PBC and OPBRC: Concepts and Implementation

Workshop on Performance Based Contracts (PBC) and Output- and Performance-based Road Contracts (OPBRC) PBC and OPBRC: Concepts and Implementation Cesar Queiroz, PhD, PE, M.ASCE, M.TRB OPBRC/PPP Technical Advisor, Consultant Former World Bank Highways Adviser August 11, 2024 Outline • Output- and Performance-Based Road Contracts (OPBRC), Why OPBRC, Traditional vs PBC/OPBRC Contracts, the issue of inadequate incentives, forms of payment to the contractor • From World Bank PBC sample bidding documents to standard procurement documents for OPBRC • The roles of key stakeholders • Road resilience and OPBRC risks; risk matrix and risk sharing • Transparency and good governance in OPBRC • OPBRC contract management; challenges during construction and maintenance • OPBRC financial model: Development and applications • Q&A Efficiency and effectiveness of road asset management through performance-based contracts (PBC) • PBC, such as Output- and Performance-based Road Contracts (OPBRC), are designed to increase the efficiency and effectiveness of road asset management, by ensuring that the physical condition of the road(s) under contract is adequate for the need of road users, over the entire period of the contract (e.g., 7 or 10 years) • OPBRC expands the role of the private sector, from the mere execution of works to the management and maintenance of road assets Source: https://www.worldbank.org/en/projects-operations/products-andservices/brief/procurement-new-framework 3 Traditional vs PBC/OPBRC Contracts • Under a traditional contract, the Contractor is responsible for the execution of works which are normally defined by the Employer, and the Contractor is paid on the basis of unit prices for different work items, such as cubic meters of asphalt concrete or sq m of double bituminous surface treatment (DBST) • An issue is that the Contractor has the wrong incentive, which is to carry out the maximum amount of works to maximize its turnover and profits, sometimes resulting in excessive variation orders Source: https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurementnew-framework 4 PBC/OPBRC address the issue of inadequate incentives • Under OPBRC, during the Bidding process, contractors compete by proposing fixed lump-sum prices for (i) bringing the roads covered by the contract to a certain service level, through rehabilitation and/or improvement, and (ii) maintaining the road(s) at a specified service level for a relatively long O&M period • Contractors are not paid directly for quantities of physical works (which they undoubtedly have to carry out), but for achieving specified Service Levels Source: https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurementnew-framework 5 Payments under OPBRC •Payments made to the Contractor for the management, construction and maintenance of road assets are linked to the contractor successfully meeting or exceeding a set of performance indicators – or service level •Examples of performance indicators: Road roughness, Pavement defects (e.g., rutting, cracking), Vegetation control, Cleanliness of the road and its right-of-way, Visibility of road signs and markings, Lane availability for use by traffic 6 Contractor remuneration under OPBRC • Works Phase: The Rehabilitation and Improvement Works, included in the contract, are paid proportionally to what has been executed, based on measurable output quantities • O&M Phase: Periodic (e.g., quarterly) lump-sum payments to the Contractor will cover all the maintenance and management services provided by the Contractor, except for Unforeseen or Emergency Works, which are remunerated separately • The periodic payments may also include any deferred payment from the Works phase of the contract 7 Full periodic payments to the Contractor • To be entitled to the full periodic payment for O&M services, the Contractor must ensure that the roads under contract comply with the Service Level specified in the bidding document • During some periods, the Contractor may have to carry out a large amount of works to comply with the required Service Level, and very little work during other periods. However, its periodic payments remain the same • In case of non-compliance with one or more performance indicators, there will be payment reduction, as specified in the bidding document 8 Contractor responsibilities under OPBRC • Under an OPBRC, the Contractor is responsible for designing the works (usually based on a preliminary design provided by the Employer) and carrying out the works and appropriate maintenance • The Contractor should have a good management/technical capacity to define, optimize and carry out on a timely basis the physical interventions that are needed for the roads under contract to meet (or exceed) the specified Service Levels • Within the contract limitations and those required to comply with local legislation, technical and performance specifications and environmental and social regulations, the Contractor is entitled to independently define: (i) what to do, (ii) where to do it, (iii) how to do it, and (iv) when to do it 9 The role of the Road Administration (Employer) • Prepare bidding documents, which is facilitated by the WB Standard Procurement Document for OPBRC and Sample Specifications • The Employer should consider providing a Preliminary (Conceptual) Design with the RFB • Carry out the competitive selection of contractors and supervision consultants • Enforce the contract by verifying compliance with the specified Service Levels and with all applicable legislation and regulations, and making fair, timely payments to the Contractor 10 Road Maintenance • Maintaining a road includes both routine and periodic tasks • Routine maintenance consists of tasks frequently necessary to maintain the function of the road, such as pothole repairs, cleaning of drainage, sealing of cracks, cutting of vegetation • Periodic maintenance consists of predictable, and more costly measures of a less frequent nature, designed to restore the specified Service Level, such as resurfacing, asphalt concrete overlays, or reconstruction • Managing the timeliness of interventions and the adequacy of technical solutions are critical Contractor’s tasks, which may lead an OPBRC Contractor to associate with