Accepting unsolicited proposals allows governments to benefit from the knowledge and ideas of the private sector. This can be a significant advantage where limited government capacity means the private sector is better able to identify infrastructure bottlenecks and innovative solutions. It also provides government with information about where commercial opportunities and market interest lie. Box 1.5: Hot lanes in Virginia-An Example of Private Sector Innovation provided an example of a PPP project originated by a private company that provided an innovative solution to a transport infrastructure problem that the public sector had been struggling to solve.
However, unsolicited proposals also create substantial challenges. First, most PPPs require government fiscal support: the government typically accepts risks, and the associated contingent liabilities, even if direct subsidies are not needed. As described in the PPIAF toolkit for PPPs in Roads and Highways [#282, Module 5, Stage 3 'Procurement'], experience suggests that proposals submitted by private companies often do not adequately assess the risks associated with the project, which may be borne by the government.
Secondly, unsolicited proposals have not been originated as part of a government planning process, and, in some cases by definition, are not part of sector plans. This raises the question of whether the service proposed is sufficiently integrated with other sector plans for demand and benefits to be robust to changing circumstances and priorities. Moreover, unsolicited projects may divert government attention from a planned approach to infrastructure as a whole.
Thirdly, negotiating with a project proponent on the basis of an unsolicited proposal-in the absence of a transparent or competitive procurement process-can create problems. It could result in poor value for money from the PPP project, given a lack of competitive tension. It could also provide opportunities for corruption. In the absence of corruption, it could nonetheless give rise to complaints about the fairness of the process, if a company is seen to benefit from a PPP without opening the opportunity to competitors. This lack of transparency can undermine the legitimacy and popular support for the PPP program.
Box 3.14: Costs of Direct Negotiation-Independent Power Tanzania provides an example of a power project in Tanzania that was directly negotiated following an unsolicited approach by the private investor, which under arbitration was found to have provided poor value for money, and possibly been corrupt.
Box 3.14: Costs of Direct Negotiation-Independent Power Tanzania The Government of Tanzania and the Tanzania Electricity Supply Company entered into contractual agreements with Independent Power Tanzania Limited (IPTL) of Malaysia for the supply of 100 megawatts of power over a 20-year period. This transaction was directly negotiated following an approach by the private investors during a power crisis. The transaction was contested by some government officials and by the international donor community and other interested stakeholders, on the grounds that it was the wrong technology (heavy fuel oil instead of indigenous gas), that it was not part of the least-cost generation plan, that it was not procured on a transparent and competitive basis, and that the power was not needed. The government ultimately submitted the case to arbitration. Under the final arbitral ruling, the project costs were reduced by about 18 percent. Even so, the costs remain well above international comparators. In the arbitration hearings the Government alleged that the contract award had been corrupt, bit failed to produce evidence to satisfy the Tribunal of this. The government has not subsequently pursued the corruption investigation. However, legal disputes between the IPTL and the government continue. Source: World Bank (2009) Deterring Corruption and Improving Governance in the Electricity Sector, Washington, D.C.; Anton Eberhard & Katharine Nawal Gratwick (2010) IPPs in Sub-Saharan Africa: Determinants of Success, Washington, D.C.: World Bank |
The PPIAF toolkit for PPPs in Roads and Highways section on unsolicited proposals [#282, Module 5, Stage 3 'Procurement'] further describes these challenges of unsolicited proposals. It sets out the 'current view' of the World Bank as follows:
…there is a place for genuine and innovative [unsolicited] proposals, but these are the exceptional case. The private sector must put up strong independently analyzed cases for unsolicited proposals at an early stage, before governments are sucked in to supporting projects that are financially weak, high risk, will take up significant human resources of the government, and will likely take a longer than normal time to implement because of these difficulties.
According to the World Bank's PPP in Infrastructure Resource Center Website section on unsolicited proposals [#286], the World Bank 'considers that unsolicited proposals should be dealt with extreme caution, and does not permit the use of unsolicited proposals in Bank-funded projects'.