2015 EU-Taiwan Government Procurement Seminar
Taipei, 22 January
Note: This is an abridged version. To read the full report, please click HERE.
The seminar was organized jointly by the European Economic and Trade Office (EETO), under the framework of the European Business and Regulatory Cooperation Programme (EBRC), the Public Construction Commission (PCC) of the Executive Yuan and the Bureau of Foreign Trade (BoFT) of the Ministry of Economic Affairs (MoEA), and co-organized by the European Chamber of Commerce Taiwan (ECCT) and the Department for the Promotion of Private Participation of the Ministry of Finance (MOF).
The seminar was aimed at paving the way to facilitate the harmonization of Taiwan's regulatory standards on public procurement with the best international practices, which will benefit Taiwanese public entities and contractors and ultimately taxpayers, as competition increases.
The full-day event featured opening speeches by guests of honor and three sessions, two of which featured three presentations each. The first two sessions were concluded by Q&A sessions while the final session was a panel discussion featuring the speakers from both of the previous sessions. Subjects covered included best public procurement practices in the EU and an overview of the reform process in Europe on public procurement, how the most economically advantageous tender criteria (MEAT) applies to procurement in the EU and how it has helped to attain high quality and cost-efficient public works, instead of the lowest price system. Subjects covered included also contract terms and conditions and the im
portance of Public Private Partnership when governments are facing budget constraints and the importance of pre-tender planning, information of the public and ensuring transparency in PPP projects.
The seminar was attended by around 185 people including officials from the Taiwanese public entities, representatives from European trade offices in Taiwan, chambers of commerce and from the industry and academia. Many of the attendees, particularly officials from the PCC and MOF, actively participated by asking questions during the Q&A and panel discussion sessions.
Guests of honour:
· Teng Min-chih, Deputy Minister, Public Construction Commission (PCC), Executive Yuan
· Viktoria Lövenberg, Deputy Head of Office, European Economic and Trade Office (EETO)
· Yang Shu-mei, Deputy Director-General, Bureau of Foreign Trade (BoFT), Ministry of Economic Affairs (MoEA)
· Dr Michael Fruhmann, Head of Unit, Constitutional Service, Austrian Federal Chancellery
· Marie Gøthgen Clasen, Assistant Attorney, Horten Law Firm, Denmark
· Francisco Alcoba, Senior Technician, INECO, Spain
· Tiffany Huang, Managing Partner, Baker & McKenzie, Taipei & Co-Chair, Project & Procurement Committee, European Chamber of Commerce Taiwan (ECCT)
· Lee Chia-chen, Deputy Director-General, Department for the Promotion of Private Participation, Ministry of Finance (MOF)
· Dr Wu Chih-hsiung, Superintendent, Shuang Ho Hospital
Teng Min-chih, Deputy Minister, Public Construction Commission
In his opening remarks, Teng highlighted some key milestones in the development of Taiwan’s regulatory environment related to government procurement. On 27 May 1999 Taiwan’s Government Procurement Act entered into force. The act was intended to bring Taiwan’s regulations in line with international standards. Since then, the government has made continuous efforts to upgrade the procurement environment. Another major milestone was on 15 July 2009 when Taiwan officially joined the WTO’s Government Procurement Agreement (GPA). Teng noted that government procurement is also part of the bilateral free trade agreements that Taiwan has signed with New Zealand and Singapore. Under terms of the agreements, signatories have opened their respective procurement markets to their partners.
Viktoria Lövenberg, Deputy Head of Office, European Economic and Trade Office (EETO)
In her remarks, EETO Deputy Head Lövenberg noted that the EU has recently undertaken a major reform initiative and modernisation of its procurement rules. The new legislation has been adopted and will need to be transposed into national law of EU member states by 2016. This is also true for concessions for which a new legal framework was designed.
The main challenge the EU will be facing over the next couple of years, she said is to ensure that these rules are properly enforced and meet their expected objectives. Some modern monitoring and enforcement tools will help to achieve this. More specifically, the European Commission is envisaging to move beyond the verification of the correct transposition of the rules and to aim for measures to make public procurement ‘SMARTER’ in Europe. This means, among other things, encouraging more professionalization of public buyers, steering the transition to e-procurement, driving consolidation and aggregation of public purchasing and developing more country-specific and sector-specific approaches.