a Consulting firm 11 Operational Performance Indicators (OPI) • A Service Level is defined through a set of Operational Performance 12 Indicators (OPIs), which are used under the OPBRC to assess the Contractor’s compliance with the minimum required road condition • Operational performance indicators include parameters such as Road Roughness, Rutting, Vegetation control, Visibility of road signs and markings, Road Safety features, Availability of each lane-km for use by traffic, Cleanliness of the road and its right-of-way, Attendance at road accidents, Drainage off the pavement, Pavement strength, Degree of sedimentation in drainage facilities • When setting the performance indicators, the Employer should consider what (i) can be afforded, and (ii) is economically justified for the contractual roads Optimal Road Condition Total Road Transport Costs Budget, Costs $ Road Agency Costs Too Large Optimal Road User Costs Too Small High IRI Too Poor Optimal Too Good Road Condition Low IRI Payment reductions Yes. And Bonus? • Payment reductions are included in the contract for non-compliance with performance indicators • Should bonus also be included in the contract if the contractor exceeds the specified performance indicators? • Example: If technical and economic considerations lead to an optimum roughness level for the contract road of an IRI = 3 m/km following improvement or rehabilitation, should the government pay bonus if the observed roughness is 2.5 m/km? 14 RONET Paved Road Deterioration Model dIRI = K gp  o  e  • • • • • • K gm m t  (1 + SNC  1 ) −5  YE 4 +  2  t  + K gm  m  IRI a  dIRI: IRI increment (m/km) YE4: traffic loading (million equivalent axles per year) SNC: pavement modified structural number t: pavement age (years) m: environmental coefficient IRIa: current pavement IRI (m/km) Source: Rodrigo Archondo-Callao. 2009. RONET User’s Guide. World Bank https://www.ssatp.org/en/page/road-network-evaluation-tools-ronet Example: Increase of IRI with Traffic Loading and Pavement Age Data Used: Kgp = 1, calibration factor of roughness progression a0 = 134, Kgm = 1, calibration factor for environment, m = 0.025, SNC = 4, YE4 = 1, IRI0 = 2.0 m/km, a1 = 0.7947, a2 = 0.0054 Source: Guidelines on Performance Specifications for Output- and Performance-Based Road Contracts (OPBRC). 2021. World Bank Lao National Road 13 Improvement and Maintenance Project (P163730). Vientiane, Lao PDR, February 2021. Additional Cost to Road Users if the IRI Curve Is Higher than Specified 17 • Considering the graph in the previous slide, if IRI starts at 3.5 m/km (for example), instead of 2.0 m/km, the road user costs (RUC) will be higher over the life of the project • RUC, as a function of IRI, can be calculated using the HDM-4 Road User Costs Model (HDM-4 RUC), Version 5.0 • The input data to run HDM-4 RUC is similar to the input data for HDM-4, but not all HDM-4 data is required • The additional cost to RUC is a proxy for the additional cost to society Sources: https://collaboration.worldbank.org/content/sites/collaboration-fordevelopment/en/groups/world-bank-road-software-tools.html https://drive.google.com/drive/folders/13EPNDQacjxn4HYYAtqyT0siJbkLMQEmz?usp=sharing An example of maintenance issue: Early cracking of concrete slab • During the visit to an ongoing OPBRC in a country in Asia, several failures in joint sealing were observed, including the one shown in the next slide • Joint sealing failures may lead to water penetration into the subbase layer, and structural weakness in the form of cracking of the concrete slab • The result may be serious impact on pavement durability 18 19 Early cracking of concrete slab observed during a field visit Potential Additional Maintenance Cost Because of Early Deterioration • To remain in good condition, a concrete slab must have – • strong uniform support from the materials beneath the pavement. Once the support is taken away, e.g., by the effect of water, prompt action must be taken, otherwise the slab will crack and breakup • the surface kept as smooth as possible to reduce the destructive effect of impact • Maintenance will in general include • Preventive maintenance by sealing joints and cracks • Preventive maintenance of drainage facilities Source: Portland Cement Concrete Pavement Maintenance. Missouri Department of Transportation. https://epg.modot.org/index.php/Category:570_Portland_Cement_Concrete_Pavement_Maintenance 20 Management Performance Indicators (MPI) • Management Performance Indicators (MPI) relate to information that the Contractor needs to deliver to the Employer, so the Employer can monitor certain aspects of the contract and the road asset, and to operate its Road Asset Management System (RAMS) • The MPI also provide the Contractor with the information needed to (i) know the degree of its own compliance with Service Level requirements, and (ii) define and plan physical interventions required to ensure that the OPIs never fall below the contractual thresholds • The above information may include vehicle axle load data 21 Axle load control system • The OPBRC Contractor should be entitled to implement an axle 22 load control system, which can be fixed or mobile, based on the legislation and in cooperation with the relevant authorities • The infrastructure and other requirements for implementing axle load control under the OPBRC should be included in the conceptual design (and related BoQ) so the Bidders can include axle load control in their technical and price proposals • Under such a system, the Contractor will build, operate and maintain the axle load control infrastructure and equipment, while the police will apply the measures foreseen under the legislation (such as penalties) Main beneficiaries of OPBRC • Road users will be able to know the Service Level they can expect in return for the payments they make for the use of the road (e.g., tolls, tariffs, user fees, taxes) • The Road Administration should benefit by obtaining better overall road condition at the same level of expenditure • For Contractors, OPBRC should open up new business opportunities, in which longer term contracts provide a more stable business environment • Future generations will not have to pay for the reconstruction of roads destroyed because of a lack of maintenance today 23 OPBRC, PBC, and