Case Study: Pre-bid investment review

INTRODUCTION

Equity investment by banks and other funders in Special Purpose Vehicles ("SPVs") that bid for large publicly procured contracts is now commonplace. This role is additional to the more traditional provision of senior debt.

The decision to invest involves the requirement for thorough investment evaluation of the project. However, investors must also be comfortable that the composition and capability of the bid vehicle is optimised in order to enhance the probability for success.

We have found that a typical investment appraisal often overlooks detail relating to aspects of the composition and governance of the SPV that can have a damaging effect during or beyond the bid process. Also that resolution of this will almost invariably involve unplanned effort and expense for the investors.

We therefore developed our Pre-bid Investment Review ("PBIR") which is a detailed commercial and capability review of the SPV. It compliments the existing checks and balances provided by Investment Evaluation and Technical Audit.
Our PBIR has been shown to identify potential pitfalls at an early stage. The issues addressed by the review are addressed below

Issues

At the best of times bidding for complex projects is a high-risk exercise with intense competition and high bid costs. Additionally, for equity investors there are significant risks associated with the performance of their SPV partners and the non-equity members of the consortium. Typically the other SPV partners will be responsible for preparation of a significant element of the tender submission - including not only technical elements such as design and service delivery proposals but also, and most crucially, pricing. In all of these areas the equity investor is potentially at a disadvantage.

It is often the case that deficiencies in the SPV, the supporting consortium or the bid team only come to the attention of the investor when the bidding process is well underway, by which time the majority of the investment in substantial bid costs has been spent or committed. The result is that the investor is presented with some unpalatable options:

to incur yet more cost; and/or
submit an uncompetitive bid; or
withdraw from the competition.

In practice the third option is very rarely exercised and the decision is often taken to press on with the bid - so avoiding the immediate writing off of the initial investment.

This is thoroughly unsatisfactory from an investor standpoint, and certainly not contemplated when the decision to invest was taken. Therefore, the implications for an investor of selecting the wrong SPV or bid team can be very costly in terms of money and lost opportunity.

To assess the risk of equity investment the investor needs to possess a detailed understanding of every aspect of the SPV and the supporting consortium. In addition, as part of the agreement to invest, they need to have agreed as many of the commercial parameters with the SPV and consortium members as practicable. The investor will also need to predetermine a clearly defined set of milestones in order to facilitate effective performance monitoring of the bid process.

These are exactly the issues that are identified and analysed in the PBIR.

Focus Levels

A PBIR examines in detail the entire commercial and capability issues that affect the viability of an equity investment and the probability of a winning bid.

We recognise that the level of review requirement may differ according to the differing parameters of projects undertaken. We therefore offer two levels of review.

Level 1

Examines in detail the entire commercial and capability issues that affect the viability of an equity investment and the probability of a winning bid. This Level 1 review covers all of the items shown in the Assessment Scope below

Level 2

Focuses purely on an assessment of the Bid Team and, if required, the SPV advisers. This Level 2 review covers only the items marked with an asterix shown in the Assessment Scope below.

Assessment Scope

SPV Partners

Do they have the required expertise and track record in successfully delivering projects of this type and size?
Have they worked successfully together previously?
Do they have a track record of commercially competitive and reliable performance in PFI/PPP bidding situations?
Are they commercially independent of the technical and service solution companies?

SPV Structure

Does the shareholder agreement provide comprehensive protection to the investor?
Are the interests and risks of the partners fully aligned?
Are the financial risks equally divided on the basis of equity interest?
Is the governance structure and underlying approval process clearly defined and agreed?

SPV Bid Team*

Assessment of the capability and organisation of the bid team.
Evaluation of the key individuals within the bid team, their experience, success, organisation and approach.
Review arrangements for teams from the partners and consortium members working together.
Process for the clear allocation of responsibility and risk within the SPV/consortium.
Assessment of the dispute resolution and escalation procedures between bidding parties.
There must be a clear and shared approach to the bidding strategy.

SPV Advisers*

Assessment of the individuals who will be providing legal, technical and financial advice.
Analysis of the quantum and depth of advice that is already available to the SPV e.g. through the funders.
Assess possibilities of cost rationalisation.
Consortium Members (non equity partners)
Do they have the requisite expertise and track record in successfully delivering projects of this type?
Does the documentation fully align them to the objective of the SPV?

Initial Commercial Assumptions

It is crucial that as many as possible of the commercial factors are agreed at the outset. These can include:

profit margins;
funding costs;
indexation;
contract terms; and
mobilisation costs

Anticipated Bid Costs

An analysis and review of the proposed bid costs. Does the outline bid budget appear satisfactory (benchmark review)?

MILESTONES

The PBIR will set out a clear programme of milestones for each significant element of the project. These will allow the investor to monitor progress of the bid and be able to identify, at an early stage, when the bid may be potentially falling behind the agreed parameters. This will allow for corrective action to be taken quickly, while minimising disruptive impact on the success of the bid and the bid budget.

OUTPUT

The output of both a PBIR is a written report detailing findings and recommendations. This report will be presented for the client's consideration at a report review meeting.

TIMESCALES

PBIRs usually take about three weeks to complete depending on the Level required. This period can be compressed if access to key individuals and documents can be facilitated.

RESULT

We use this PBIR process extensively in establishing our approach to all of our bid management assignments and to reviews that we undertake for investor clients. We have found it to be an essential and invaluable exercise.