This new approach implies some rethinking of processes, and the tools used. For instance, now that the rules are in place, soft measures (not necessarily legislation) might be more appropriate. The rules are important but it is equally, if not more important, how they are implemented. We also need to remember the impact the rules have on the behaviour of market participants and on market structure, she said.
Yang Shu-mei, Deputy Director General, Bureau of Foreign Trade (BoFT), Ministry of Economic Affairs
In her opening remarks Deputy Director General Yang said that the seminar had been endorsed by the governments and business sectors of both the EU and Taiwan and aims to unlock the vast future opportunities in Taiwan’s government procurement markets. She noted that the BoFT has always been supportive of events held by the EETO and has demonstrated this by supporting past events on subjects including food safety, services and management of high voltage electrical equipment in 2014. She noted that hundreds of participants, including decision makers from our governments, industry and academia attended the seminars, thereby contributing positively to the harmonization of Taiwan’s regulations with the world, assisting the government to address many long-term challenges and to enhance the industrial competitiveness in Taiwan. Since acceding to the GPA, the BoFT has commissioned the Taiwan External Trade Development Council (TAITRA) to implement the Global Government Procurement Project, and launch a website to provide Taiwanese companies with first-hand government procurement information from all over the world. Promoting best practices in this way has helped ICT, surveillance and security firms to secure contracts worth over US$3 billion between July 2009 and the end of 2013. She concluded that the BoFT will step up its efforts to help local industry to tap into government procurement contracts abroad and create a more business-friendly government procurement environment in Taiwan.
Improving the overall procurement environment: Lessons learned and best practices
This session featured three presentations.
1. Topic: The new EU public procurement policy and legal framework – Overview
Speaker: Mag Dr Michael Fruhmann, Head of Unit, Constitutional Service, Austrian Federal Chancellery
Fruhmann introduced the legal framework of the EU. The current legal framework draws on the following legislation:
· Classical Directive (2004/18/EC), which covers public works, public supplies and public services
· Utilities Directive (2004/17/EC), which covers water, energy, transport and postal services sectors
· Directive on Defence procurement (2009/81/EC)
· Remedies Directives (89/665/EEC and 92/13/EC)
In January 2011 work began on a new legal framework starting with a “green paper” evaluation of existing rules through various studies. The studies showed that procurement across borders was still very low, that the median contract value is around €400,000 and that in 70% of all contracts awarded (corresponding to about 80% of values procured) the most economically advantageous tender (MEAT) criterion was used as the award principle, whereas the price only criterion was (and still is) relatively more common in small value contracts, unlike in Taiwan, where the lowest price criterion remains the most commonly used method.
Following the studies, Commission submitted a proposal to the Council in December 2011. After extensive negotiations in the Council and with the European Parliament the proposal was adopted in February 2014 and published in April 2014. Member states have to transpose the new directives and have maximum 4.5 years to implement e-procurement.
The new package consists of Directive 2014/23/EU (Concessions Directive), 2014/24/EU (“Classical Directive”) and 2014/25/EU (“Utilities Directive”) with several hundred pages and was published in the Official Journal of the European Union (OJEU) of 28 March 2014, No. L 94. While the Classical and Utilities directives were substantially changed, there were no changes to the Defence and Remedies directives (2009/81/EC, 89/665/EEC and 92/13/EC). There were seven main objectives of the EU public procurement reform:
· Enhance simplicity and flexibility: It was agreed that rules needed to be simplified following complaints that the rules were too complex
· Allow for more strategic use of public procurement, so as to achieve “strategic” objectives (such as green or social objectives)
· Better access for SMEs
· Sound procedures
· Compliance with GPA
· New rules for concessions (not in place previously).
Although significant changes have been made to the EU rules, the essential structure of the EU PP rules and the PP process remained unchanged: There are for example no changes to the bodies covered (contracting authorities and contracting entities), no changes in the material scope (works/supplies/services covered), and no changes to thresholds of application of the directive (due to GPA obligations). As in the past, contracting authorities and contracting entities must comply with the fundamental principles of Union Law, especially the principles of transparency, non-discrimination, equal treatment and proportionality as highlighted by the jurisprudence of the European Court of Justice (ECJ).