PPP • Output- and Performance-based Road Contracts (OPBRC) is a form of PBC for which the World Bank has issued a Standard Procurement Document for requesting bids, which comprises: Bidding Procedures, Works’ and Services’ Requirements, Conditions of Contract, and Contract Forms • OPBRC, as defined in the World Bank Standard Procurement Document, is a form of PBC https://www.worldbank.org/en/projectsoperations/products-and-services/brief/procurement-new-framework • OPBRC is also a form of PPP, according to the WB/PPIAF Toolkit for PPP in Roads and Highways https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/index.html 24 OPBRC Standard Procurement Documents (SPD) July 2023 Versions 25 The July 2023 revisions require the application of rated criteria for bid evaluation purposes, as well as the two-envelope bidding process. Here are the two versions of the SPD, available in English, French and Spanish: • • RFB, OPBRC (With or Without Prequalification), to be applied for contracts under Projects assessed as high risk for Sexual Exploitation and Abuse (SEA) and/or Sexual Harassment (SH) RFB, OPBRC (With or Without Prequalification), where the Bank’s disqualification mechanism for non-compliance with SEA/SH obligations DOES NOT APPLY https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework • • • • PMMR OPRC OPBRC 26 Sample Bidding Document for Procurement of Performance-based Management and Maintenance of Roads (PMMR): issued by the WB in February 2002 Sample Bidding Document for Output- and Performance-based Road Contracts (OPRC): issued by the WB in October 2006 Standard Procurement Document for Output- and PerformanceBased Road Contracts (OPBRC): launched on July 1, 2016 – several revisions so far, latest Jan/Feb 2021 and July 2023 Such documents are also suitable for the procurement of works and services under longer-term “Design-Build-Operate-Maintain (DBOM)” contracts for roads (World Bank, October 2006) 27 World Bank Sample Bidding Document for Output- and Performance-based Road Contracts (OPRC) October 2006 World Bank Sample Bidding Document for Output- and Performance-based Road Contracts (OPRC) October 2006 28 29 The above paragraph was included in the Sample Bidding Document for Procurement of Performance-based Management and Maintenance of Roads (PMMR), issued by the World Bank in February 2002. Such a paragraph was not included in the «Sample Bidding Document for Output- and Performance-based Road Contracts», issued by the WB in October 2006 to supersede the PMMR document. • • • OPBRC Sample Specifications Available in English, French, and Spanish Sample Specifications for Output- and Performance-based Road Contracts – latest version issued in July 2023 The Sample Specifications include • • • • Part A - Basic Concept of OPBRC Part B - Technical and Performance Specifications Part C - Operational Procedures Part D - Environmental and Social Requirements https://www.worldbank.org/en/projects-operations/products-andservices/brief/procurement-new-framework 30 • • • Sydney Roads Asset Performance Contract Employer: Transport for New South Wales Several Contractors, e.g., ConnectSydney Pty Ltd Contractor’s responsibilities include: • • • Maintenance of roads, bridges, culverts, slopes, and traffic signals Road resurfacing, bridge painting, slope rehabilitation, and culvert relining Minor capital improvement works, such traffic signals upgrades Source: https://www.transport.nsw.gov.au/system/files/media/documents/2021/%5BREDACTED%5DExecuted-Contract-Documents-Harbour.pdf 31 • • • • India Hybrid Annuity Model Contracts Contract type: design, build, operate and transfer - the “DBOT Annuity” or “Hybrid Annuity Model” (HAM) The Selected Bidder (the “Concessionaire”) is responsible for designing, engineering, financing, procurement, construction, operation and maintenance of the Project The scope of works may include construction of new pavement, rehabilitation of existing pavement, construction and/or rehabilitation of major and minor bridges, culverts, road intersections, interchanges, drains, etc. including those prescribed in the Concession Agreement and its Schedules In summary, similar to an OPBRC Source: https://www.adb.org/sites/default/files/publication/546641/swp-068-hybrid-annuity-contracts-india-road-projects.pdf 32 • • • Performance Based Contracts in Dredging Projects PBC to dredging (also known as a “draft guarantee contract”) transfers to the contractor sedimentation risks over a long period Usually port and waterway authorities pay the contractor for all the services via periodic (e.g., monthly) fixed amounts In some cases the PBC contractor is remunerated from tolls paid for use of the waterway. The contract is then equivalent to a concession contract Source: Contractual Model for Dredging Projects to Avoid Disputes: Case Studies of the application of Performance Based Contracts in dredging projects around the world. https://coms.events/pianc-panama/data/full_papers/full_paper_406.pdf 33 • • • Transfer of Risks Under OPBRC OPBRC tends to transfer more risks from the Employer to the Contractor than traditional forms of contract Governance may affect the willingness of the private sector to assume risks Some risks in OPBRC projects: Land Availability, Design, Construction, Maintenance, Condition at Handback, Force Majeure (which is related to road resilience) 34 GI Hub PPP Risk Allocation Tool  Global Infrastructure Hub – originally under the G20, as of July 1, 2024, it became the global knowledge platform of the World Bank's Public-Private Infrastructure Advisory Facility (PPIAF): https://www.gihub.org/about/about/  PPP Risk Allocation Tool - a reference guide for governments and other stakeholders in deciding on the appropriate allocation of project risks in a given PPP project, as well as potential risk mitigation measures  Available in English and Portuguese at: https://ppprisk.gihub.org/  Available in Spanish at: http://dx.doi.org/10.18235/0001510 GI Hub Risk Allocation Matrices A risk allocation matrix is a precondition to the drafting of every PPP agreement/OPBRC contract The Tool includes 18 annotated risk allocation matrices for PPP transactions The matrices can be accessed at: https://ppp-risk.gihub.org/ To download: https://www.gihub.org/resources/publications/ppp-riskallocation-tool-2019-edition/ Sectors covered: Transport, energy, water & waste, communication, industrial park, social • • • • Resilient Roads Infrastructure services are essential for raising and maintaining people’s quality of life But sometimes infrastructure is unreliable, a problem that is magnified by natural hazards Infrastructure resilience—the ability of infrastructure systems to function during and after a natural shock. See “Lifelines: The Resilient Infrastructure Opportunity” http://hdl.handle.net/10986/31805 If properly designed and implemented, PBC/OPBRC will lead to resilient roads 37 Climate Change ❑Climate change is an acute threat to global development and efforts to end poverty ❑Climate change impacts include droughts, floods, more intense and frequent natural disasters, air pollution, sea-level rise ❑With each passing year, the risks of unabated climate change are mounting https://www.worldbank.org/en/topic/climatechange Landslides close roads in Washington State, US, and cut off rural communities. Pierce County, Feb 6, 2020 Source: https://crosscut.com/202 0/02/landslides-closeroads-washingtonsremote-towns-dealisolation 39 How can a Road Administration assure that the OPBRC roads will be resilient? 1/2  Include resilience (e.g., larger diameter culverts), as well as any other design requirements (e.g., min AC overlay thickness), in the Conceptual Design, which would be available to all bidders as an integral part of the Request for Bids (RFB)  State in the RFB that the Contractor will be responsible to prepare, and submit for approval, the Final Engineering Design, considering the Conceptual Design as the minimum requirement  For example, if the Conceptual Design specifies an 8-cm thick asphalt overlay, this will be the minimum acceptable overlay thickness in the Final Engineering Design  When the Contractors are responsible for the design, they assume the design risks, which will help avoid variation orders  If the Road Administration has prepared a Final Engineering Design, make it available to all bidders. However, when incorporating it into the RFB, rename it "Conceptual Design” How can a Road Administration assure that the OPBRC roads will be resilient? 2/2 41  Ideally, all relevant design requirements, including resilience parameters, should be included in the TOR for consultants to prepare the Conceptual Design (or detailed design, in some cases)  If such designs are already underway, and road resilience requirements were not fully included in the contract, a possible solution would be amending accordingly the current consultant's contract  Waiting until the detailed design phase to incorporate requirements related to climate change/resilience would not be practical, because the bidders will prepare their financial proposals based on the conceptual design [Wishful thinking: let the Contractor figure out what to do.]  Any additional requirement after the bidding might result in variation orders [but it is better late than never] Request for Bids (RFB) and Request for Proposals (RFP)  There are differences  RFB: The Most Advantageous Bid (MAB) is the Bid of the Bidder that meets the qualification criteria and whose Bid has been determined to be:   substantially responsive to the RFB, and  the lowest evaluated cost RFP: the Most Advantageous Proposal (MAP) is the Proposal of the Proposer that meets the qualification criteria and whose Proposal has been determined to be:  substantially responsive to the RFP, and  the highest ranked Proposal Source: WB Procurement Guidance: Standard Procurement Documents – An overview for practitioners, Nov 2016. https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework 42 Good Governance in OPBRC Projects  Competitive selection of the successful Bidder  Proper disclosure of relevant information to the public  A Government entity appropriately supervises compliance [usually with the help of consultants] with contractual obligations over the life of the contract  An appropriate legal framework helps to reduce the need for public sector guarantees, facilitating the transfer of risks to the private sector, which is a key feature of OPBRC 43 Governance and OPBRC Structure  44 The Contractor is responsible for ◼ Upgrading/rehabilitating road and O&M over the contract period ◼ Keeping the road(s) in acceptable condition, meeting or exceeding KPIs specified in the Contract ◼ Management of road assets transferred to Contractor over the contract life while ownership of assets remains with Road Administration  The Government pays the Contractor through (a) milestone payments (upgrading, rehabilitation), and (b) periodic O&M payments based on meeting the specified indicators  Governments may not want to pay 100% of investment costs through milestones to keep Contractor’s interest until the end of the O&M phase [so the contractors keep their “skin in the game” – see ITB 33.4]  The Contractor may borrow from banks, as needed. IFIs could provide loan and/or payment guarantees, if agreed Good Governance: Contract Supervision • There is a need to ensure that private sector’s involvement yields maximum benefit for society, and especially road users • The Road Administration will monitor performance of its roads under OPBRC, usually with support of Supervision Consultants • Roads (and structures) shoud follow required standards for construction, operation and maintenance • Supervision involves checking indicators of condition, such as roughness, skid resistance, luminescence of pavement markings, presence and condition of signs, lighting, and other safety features • Contractual payment reductions for the Contractor should be applied when indicators fall outside acceptable boundaries • Dispute resolution processes should be set up for OPBRC projects • Helps assure continuation of services and prevent collapse of projects Defect liability period following completion of the works 1/2 The Contractor warrants that the Works and Services shall be free from defects in the design, engineering, materials and workmanship. General Condition 41.1, Section VIII, OPBRC SPD The Defect Liability Period shall be 12 months from the date of Completion of the Contract, or 18 months from the date of Certificate of Completion of the Works, whichever occurs first, unless specified otherwise