Update on CSP Front, Part 2 – Games People Play in “Swiss Challenge” Biddings
David Celestra Tan, MSK
14 February 2016
It is Valentines Day and it is great to read the consumer-heartwarming news about the ERC disagreeing to the requests of many electric cooperatives for exemption from the mandatory bidding or CSP of their pending power supply contracts.
The deadline set by the ERC was November 6, 2015 for filing with their applications with the ERC to be exempted from the new rule as called for in the national policy set by the Department of Energy on June 30, 2015.
Part of sensible governance is the use of an orderly transition period from an old system to a new one. In the case of the CSP rule, where competitive bidding is required, there is a need for a rational transition period to deal with those power supply contracts that have already been signed before November 6, 2015. This is both to be fair to those DU’s and generators whose contracts have been signed and close to implementation and to assure the timely development of power supply to consumers.
We have to hand it to the ERC Commission led by new ERC Chairman Jose Vicente Salazar for deciding on a sensible transition CSP method, one of which is a Swiss Challenge (or price challenge as used by Meralco recently). Happy Valentines to you too, your Honors!
“Swiss Challenge” has its basis in the BOT Law in dealing with unsolicited proposals and defined under Section 10.2. Obviously it must not be in the governments “list of priority projects”.
Should it be blindly adopted for purposes of implementing the “Competitive Selection Process” (CSP) policy on power supply contracts?
Swiss Challenge (or price challenge) favors a chosen project proponent with a “right to beat” privilege and hence is only theoretically competitive. It also discourages true competitors from bothering to bid. In fact it is not unusual for potential bidders to back out because they can see that the rules are already designed to favor one preselected bidder. One of its major flaws is the challengers can only challenge the price and not deviate from the technical and commercial aspects even if those are actually faulty and disadvantageous to the off-taker and the consumers.
The key issue is what the original proponent would have done to be entitled to the privilege of “right to beat” the other bidders?
First it must be an Innovative Proposal. This Means an infrastructure proposal submitted by a Private Sector Participant that has innovation in technology that is unique and legally owned or authorized to be used by the Proposal Initiator that could result in increased value addition; it may refer to incremental, emergent or revolutionary changes in products, services, costs, and environmental advantages.
Some private proponents claim that special circumstances dictate the necessity to sole-source some project proposals, such as the following reasons:
• A project developer possesses intellectual property rights to key approaches or technologies;
• A lack of private-sector interest due to the small scale, remote location, or political risk of the project; • Organizing a public tender may not be cost efficient for governments, bidders, or 2 both;
• The speed of project development would be more rapid through negotiations, especially during emergencies or widespread shortages. Intellectual Property Rights Many companies propose unsolicited projects claiming to use new technology. The BOT Law as revised in 2012 deals with “new technology” under Section 10.2
SECTION 10.2 – NEW TECHNOLOGY
The new technology must possess at least one of the following attributes:
a. A recognized process, design, methodology or engineering concept which has demonstrated its ability to significantly reduce implementation of Construction costs, accelerate project execution, improve safety, enhance project performance, extend economic life, reduce costs of facility maintenance and operation s, or reduce negative environ mental imp act or social/economic disturbances or disruptions either during the project implementation/Construction phase or the operation phase;
b. A process for which the Project Proponent or any member of the proponent consortium possesses exclusive rights, either world -wide or regionally; or
c. A design, methodology or engineering concept for which the proponent or a member of the proponent consortium or association possesses intellectual property rights.
The idea of “intellectual property rights” means having the exclusive or priority rights to offer the service. For power generation, this can include having the water rights to a mini-hydro project, locational rights to a wind-rich area. For the distribution utility it means deciding whether the power supply it needs can be provided from different options.
SECTION 10.3 – PROJECTS INELIGIBLE FOR UNSOLICITED PROPOSALS Projects included in the “List of Priority Projects”.
Most Power generation projects are no longer innovative and involve old and established technologies. Diesel plants, coal, natural gas, solar.
Games People Play in CSP
1. Swiss Knife
One EC had the nerve to invite for challengers without disclosing the price that is being challenged on the claim that it is “not fair” to the original offeror! (That was Swiss alright but not a Challenge!)And the DOE then certified that, for regulatory compliance,” the EC had conducted a CSP” apparently thinking (or not thinking) that it does not matter whether the CSP was manipulated and not truly competitive. This resulted to the government paying more than P100 million a year in additional subsidies or P1.0 billion over its 10 year term. (Did the PDAF scandal only involve P980 million?) It involved the old diesel plant technology.
2. Ropa Dope
In another case, the EC and the favored bidder contrived a scheme where the bid bond was required to be a cash bond of tens of millions of pesos. After the naturally scared potential bidders did not buy the tender documents, the terms of the bid were amended to allow same amount of bid bond but in surety bond not cash. By that time the potential bidders who did not buy the tender documents were no longer required to be notified. Hence competition was eliminated and there were only two bidders, and the second one, as you guessed, was a joker bid. The increase in missionary subsidy was about P20 million a year. This involved diesel technology.