One drawback is that the EU thresholds in the current directives were set over 20 years ago and stem from the GPA (and its predecessor the GATT Code on Government Procurement 1981) and are therefore considered by member states to be unnecessarily low considering the inflation since 1981 (which has not been compensated due to the lack of an indexation clause in the Agreement) and much higher transaction costs today. However, changing the thresholds will depend on future negotiations with the other parties to the GPA (including the US and Taiwan).
The following changes to EU procurement rules have been made.
Simplification & more flexibility
Exemptions for public-public contracts: A number of judgments by the ECJ have identified circumstances where a contract between two public bodies is exempted from the EU rules (so called “in-house” and “public-public cooperation” situations). The new directives codify these conditions, which must all be met. The conditions for the “in-house” exception are: 1) the authority (or authorities) exert(s) on the ‘supplying authority’ a control similar to that which it (they) exercises over its (their) own departments, 2) more than 80% of the activities of the ‘supplying authority’ are for the ‘buying authority/ies’ or other bodies controlled by it/them and 3) there is no direct private capital participation in the ‘supplying authority’, the conditions for the “public-public cooperation” exception are: 1) That participating authorities co-operate to perform public services they must provide, meeting common objectives, 2) The co-operation is for public interest reasons only and 3) The participating authorities perform less than 20% of the activities on the open market. These exemptions are expected to give more flexibility in areas like waste management and “shared services”.
Changes to procedures: There are five main procedures involving competition, compared to four previously. The open procedure and the restricted procedure are unchanged. The “competitive procedure with negotiation” replaces the current negotiated procedure with publication. The scope of application for the competitive dialogue has been aligned with the “competitive procedure with negotiations”. The procedure remains largely unchanged with the exception of a slightly broader scope for negotiations in the final stages of the procedure. The new procedure “innovation partnership” allows authorities to encourage suppliers to develop works, supplies or services not currently available on the market, through a competitive procedure establishing long term partnerships. The exceptional negotiated procedure without prior publication remained unchanged.
The new directives recognise the contribution that negotiations can make to achieve best value for money. They therefore provides for a greater opportunity for authorities to seek better value through negotiations, by setting out broader justifications for its use. These justifications apply equally to competitive dialogue and the competitive procedure with negotiation.
Reduced time limits: Unnecessarily long time limits can increase the costs of procurement and deter suppliers from taking part. The new rules include minimum time limits that are around 30% shorter than at present. These can be shortened further in certain cases (such as if tender documents are electronically available or if a Prior Information Notice (PIN) has preceded the actual notice or in cases of urgency).
When setting time limits authorities must - as now - take into account the complexity of the contract and the time required for suppliers to respond. In all cases, a notice of contract award must be sent to the OJEU within 30 days of conclusion of the framework agreement or contract. All deadlines set by contracting authorities during a public procurement procedure must conform to the principle of proportionality, which provides that all deadlines must be sufficiently long to enable tenderers and candidates to prepare and set the required measures (including the preparation of an expression of interest or the submission of tenders). It also ensures the observance of equal treatment. Additional flexibility regarding time limits is granted to authorities other than central governments, referred to as sub-central authorities (regional or municipal governments).
Light touch regime: Under the new rules, some services (mainly social and health services) will be subject only to a new ‘light touch’ regime to reflect their limited cross-border interest (eg they relate to legal services in the context of national law) or are sensitive (eg services to people). The new regime makes clear the need for an OJEU call for competition notice and an award notice, to ensure the transparency needed to avoid discrimination, but imposes few other obligations. Member states or contracting authorities or contracting entities may therefore establish their own rules for the award of such services. These contracts will only be covered by the directive if their value exceeds €750,000 (a much higher threshold than for other services). Contracts below this threshold are assumed to be of no cross border interest, so no advertising in the OJEU is necessary.
E-procurement: E-procurement is a real revolution in the making, according to Fruhmann. Current EU rules already allow (and indeed encourage) e-communication but the new directives mandate electronic methods in parts of the process (and mandates safeguards on interoperability and data integrity). Electronic OJEU notification and electronic availability of procurement documents to suppliers from the date of notice publication will be mandatory right from 2016 (transposition deadline). Authorities must also, in due course, allow electronic submission of tenders and requests to participate. Starting from mid-2016, notices in the OJEU may exclusively be transmitted via e-notices or an OJS e-sender.