in the PC. If during the Defect Liability Period any defect should be found, the Contractor shall, at its cost, repair, replace or otherwise make good such defect. GC 41.2 Particular Conditions shall supplement the GC. They are to be completed by the Employer and presented as part of the bidding document. Whenever there is a conflict, the PC provisions shall prevail over those in the GC. PC: Section IX of OPBRC SPD https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework Defect liability period following completion of the works 2/2 Following satisfactory completion of the rehabilitation/improvement works, the Employer will issue a Certificate of Completion of the Works The Employer shall retain the percentage indicated in the PC from each payment due to the Contractor for the Works. The regular lump-sum payments for performance-based O&M will not be subject to retentions, unless indicated in the PC. GC 51. Reduction of regular O&M payments due to non-compliance with the performance indicators will be made. See GC 47.1. As a result, some Employers prefer to not require a Defect Liability Period (possible duplication) In summary, the Employer can decide, through the PC, whether to require or not a DLP Opportunities for risk transfer and mitigation • Final engineering design – Contractor’s responsibility, considering Conceptual Design as minimum requirement • Timely land availability - obtain/price land before request for bids (RFB), to the extent possible • Resettlement of people and activities - proper social assessment before issuing RFB • Geological issues - surveys, sharing information • Environmental issues – obtain permits before issuing RFB, to the extent possible Public-private risks & ways to manage roads Availability plus tolls Non-PPP toll roads PPP toll-roads Non-PPP toll-free roads PPP toll-free roads Toll-road concession Shadow toll Availability payments OPBRC A range of ways to finance a PPP project User Fees Construction Subsidy User Fees User Fees Construction Subsidy User Fees (Tolling, Tariffs) Availability Payments Construction Subsidy Availability Payments Availability Payments Availability Payments Typical OPBRC Also OPBRC Force majeure and resilience Force majeure: The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance Contractual risk allocation Insurance Public risk (i.e., Employer’s risk) Is the project road resilient? Climate events (e.g., storms, hurricanes) Earthquakes In Chile, bridges that collapsed because of the 2010 earthquake were rebuilt by the concessionaries, with no cost to the public sector A road section that was closed due to high-water conditions from the Snoqualmie River (Washington State) on Nov. 12, 2021, after inches of rain fell within hours Source: The Washington Post, Nov 18, 2021 (Ted S. Warren/AP), page A25 How is the OPBRC Contractor paid? 1/2 1. The Contractor is typically paid through milestone payments for: Bringing the road to a certain service level, through Rehabilitation and/or Improvement Works carried out in the first years of the contract This phase is typically called the Works (or Investment) phase of the contract When the government provides milestone payments during the rehabilitation period, the amount of such payments is usually called “subsidies” (or “construction grant”) in financial modeling How is the OPBRC Contractor paid? 2/2 2. The Contractor is typically paid through periodic (e.g., monthly, quarterly) lump-sum payments, during the O&M phase of the contract, for: Maintaining the road at a specified service level for a relatively long period (usually 4 to 8 years) For example, if the OPBRC contract life is 10 years and rehabilitation works will be carried out in Years 1 to 3, then 28 quarterly payments would be made in Years 4 to 10. There may or may not be payments during the Works period The contractual amount of each payment is defined in the bidding process Typical OPBRC Request for Bids Usually bidders are requested to present their financial offers for: • Rehabilitation and improvement works (which may include other requirements, such as facilities for axle load control) • Periodic (e.g, Monthly, Quarterly, Semi- annual) payments during the O&M phase 56 OPBRC Total Bid Price TBP = C1 + N x C2 • TBP: Total Bid Price • C1: Cost of Rehabilitation & Improvement Works, which may be limited, for example, to 80% of TBP • C2: Amount of each Quarterly Payment during O&M period • N: Number of Quarterly Payments during the O&M period • Do we have to use Present Values for C1 and C2? 57 OPBRC Total Bid Price TBP = C1 + N x C2 • TBP: Total Bid Price • C1: Cost of Rehabilitation & Improvement Works, which may be limited to, for example, a maximum of 80% of TBP • C2: Amount of each Quarterly Payment during O&M period • N: Number of Quarterly Payments during the O&M period • Do we have to use Present Values for C1 and C2? No because 58 all prices are in terms of 28 days prior to bid submission date Contract Management •Question: What is the first key step for good Contract management? •Answer: Read the Contract (as well as any other relevant documents) 59 Contract Management Tasks •Inspect contract work often •Make payments based on contract deliverables •Establish dispute review procedures •Minimize opportunities for contract variation •Ensure that the contractor delivers based on contractual obligations •Carry out audits 60 OPBRC Contract Management •Project Manager, Road Manager, Supervision Consultant •OPBRC Standard Procurement Document, Part 3 •Section VIII – General Conditions of Contract •Section IX – Particular Conditions of Contract Source: https://www.worldbank.org/en/projects-operations/products-andservices/brief/procurement-new-framework 61 Contract Management: Roles and Definitions •The Employer is the party who employs the Contractor to carry out the Works and Services [Section VIII – General Conditions of Contract] •Example: Lao Ministry of Public Works and Transport/Department of Roads (MPWT/DoR) 62 Project Manager •The Project Manager is the person named in the PC who is responsible for the overall administration of the Contract on behalf of the Employer, and the supervision of works and services to be performed thereunder • The Project Manager may delegate through a written instrument some of his functions to