In a context of scarcity of funds, it is becoming increasingly difficult for multiple bidders to assemble enough banks to cover their entire funding requirement. Except for small transactions, there are not enough banks in the market to support several bids at submission stage. For medium to large projects, it is practically indispensable to allow the preferred bidder to access the largest banking market, including its competitors' funders.
This implies that banks should not be committed to any bidder on an exclusive basis before selection of the preferred bidder.
Several approaches can be envisaged:
a) Funding competition:
This concept was used in the UK market around 2004-5. Its original intention was to reduce funding costs by applying added competitive pressure on the finance markets. Competing groups of funders such as banks and capital market investors were asked to bid their best terms based on the selected bid. This is a complex approach, requiring considerable expertise and resources from the procurer. It has been used on a few large UK procurements only (HMT and MoD buildings, Bart's and Royal London Hospitals). In its original form, it does not fit particularly well in the current market, as it relies upon a market with sufficient liquidity to organise competition.
b) Staple financing:
This approach is used mostly in acquisition finance and "brownfield" projects. The procurer designs its own financing package, with its own advisers, which is offered at the tender stage. Bidders can either take the procurer's offer or, if they can deliver more competitive terms, propose their own. The authority benefits from competition between the bidders, with the protection of its "staple" offer as a back-stop. Again, this method is mostly designed for "re-financing" existing projects rather than "greenfields", as it is difficult to design a sensible staple without a good knowledge of the underlying project.
c) "Competitive" book-building:
This is generally the approach used in the current market, often under the "funding competition" name. The preferred bidder is allowed to access the broader funding market, including funders previously associated with unsuccessful bidders, and completes its financing under the procurer's control. The nature and extent of this control is the difficult issue for the authority. Once there is a preferred bidder, competitive tension is significantly reduced and there is a risk that the bidder will not have real incentives to optimise its offer. A form of sharing the benefits from its original tender with the procurer could provide this incentive, but this is likely to imply the authority's acceptance to also share any downside. There is no tested template for such an approach.
d) A combination of the above:
This is where the procurer separates the financing from the rest of the project and puts it out to competition separately. This is akin to tendering two separate contracts (Design Build Maintain/Operate (DBM/O) and Finance (F). The procurer may merge the two tenders at financial close under the bidder's responsibility or may choose to keep control of the financing during the contract period. This is also untested and raises complex issues, notably, which party bears the final responsibility of the financing and the integrity of the PPP concept.
PROS: These options are the unavoidable consequence of the current market conditions, at least for large projects. Increasing the size of the potential funding group can only be beneficial to the procurer.
CONS: They tend to distance the bidder from the full responsibility of its financing. In addition, the mechanics of these methods are complex, both at tender and financial close stages, and largely untested.