The directives does not normally require electronic processing/evaluation of tenders (an exception to this rule exists for purely electronic procedures such as e-Auctions or Dynamic Purchasing Systems). Oral communication is permitted provided it does not affect essential elements of procurement (eg tender documents) and provided a record is kept of decisions made. Other methods of communication are permitted for sensitive information or where special equipment/file formats are required or where information is so confidential that generally-available tools cannot be used.
The switch to e-procurement poses a real challenge for all Member States (especially for the contracting authorities and contracting entities) as well European businesses and authorities. Since intelligent e-procurement systems provide for a full fledge system for the whole PP cycle, Member States do face the challenge to revolutionize their PP systems as such (and not just switch from paper to an e-environment).
Strategic use of public procurement
Strategic procurement considerations may be taken into account in various stages of the procurement process, however the discussions almost always focus on the possibility to implement such considerations in award decisions.
The new Directives contain prima facie only MEAT as the award criterion. However it will still be possible, as it is now, for an authority to award a contract to the supplier that offers the lowest price. The new regime also provides the possibility to award a contract according to the “lowest costs” criterion. In this respect the directives set out some rules for evaluating such “costs”, especially how life cycle costs (total costs of ownership, maintenance during use and recycling as well as external costs) can be taken into account. External costs or costs imputed to environmental externalities linked to the product, service or works during its life cycle may be taken into account provided their monetary value can be determined and verified. Such costs may include the cost of emissions of greenhouse gases and of other pollutant emissions and other climate change mitigation costs. Where contracting authorities assess the costs using a life-cycle costing approach, they need to indicate in the procurement documents the data to be provided by the tenderers and the method which the contracting authority will use to determine the life-cycle costs on the basis of those data.
As now, the directives do not contain an exhaustive list of award criteria (the directives list for example quality, accessibility, design for all users, and innovative characteristics as possible award criteria). There are however some basic requirements they need to conform to such as the requirement that the award criteria must be linked to the subject matter of the contract. Such a link can be the process of production of goods (eg no toxic chemicals), the provision of services (eg energy efficiency of machines) or trading (eg the use of ‘fair trade’ products in the contract).It is important to note that award criteria must be contract-specific rather than aimed at assessing the corporate policy of the tenderer (for example, it would be wrong to award extra points to a supplier that supplied fair trade products to all its customers). Award criteria must be structured such that the information in tenders can be verified effectively against the criteria. As in the past, the contract notice or the tender documents must disclose the relative weighting of each of the award criteria (including the weighting used, range of weighting or ranking).
As now, technical specifications may refer to the production process or the integration of disabled and disadvantaged workers.
The directives provide that certain services contracts can be reserved for social enterprises and sheltered workshops but these have to meet strict conditions to verify their authenticity.
Innovation partnership: This is a new procedure which allows authorities to encourage suppliers to develop works, supplies or services not currently available on the market, through long term partnerships. When using this option, the authority must disclose required selection information and minimum requirements for tenders as well as award criteria. Innovation partnerships can only be awarded on the basis of the best price-quality ratio (not lowest price).
Use of environmental and social labels: Under the new directive, it is possible to require specific social/environmental labels. However, suppliers must be allowed to offer compliance with equivalent labels or offer other proof (eg technical dossiers) in cases where the label cannot be obtained within the relevant time limits. Labels must also, as they do now, meet certain conditions such as being based on transparent and non-discriminatory criteria and awarded by a body independent of the supplier applying for the label.
Better access for SMEs
Since SMEs make up the major part of EU firms, new rules are designed to help them. Contracting authorities are required, except in the case of contracts whose division has been made mandatory pursuant to national legislation, to consider splitting contracts into lots. Moreover, in order to improve administrative procedures, the Commission is to develop a standard ‘European Single Procurement Document’ which a supplier could use to submit standard information, and which can be reused for any number of procurement opportunities. A draft has been sent out for consultation/approval in January 2015. Once finalized, this will save SMEs a lot of time and effort.
A number of improvements have been made in new rule to improve procedures. These include clarifying conflicts of interests, strengthening and extending grounds for exclusion and rules for simplifying and clarifying the admissible modifications of contracts. For example, if tenders are abnormally low, authorities must verify why (and in case the justification given is not satisfactory abnormally low tenders must be excluded from the procurement process). As is the case now, suppliers must be excluded from contracts if they have been convicted of offences related to organised crime, corruption, fraud or money laundering. New obligations will be introduced to exclude suppliers for convictions for terrorist, child labour and human trafficking-related offences. Moreover, there will be a new obligation to exclude a supplier which has been the subject of a binding legal decision which found a breach of legal obligations to pay tax or social security obligations.