any other competent person [e.g., Supervision Consultant], retaining however the overall responsibility for the actions of that person •The Project Manager may not delegate the overall administrative control of the Contract. [General Conditions of Contract, Section VIII; Particular Conditions of Contract, Section IX] 63 Contractor and Road Manager •The Contractor is a person or corporate body whose Bid to carry out the Works and Services has been accepted by the Employer •The Road Manager is a person appointed by the Contractor who is in charge of managing all activities of the Contractor under the Contract. He/she is also the Contractor’s Representative for the purposes of the contract 64 Dispute Review Expert •Dispute Review Expert (DRE) is one expert selected and acting in accordance with rules and procedures defined in the Contract to seek to resolve any dispute of any kind that may arise between the Employer and the Contractor in connection with or arising out of the contract, as provided for in GC Clause 6 of the Contract 65 Dispute Review Board •Dispute Review Board (DRB) is a board of three members selected to act in accordance with rules and procedures defined in the Contract to seek to resolve any dispute of any kind that may arise between the Employer and the Contractor in connection with or arising out of the Contract, as provided for in GC Clause 6 of the Contract 66 Contractor’s Supervision •Section VIII General Conditions of Contract •18.1.2 Contractor’s Supervision. The Contractor shall give or provide all necessary supervision during the execution of the Works, and the Road Manager or its deputy shall be on the Site to provide full-time supervision of the execution. •The Contractor shall provide and employ only technical personnel who are skilled and experienced in their respective areas, and supervisory staff who are competent to adequately supervise the work at hand. 67 Contractor’s Self Control Unit - SCU •GC 25.2 The Contractor shall establish, within his own organizational structure, a specific Unit staffed with qualified personnel, whose task is to verify continuously the degree of compliance by the Contractor with the required Service Levels. The SCU will also be responsible for the generation and presentation of the information needed by the contractor for the documentation required as defined in the Specifications. The SCU will be responsible for maintaining a detailed and complete knowledge of the condition of the Road and to provide to the Road Manager all the information needed to efficiently manage and maintain the Road. The SCU shall also carry out, in close collaboration with the Project Manager, the verifications on the Service Levels. [GC Clause 25.2, PC: Self Control Unit] 68 Self Control Unit - SCU •Should be staffed with qualified personnel •Should have a lab with facilities to test materials as required •Should have available appropriate equipment, such as Laser Profilometer, Falling Weight Deflectometer, Grip Tester, Portable Scales, Traffic Counters •The above requirements should be included in the RfB so Bidders can price their bids accordingly 69 Main Risks in OPBRC Projects  Land purchase and site risk  Force majeure risk  Environmental and social risk  Exchange rate risk  Design risk  Interest rate risk  Construction risk  Insurance risk  Completion (including delay  Political risk and cost overrun) risk  Performance risk  Resource or input risk  Payment risk  Maintenance risk  Regulatory  Inflation risk  Disruptive technology risk  Early termination (including any compensation) risk Early Termination Risk  Because of relatively high rehabilitation costs (initial or Works phase of the contract) and smaller maintenance costs (O&M phase of the contract), the Contractor may not want to be fully engaged after the completion [and payment] of the Works  The Employer can prevent this by making partial payments (or no payment) during the Works phase of the contract  ITB 34.4, the “skin in the game” Clause of the OPBRC: “The price of the Rehabilitation and Improvement Works included in each Bid shall not be higher than the threshold indicated in the BDS. If the Bidder estimates that its costs for the Rehabilitation and Improvement Works are higher than the threshold indicated in the BDS, it shall include the portion above the threshold in its price for the Maintenance Services. If the Bid price in the Most Advantageous Bid is above the threshold indicated in the BDS for the Rehabilitation and Improvement Works, the Employer may reject the Bid.” Typical risk allocation under different types of projects Typical OPBRC GI Hub: Summary Risk Matrix for a Road PPP Land Availability, Access and Site Risk • Risk description: The risk associated with selecting land suitable for the project; providing it with good title and free of encumbrances; addressing indigenous rights; obtaining necessary planning approvals; providing access to the site; site security; and site and existing asset condition • Basic risk allocation: Public sector https://ppp-risk.gihub.org/ Operating Risk • Risk description: The risk of events affecting performance or increasing costs beyond modelled costs; performance standards and price; availability of resources; health and safety; compliance with maintenance standards; and vandalism • Basic risk allocation: Private sector https://ppp-risk.gihub.org/ World Bank Group Guarantees • May be needed depending on the perception of risks (e.g., poor governance) • Credit Guarantees - For loans to the public or private sector • Example: guarantee provided to a lender to an OPBRC contractor or BOT concessionaire • Political Risk Insurance - Insuring against non-commercial risks for private sector projects or public-private partnerships • Example: guarantee of the quarterly O&M payments to an OPBRC contractor https://www.miga.org/WBGGuarantees/about-us Example of a Political Risk Insurance: Guarantee of the quarterly O&M payments to an OPBRC contractor Indemnity Agreement Government Guarantee agreement Government payments Loan repayment Project Company (OPBRC Contractor) loan Commercial Bank Project agreement 77 Road Contracting Options and the Distribution of Key Risks Option Construction Demand Performance - Traditional Public Public Public Outsourcing - OPBRC Private Public