3. Trojan Horse Gambit
In yet another case where there was a battle between an RE biomass project versus a coal project, the EC with the inexplicable blessing of the Arroyo ERC and the DOE’s EPIMB allowed the removal of VAT in the bid comparison thus eliminating the “true cost of generation” disadvantage of the favored Coal proponent. On top of that, the EC and DOE already knew at that time that the people of their island did not want coal to protect the islands main business which was tourism. Thus allowing coal as a bid almost guaranteed a delay in the project because of lengthy battles with the community environmentalists. As you guessed, the coal proponent won the CSP but the coal plant had been rejected by the people in three different towns. That island is now suffering from power shortages.
Another mystery was the PSA was changed to P12.80 per kwh of bunker c based power after the bidder won with a P9.50 per kwh bid offering coal. This, with the approval of both the DOE and ERC. Some companies can get away with murder.
4. Hot Dog Sandwich
In this one, the DU will call for bids that are specifically suited to the specifications, location, and timetable of the preferred proponent specially a sister company. The “hot dog” is sandwiched between specifications and delivery time that only the preferred proponent can meet. The DU waits until its preferred supplier has had an insurmountable headstart to gain an advantage and offer specifications, permits, and delivery time that other challengers will be impossible to beat. We expect the large distributor-generator groups to try this one.
Outwitting the rules is a national past time in the Philippines. Let us hope the new DOE Secretary and new ERC Chairman will not allow these CSP shenanigans to happen.
If the DOE and ERC check the records, the Swiss challenge biddings in the Spug areas and even Meralco recently, either end up with no challenging bidders, or with joker competitor bids.
Swiss or Price Challenge should not be an acceptable procedure for compliance to the words and spirit of the CSP policy of the DOE. This must be the standard policy. However, for a Transition CSP of say 90 days and in the interest of continuing direly needed power supply projects, Swiss Challenge can be tolerated…..but with well thought off safeguards to assure “true challenges” to the price.
We offer the following safeguards for the consumers:
1. The PSA must be a signed and binding and notarized contract before November 6, 2015. No exceptions. Board approvals and notice of awards are not PSA contracts.
2. It must have been awarded in accordance with the bilateral contract rules in effect at that time before November 6, 2015. If it is for the EC in the off-grid area then it must have undertaken a truly competitive bidding or CSP under the existing rules of the DOE for CSP in missionary areas. (DOE Circular 2004-01-001)
3. The contract cannot be between related DU and Genco.
4. Encourage True Bidders and Level the playing field
Swiss Challenge actually is normally intended to favor a chosen supplier. So a Swiss Challenge term of reference normally contain requirements that favor him and difficult for new bidders to challenge.
a) Sufficient time to submit a challenge bid
New bidders are normally allowed about 45 days to submit their bid, hardly enough to prepare a power supply proposal especially bigger projects.
b) Sufficient time to Complete the project
Since the proponent has had probably a year’s jumpstart in preparing his offer, there can be a truly competitive challenge if new bidders are given as much time as feasible for project completion.
The EC or DU must be required to prove to the satisfaction of the DOE that the intended power supply is urgently needed and proceeding with the signed contract is its best chance to meet the timetable and that the contracted capacity and technology is appropriate for its service area. If the power supply timetable has room, then the Swiss Challenge bidding must allow for a longer delivery timetable instead of the one provided for under the contract. This is one area of levelling the playing field for new bidders especially when time constraints for project completion are not really necessary.
c) Sanitizing the Terms of Reference
The proposed terms of reference for the challenge must be thoroughly reviewed by a specially trained competitive bid team at the DOE that will comb through the proposed bid terms to spot provisions that tend to favor the current proponent and put the new bidders at a disadvantage or outright deterrent for new bidders.
5. DOE must adopt an Eco-Technical Swiss Challenge (of course it is possible!)
To guard against contracted but improperly conceptualized power project, the challenge shall be both economic (price) and technical.
a) A bonafide challenger can match the proponents price or lower, offer superior terms, and also be allowed to improve or revise the specs for the better.
b) An independent technical consultant hired by the DOE and ERC can evaluate whether the technical revision was an improvement over the originally offered technical specifications. Like, brand new vs refurbished engines, or 4mw engine sizes instead of 8mw.
If it is an improvement, the original proponent would be allowed to match or lower both the technical and price of the challenger.
6. This Transition CSP must definitely require the use of independent Third Party bid administrators.
7. Stiff Penalties
For good measure the ERC must specify stiff penalties to those who will be found to be circumventing the November 6, 2015 deadline likely falsifying and anti-dating the PSA.
We can refine international practices to suit Philippine conditions especially when it will benefit the consumers. Maybe we should call this Filipino Challenge.
This Transition CSP program is only for those DU’s who did not have any PSA’s exempted by the ERC under the normal CSP policy that came into effect on November 6, 2015.
In the case of Meralco and Meralco PowerGen, they should no longer be allowed to avail of this transition CSP because their two contracts the 480MW Mauban expansion and the 600mw Redondo Power project in Subic have already been exempted under this new CSP rule.
These safeguard ideas are by no means complete. The point is yes, Swiss challenges can be adopted as Transition CSP only for a fixed grace period with appropriate safeguards to protect consumers and assure a truly competitive challenge. And only for signed and binding PSA’s and with a 60 day deadline to submit the ERC application. Swiss Challenge should not be adopted as normal policy for CSP purposes.
Happy Valentine’s Day everyone!
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