Summary of the new Utilities Directive
While many rules remain unchanged, the new directive provides – as now - a more flexible regime for utilities. One of the major differences is that authorities now have more flexibility in determining the duration of framework contracts. In addition, it remains possible to exempt specific utilities markets in given countries from public procurement rules if it can be proven that the legal/regulatory environment permits access and competition in the sector concerned and the utility operators in the market concerned are subject to competitive pressure (“de jure and de facto competition”). The European Commission establishes, by means of implementing acts, whether the requested utility activity is directly exposed to competition or not. So far the Commission has exempted activities in the field of postal services and energy in various Member States.
Summary of the new Concessions Directive
The new directive on concessions applies to works and services concessions valued at over €5.186 million. Excluded from the scope are drinking water (supply or distribution), exclusive rights, lotteries (but not other gambling services), public passenger transport services, hydraulic engineering projects or sewage projects. Like the “light touch regime” for social and other services in the classical and utilities directive, the concessions directive allows Member States (or contracting authorities or contracting entities) to establish their own rules for the award of concessions, within the framework of treaty obligations (especially transparency and equal treatment). Therefore the directive contains no obligation to use a specific procedure. The award of a works or services concession must involve the transfer to the concessionaire of an operating risk in exploiting those works or services encompassing demand or supply risk or both. The concessionaire shall be deemed to assume operating risk and there can be no guarantee to recoup the investments made or the costs incurred in operating the works or the services (otherwise the contract would be considered to be no concession but a “regular” (public) contract subject to the rules of the classical or utilities directive). The part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market.
The duration of concessions must be limited in order to avoid market foreclosure and restriction of competition. For concession contracts lasting more than five years specific rules to determine the maximum length of such contracts do exist.
Summary of the E-invoicing Directive
The directive on e-invoicing in public procurement (2014/55/EU) mandates the EU’s standardisation body (CEN) to draw up a new European e-invoicing standard. Contracting authorities and contracting entities will be obliged to accept electronic invoices compliant with the new standard (to adapt the various systems to the new standard the aforementioned obligation is effective only 1.5 years after the standard has been published). The standard will only cover public procurement invoices and is expected to be ready in about three years.
2. Topic: Taiwan government procurement contracts - Focus on terms and conditions
Speaker: Tiffany Huang, Managing Partner, Baker & McKenzie, Taipei
The speaker provided a background and overview of the procurement environment in Taiwan.
Procurement law in Taiwan dates back to 1998 (although the Government Procurement Law became effective in 1999).
There are three types of model contacts: for construction, property and services. In principle the model contract is adopted by all levels of government.
Features of the model contract: The International Federation of Consulting Engineers (FIDIC) contract is quite popular in Taiwan. It was used in the Taipei metro (MRT), where many international contractors were invited to participate. While the terms are mostly followed, the “spirit” is not quite followed. For example, there is some localization of the terms of contracts while translations in Chinese sometimes change the original meaning. Another factor is interpretation under Taiwan law (civil code) which changed the features compared to US or English law.
Major issues of contract terms and conditions
Liquidated damages: Normally in infrastructure contracts, damages are difficult to calculate but in Taiwan the “model contract” stipulates an agreed total amount of damages (liquidated damages, LD) for delays or non-performance (performance or function criteria). Civil Code: Art. 250 (2) allows parties to agree to a total amount of damages (fixed amount or percentage) to be paid by the debtor when it fails to perform the obligations in accordance with the agreed time or the agreed methods. Unless the contract specifically stipulates the agreed penalty amount, the agreed amount shall be deemed the total amount of damages due to delay or non-performance. However, there is an exemption for punitive damages if obligations under the contract are not performed, whereby the creditor may claim damages for non-performance, in addition to a penalty.
Punitive vs liquidated damages: In addition to the stipulated penalty, the creditor may claim for punitive damages (proof must be provided). However, if the stipulated penalty is disproportionately high, the court may reduce it to a reasonable amount. For liquidated damages, since both parties have agreed to a total amount of damages, the creditor may not claim for other damages. Huang noted that there is a tendency in Taiwan to impose high penalties, which acts as a disincentive to foreign investors to participate in procurement projects in Taiwan.