Private - BOT (Tolls) Private Private Private - Shadow Tolls Private Private Private - Availability Private Public Private Payment Allocation of risks High RISKS TO PUBLIC SECTOR Force Account Traditional Outsourcing OPBRC Availability Payments Shadow Tolls Toll Road BOT Decreasing Public Risks, Increasing Private Risks Low RISKS TO PRIVATE SECTOR BOO High OPBRC financial model: Development and applications 81 OPBRC Financial Model and Team Exercise Outline • Financial models of the Toolkit for PPP in Roads and Highways • Adaptation of the Toolkit graphical toll road model to Output- and Performance-Based Road Contracts (OPBRC) • Model input and output • An interactive demonstration of the model • Impact of “guarantees” on required periodic payments under OPBRC • Team exercise 82 Toolkit for PPP in Roads and Highways • Developed by the World Bank/PPIAF • To assist transport sector policy makers to promote private sector participation and financing of roads • Available, in English and Russian, free of charge at: https://ppiaf.org/sites/ppiaf.org/files/document s/toolkits/highwaystoolkit/index.html 83 Toolkit Financial Models • Simplified financial models, graphical and numerical versions • Familiarization of non-financial specialists with the basics of project finance and financial simulations for a road PPP project • Facilitate the computation of key parameters which affect the financial viability of a PPP project • The financial models are available at: https://ppiaf.org/sites/ppiaf.org/files/documents/to olkits/highwaystoolkit/6/index.html 84 Use of Financial Models  The employer (e.g., a road administration), bidders, and lenders use financial models to determine a project’s financial feasibility from their perspectives  Financial models produce indicators that help  the employer to determine the amount of public financial contribution that might be needed  private bidders to determine the potential profitability of the project  lenders to check the project’s capacity to repay debt Source: Financial Structuring and Assessment for Public–Private Partnerships: A Primer. US Federal Highway Administration, 2013. https://www.fhwa.dot.gov/ipd/p3/toolkit/publications/primers/financial_structuring_and_assessment/ PBC/OPBRC financial model • Based on the graphical model of the Toolkit for PPP in Roads and Highways • Using proper input data, can be used to estimate the required annual payments under an OPBRC • Available free of charge • Source: G. Mladenovic and C. Queiroz. A Financial Model to Estimate Annual Payments Required under Outputand Performance-Based Road Contracts. ASCE/T&DI International Conference on Transportation & Development, Pittsburg, USA, July 15-18, 2018 https://ascelibrary.org/doi/10.1061/9780784481561.016 86 Key Financial Analysis Outputs • Key outputs include (i) return on equity (ROE) or equity internal rate of return (IRR), and (ii) annual debt service coverage ratio (ADSCR) • Return on equity (ROE) is a measure of profitability that indicates how many dollars of profit a company generates with each dollar of shareholders' equity. For example, ROE = 12% per year 87 Net Present Value (NPV) and Internal Rate of Return NPV = Sum of PV of benefits minus sum of PV of costs 𝑵𝑷𝑽 = σ𝑵 ί=𝒐 𝑩ί (𝟏+𝒓)ί − σ𝑵 ί=𝒐 𝑪ί (𝟏+𝒓)ί Internal Rate of Return (IRR) 𝑵 𝑵 ί=𝒐 ί=𝒐 𝑩ί 𝑪ί 𝑶 =෍ −෍ ί (𝟏 + 𝒍𝑹𝑹) (𝟏 + 𝒍𝑹𝑹)ί Annual debt service coverage ratio • Annual debt service coverage ratio (ADSCR) represents, for any operating year, the ability of the project contractor/concessionaire to repay the debt • ADSCR is calculated by dividing the net operating income (NOI) by the debt service (DS), for a given year: ADSCRi = NOIi / DSi • ADSCR is a measure of bankability of the project 89 Examples of Financial Indicators Typical range to check whether a project can attract private investors and lenders: Financial Indicator Developed Countries Developing Countries (High-income) (Low- and Middle-income) Equity Internal Rate of Return (or Return on Equity), in real terms, IRR (%) 5 to 9 10 to 16 Annual Debt Service Cover Ratio, ADSCR 1.1 to 1.2 1.2 to 1.4 Note: Actual values depend on many factors, including the perception of risks (e.g., host country political stability, nature of the project, government support). Investors may put up with delays, bureaucracy and other costs if the expected returns are high. Input data includes •Project parameters, such as contract life, rehabilitation/upgrading period, capital cost, O&M cost, capital grant •Loan terms: interest rate, grace period, repayment period •Macro-economics parameters such as inflation, tax rates (corporate, VAT) 91 Cash Flow Graph of the OPBRC financial model 92 Impact of Guarantees • When a guarantee is provided to bidders, usually the bidders are able to obtain loans with lower interest rate and/or longer maturities • The expected result, which can be estimated using the OPBRC financial model, is a lower Annual Payment offered by the bidders in their financial proposals • Details of the World Bank Guarantees Program are available at: https://www.miga.org/WBGGuarantees/about-us 93 Financial Model Team Exercise 94 Team Exercise Objectives Instructions to participants Assumptions and data Questions to each team Presentation of results by each team Discussions Objectives of the Exercise This practical session will provide participants with an opportunity to use a graphical financial simulation model (which was developed based on the toll road financial model of the World Bank/PPIAF Toolkit for PPP in Roads and Highways) to estimate periodic payments under an OPBRC (or an estimate of the “shadow bid”) Following completion of the exercise, the participants should be able to work on several OPBRC financial issues, such as the main factors defining the minimum periodic payments required for an OPBRC to attract bidders, carrying out sensitivity analysis, and estimating the impact of “guarantees” Instructions to Participants Please form teams with a few members each Each team will be assigned a number, n = 1, 2, 3… Each team will be given a set of data for a proposed OPBRC project and will be asked questions on the financial assessment of the project Please choose the team member who will make a brief presentation of your team’s results, after deliberations Please assume that