4.4.1 A bid cannot be credible without satisfactory assurances about the adequacy of funding. This is particularly important for larger projects. Prior to the appointment of a preferred bidder, the procurer should approach the proposed funding institutions behind the proposed bidder to seek assurances that they are willing (in principle) to finance the proposed venture and that they have had sight of, and are in principle content with, the commercial terms. Procurers should be aware, however, that it does not necessarily follow that a preferred bidder will have a single captive source of finance. If an alternative option is maintained, (eg bank vs. bond), in order to retain an element of competition beyond preferred bidder stage, it should be clear to the procurer how the benefits of that further competition will be shared.
4.4.2 As much information as possible should be obtained on:
• the quality of the funding institutions, including their experience of PFI and similar projects. This might include credit ratings and views from advisers on ability to deliver;
• the financing plan, the proposed method of funding (eg bonds) and an outline of the financing facilities to deliver that plan;
• any security guarantees or other support the funders will require from the consortium;
• the bidders' and their funders' due diligence requirements, distinguishing between legal and technical due diligence (see 4.4.6 below);
4.4.3 The Taskforce recommends that, as part of the documentation accompanying responses to an ITN, procurers should require bidders to submit preliminary term sheets for the facilities required as part of the financing plan. The deliverability of the financing plan should, however, be an explicit feature in the criteria for evaluating bidders' proposals, and a matter on which procurers should seek the expert advice of their own financial advisers in order to test proposals received from bidders.
4.4.4 Before the appointment of a preferred bidder, it is also recommended that procurers obtain confirmation from the debt providers appointed to arrange or underwrite the debt facilities to the project to the effect that:
• the debt providers have reviewed the results of financial model runs reflecting the results of the commercial proposals agreed between the procurer and the bidder as a basis on which the bidder can be selected as preferred bidder, and are satisfied, subject to final credit approval, that those results are capable of supporting the debt facilities envisaged by the project's financing plan; and
• where realistic, all key aspects of the debt providers' due diligence process capable of affecting their willingness to enter into the financing have been completed to their satisfaction. It will be necessary to identify, on a case-by-case basis, which aspects of the due diligence process fall into this category. In a road project, for example, due diligence on traffic forecasts might well be considered as a key aspect, while due diligence on insurance matters might be regarded as more routine.
4.4.5 To sign off due diligence on certain issues, debt providers may need to engage specialist consultants and bidders themselves may have to incur greater design development costs than it is realistic to expect at this stage. In deciding how far they wish the due diligence process to have been completed before a preferred bidder is appointed, procurers will also need to pay attention to the level of cost to which bidders are likely to be put as a result, and in establishing their requirements procurers should consult their financial advisers to determine what is reasonable in the circumstances. During negotiations prior to the selection of a preferred bidder, the full extent of due diligence requirements should be ascertained. Clients may need independent professional and technical advice to reach a view on this issue.
4.4.6 There is a distinction between legal and technical due diligence. The former concerns itself with the formal aspects of contract signature, such as ascertaining the position on vires. The latter is closely intertwined with the potential contractor's ability to successfully complete the project. It would, for example, include being satisfied about ground conditions in a DBFO roads project.
4.4.7 There is much the public sector can do to help with both, particularly with legal due diligence. At an early stage in the negotiations bidders should be asked what their and their funders' legal and technical due diligence requirements are likely to be.
4.4.8 Even with technical due diligence, procurers should agree with shortlisted bidders the extent to which:
• the procurer can provide the technical due diligence information sought to all parties on a standard basis, eg traffic forecasts or condition surveys; or
• one or more of the bidders could undertake technical due diligence (eg site and condition surveys) and then pool the information, with the costs being shared between all the shortlisted bidders (and the procurer as necessary) on a basis to be agreed in advance.
4.4.9 Where the information serves a common purpose to all bidders, this should prove an attractive proposition in keeping down bidders' costs. Where a particular bidder requires information peculiar to its unique solution, it may not be happy to adopt a pooled approach. If so, then the bidder will have to decide whether the cost of the due diligence is justified by the potential competitive edge that its innovative solution will give to its bid.
4.4.10 How far legal due diligence can properly be expected to have progressed before the appointment of a preferred bidder will be influenced by the quality of the information on the commercial terms included in the ITN. At the very least, debt providers should have reviewed a detailed contract summary reflecting the allocation of risks between the procurer and the bidders, and should be satisfied, subject to any detailed matters arising during any subsequent full documentary due diligence, that the allocation of risks is acceptable as a basis for the provision of the debt facilities. In the future, as standard template contracts are introduced, it should increasingly be possible to ask debt providers to sign off the templates themselves. Where a type of project has become fully established as a commodity product, changes should be made to the template to meet the circumstances of the particular case. This will enable the negotiating process to be brought to a close with bidders and their debt providers before competition ceases.
4.4.11 Prior to the appointment of a preferred bidder, debt providers should also be asked to confirm that, subject to documentation and subject to any outstanding aspects of their due diligence programme, they have received approval "in principle" from their credit committees or other internal sanctioning authorities to enter into financing on the basis of the financing plan. A timetable to financial close should also be agreed, with confirmation from the debt providers of the extent of their due diligence programme still outstanding.