Limitation or cap on total liability in the model contract: LDs for delays are capped at 20% of the total contract price In addition to LD for delays, the contract may stipulate the scope or cap of total liability. Normally the total cap is 50-100% of the contract price, except in cases such as intentional acts, gross negligence or fraud (the civil code provides that intentional acts or gross negligence cannot be excluded in advance). The current provision in the model contract (revised in 2014) allows the procurement entity to set the liability cap. If the procurement entity does not set a cap, it is based on article 216 of civil code. However, Huang noted that this article refers to “legally claimable damages” meaning that actual damages or evidence of loss of profit based on wrongdoing can be claimable. In effect, this means that there is no cap.
The European Chamber of Commerce’s (ECCT) Project and Procurement committee has suggested in its 2015 Position Paper to restore previous provisions in the model contract which specify limitations of liabilities as well as define terms first or itemize allowable items to make sure terms are fair.
Prescription is a statutory requirement. Under Taiwan’s civil code the period of prescription cannot be extended or reduced by contract or agreement although there is no special provision on prescriptions in the model contract.
The period allowed to claim for damages in Taiwan is 15 years, much longer than other countries such as the UK. However, contractors only have two years to claim for remuneration (this is based on provisions not changed since 1929). Moreover, contractors must claim damages against employers within one year from the occurrence of cause. Employers’ demands for repair of defects, for reduction of remuneration, and claims for damage against contractors or rescission of contracts is also only one year from the discovery of defects.
Normally contracts last 5-10 years, which means that these periods are not practical and contractors are naturally concerned that claims may be time-barred and thereby may damage relations between parties. In addition, the definition of “starts when the claim is claimable” is very vague.
The model contract provides for force majeure (important in Taiwan which faces many risks, such as natural disasters and underground risks, which are unforeseeable and out of the control of either party). The model contract allows for extending performance times or the release from performance obligations for force majeure occurrences. Although some consequences may be excused on account of force majeure, contracting parties have a duty to “minimize the impact” of unforeseen events.
Under the civil code, unlike punitive damages, the court has force majeure principles (called change of circumstances in the civil code). This gives the court discretion to adjust payments based on fair standards. However force majeure criteria are very strict and based on objective and fair standards. Huang advised contractors to specify what kind of events qualify as force majeure in their contracts.
Employers’ obligations: Under the model contract, current provisions of employers’ obligations are not explicit or clear. The main obligation is to “make payment according to the contract”. Besides payment, employers have a number of obligations, such as providing clear instructions for contractors to perform and assisting in getting permits and access to sites.
For cases of disputes regarding government procurement contracts, the contractor or entity may apply for mediation in the Compliant Review Board of Government Procurement (CRBGP), under the PCC. The CRBGP’s mediation proposal is subject to the acceptance of both parties.
Huang concluded by advising both contractors and entities to view themselves as partners and go beyond legal obligations in their dealings so as to preempt disputes.
3. Topic: Contract Terms and Contract Performance - Experiences from Denmark
Speaker: Marie Gøthgen Clasen, Assistant Attorney, Horten Law Firm
Clasen noted that Danish regulations are in line with EU regulations.
Contracts for government procurement projects are not based on negotiations. They are drafted in advance by authorities and provided to interested parties along with procurement specifications. The contract should have clear terms. The following terms were highlighted:
· Deadlines: If the project is to be completed in phases, the contract must be clear on what must be delivered in each phase.
· Payment: This specifies when payments are due and what penalties will be due if deadlines are not met.
· Security: This deals with issues like bank guarantees.
· Remedies: This deals with remedies if conditions are not met.
Contractors may not use subcontractors unless this is specified in the contract or if the contractor has mentioned the subcontractors in the bid and has been awarded the contract with the subcontractors. In principle, tenders must be attractive in order to attract many bids. The contracting authority is advised to do market research and consult with fellow authorities in the preparatory process in order to draft the best contracts. She noted that contractors cannot make any substantial changes to draft contracts.
Contracts must specify requirements. Clasen acknowledged that it is a challenge to distinguish between minimum requirements and “wishes” on the part of contracting authorities to help in the evaluation process.