previous studies have shown that the proposed OPBRC is economically justified (for example, using HDM-4 or RONET), and socially and environmentally sound Assumptions regarding payments to the Contractor • For the purpose of this exercise (which is also the case in several actual contracts), please assume that the only payment made to the Contractor will be the periodic (e.g., monthly or quarterly) lump-sum remuneration during the O&M period • The contract requires that specified rehabilitation works be carried out in the first year of the contract, but there will be no payments during such year (i.e., Year 1) • The OPBRC contractor complies, each period, with the specified Service Level • Any unforeseen emergency works will be remunerated separately, based on the Bill of Quantities included in the contract How will the Contractor be paid? • The Contractor will be paid through periodic (e.g. monthly, quarterly) lump-sum payments for: • Bringing the road to a certain service level, through Rehabilitation Works carried out in Year 1 of the contract; and • Maintaining the road at a specified service level for a relatively long period (usually 4 to 10 years) • For example, if the OPBRC contract life is 8 years and rehabilitation works will be carried out in Year 1, then 84 monthly (or 28 quarterly) payments would be made in Years 2 to 8. There will be no payments during the rehabilitation period. Note: When the government provides milestone payments during the rehabilitation period, the amount of such payments is entered in the model as “subsidies” (also called construction grant) Data to be used by each team OPBRC contract life: 8 years Rehabilitation cost in year 1: (5 + 5n), in US$ million, where n is the team number Annual maintenance cost during the first year after rehabilitation (in this case, Year 2): $1.5 million (maintenance cost in subsequent years is automatically adjusted by the model based on inflation) Capital structure: Equity, 30%; Loans, 70%; No investment subsidies (i.e., no milestone payments) Nominal interest rate: 9% per year Loan grace period: 1 year Loan repayment period: 4 years (i.e., debt maturity: 5 years) Data to be used (cont’d) Discount rate (real terms): 8% Inflation: 4% per year Tax rates: (a) VAT: 20%; (b) Corporate tax: 15% Amortization period: 7 years Financial Indicator Targets Please assume that the following targets (or constraints) will have to be met for the OPBRC to attract private bidders: Equity Internal Rate of Return (or Return on Equity): ROE ≥ 12% Annual Debt Service Cover Ratio: ADSCR ≥ 1.2 Questions to each team 1. Please estimate the minimum annual payments (in years 2 to 8) required for the OPBRC project to be able to attract bidders Note: The minimum annual payment ($ million/year) can be obtained by trial and error using the “Cash Flow” sheet of the OPBRC graphical financial simulation model. After you have entered all the data applicable to your specific OPBRC project, you can vary the (initial) annual payment so the financial indicators calculated by the model are equal to, or just above, the financial indicator targets (see previous slide). Annual payments in subsequent years are adjusted for inflation. Questions to each team (cont’d) 2. Please estimate the minimum quarterly payments (in years 2 to 8) required for the PBC/OPBRC project to be able to attract bidders 3. How does the project financial internal rate of return (IRR) vary with the cost of rehabilitation works? 4. How does the equity IRR vary with the cost of rehabilitation works? 5. What financial criterion (or criteria) would you include in the bidding documents, to allow for an objective evaluation of financial proposals under a competitive selection of the PBC/OPBRC contractor? Questions to each team (cont’d) 6. Assuming that a World Bank payment guarantee would lower the interest rate from 9% to 6% per year and increase the debt maturity from 5 to 6 years, what would be the impact of the guarantee on the annual payments? 7. Please make a brief presentation summarizing your team’s discussions and results References • World Bank/PPIAF. 2009. “Toolkit for PPP in Roads and Highways.” http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/index.html http://go.worldbank.org/MWXJNY6CC0 • World Bank TP 42: A Guide to Delivering Good Asset Management in the Road Sector through Performance Based Contracting. Ben Gericke, Theuns Henning and Ian Greenwood http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/05/01/000442464_2014050 1134735/Rendered/PDF/878270NWP0TP4200Box377314B00PUBLIC0.pdf • Mladenovic, Goran, and Cesar Queiroz. 2018. A Financial Model to Estimate Annual Payments Required under Output- and Performance-Based Road Contracts. Presented at the ASCE/T&DI International Conference on Transportation & Development, Pittsburg, July 15-18, 2018 https://ascelibrary.org/doi/abs/10.1061/9780784481561.016 • Stankevich, Natalya, Navaid Qureshi and Cesar Queiroz. 2009. Performance-based Contracting for Preservation and Improvement of Road Assets. World Bank TN-27 https://collaboration.worldbank.org/content/sites/collaboration-for-development/en/groups/road-assetmanagement-and-rural-accessibility/documents.html • World Bank. July 2023. Standard Procurement Document for Output- and Performance-based Road Contracts (OPBRC) https://www.worldbank.org/en/projects-operations/products-andservices/brief/procurement-new-framework • Eric Metreau et al. 2024. World Bank country classifications by income level for 2024-2025. July 1, 2024. https://blogs.worldbank.org/en/opendata/world-bank-country-classifications-by-income-level-for106 2024-2025-ja?cid=ECR_E_NewsletterWeekly_EN_EXT&deliveryName=DM224433 Cesar Queiroz, PhD, PE, M.ASCE, M.TRB OPBRC/PPP Technical Advisor Roads and Transport Infrastructure Consultant Course Advisor and Lecturer, International Law Institute (ILI.org) Former World Bank Highways Adviser Tel: +1 301 755 7591 Email: [email protected] Washington, DC USA http://www.worldbank.org/en/search?q=cesar+queiroz&currentTab=1 http://www.linkedin.com/in/cesarqueiroz https://www.ili.org/training/1521-2024-public-private-partnerships-financialand-risk-analysis/ Acknowledgment: This presentation draws heavily on a seminar delivered by the Author in Lao PDR on July 30, 2024, on behalf of the World Bank.