited of Incentives in Procurement and Regulation. Cambridge, official policy of the World proposals for private infrastructure projects may Mass.: MIT Press. Bank or of its Executive lead some governments to see blanket refusals UNCITRAL (United Nations Commission on Directors or the countries as the only way to safeguard against potential International Trade Law). 2001. Legislative Guide on they represent. problems with corruption and lack of trans- Privately Financed Infrastructure Projects. New York: United parency. Naturally, governments should be Nations. To order additional copies especially wary of unsolicited proposals requir- contact Suzanne Smith, ing substantial support (such as government managing editor, guarantees or land grants). Many private com- Room I9-009, panies are well positioned to recognize poten- The World Bank, 1818 H Street, NW, tial demand for infrastructure, however, and Washington, DC 20433. governments may want to encourage such com- panies to submit project ideas. The main chal- Telephone: lenge for a government then is how to harness 001 202 458 7281 and promote private participation during the Fax: conceptualization of a project without losing 001 202 522 3480 the transparency and efficiency gains of a well- Email: conceived competitive tender process. ssmith7@worldbank.org Copyedited and produced by Communications Notes Development Inc. This Note focuses on infrastructure concessions in markets with little or no competition (such as airports, toll Printed on recycled paper roads, and water distribution) rather than projects that must compete within a market (such as merchant power plants and cellular telecommunications service). 1. Data are from the World Bank's Private Participation in Infrastructure (PPI) Project Database, which records total investment in projects with private par- ticipation, not private investment alone. T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / V i e w p o i n t / i n d e x . a s p