The most economically advantageous tender criteria –MEAT- (price supplemented by other factors such as maintenance and design) is usually used. Clasen said that she has never seen a construction contract awarded based on the lowest price.
Examples of most economically advantageous criteria include: Quality (this should be specified), technical merit, aesthetic and functional characteristics, environmental characteristics, running costs, cost-effectiveness, after-sales services, technical assistance, delivery date and delivery period or period of completion.
Contracting authorities do not have unlimited freedom in selecting contracting parties. The criteria must be related to the contract, be objective and impartial and respect the principles of equality and transparency.
Price can be evaluated on more than one criterion. For example it can cover the actual price for the construction work, overall economy and operating and maintenance costs. In general, it must be clear for the bidders what will be evaluated, and what information the bidders have to disclose in their tenders. For example if environmental factors will be taken into account, this should be stated upfront.
Criteria should be weighted and, in order to be transparent, contracting authorities should specify the exact weighting for various aspects in order to make it easier for contractors. Sub-criteria don’t have to be weighted.
When evaluating tenders, the evaluation should be an assessment of the tenders’ satisfaction of the criteria, not a comparison of the tenders. While a text or points evaluation may be used, a points system is recommended because just using text makes it hard to evaluate. However, evaluators can add comments to give reasons for the scores. In Denmark, the contracting authority is responsible for the evaluation. In more complex procurement processes it is not unusual for the contracting authority to hire an adviser who is an expert within the relevant field of the contract. In addition, the contracting authority can also hire a legal advisor.
In the procurement processes in Denmark, it is always possible for the bidders to request additional information in writing from the contracting authority and a procedure is typically described in the procurement specifications. The contracting authority must supply additional information if it is requested in good time. The contractor can ask questions regarding contract terms and if the contractor finds a specific contract term unattractive, the contractor can propose a new formulation of that contract term. However, Clasen noted that since the terms of the contract have already been thoroughly considered, contracting authorities will seldom accept changes.
If a bidder request changes t the contract in the bid the contracting authority may exclude the bidder. Often, contracting authorities are actually required to exclude these tenders. Clasen cited a case of a construction project at a beach in Copenhagen. In this case, the bidder who was awarded the contract had enclosed its standard terms in the contract. The bidder with the “second most economically advantageous tender” filed a complaint. The Supreme Court found that the contracting authority had been obliged to exclude the winning bidder. As a consequence, the contracting authority had to pay damages to the bidder with the second most economically advantageous tender since this bidder should have been awarded the contract initially.
Session 1 Q&A session
Moderator: Teng Min-chih, Deputy Minister, Public Construction Commission
In Europe, liability is dealt with according to national law. Liability can only be set within a specific framework in Austria. In Austria, contracting authorities do not have discretion to decide liability limits.
Limits are dealt with on case by case basis. In Denmark it is acceptable for both parties to agree to a cap.
On the question of reservations, in Taiwan if tenderers insert reservations they could be excluded. In Taiwan, compensation can be claimed for losses if agreed by both parties and if these losses are based on contractual obligations. However, consequential damages need to have causal relationship and there should be clear evidence.
Taiwan has few laws about the performance of the contract. Sample contracts respect the freedom of parties to create their own terms as long as they are not “against basic law and social norms”.
On the subject of contract terms, like in Denmark, the general principle in Austria and Germany, is that contracting authorities adopt a “take it or leave it” principle, whereby tenderers must accept all the terms and conditions or they will be excluded.
Focus on Public Private Partnerships
1. Topic: Act for the promotion of private participation in infrastructure projects
Speaker: Lee Chia-chen, Deputy Director-General, Department for the Promotion of Private Participation, Ministry of Finance (MoF)
Authorities in Taiwan began to promote private participation in public procurement projects by implementing the Statute for Encouragement of Private Participation in Transportation Infrastructure in 1994. This was strengthened with the Act for Promotion of Private Participation in Infrastructure Projects (PPIP) in 2000. Twenty types of projects are now eligible for PPIP.
According to the definition of qualifying entities, the equity or donation of the government or any government-owned enterprise must not exceed 20% of the total capital or asset of the private institution. There are no restrictions on foreign ownership although foreign investors have to apply for approval from the Executive Yuan.
The MoF is the “competent authority” on PPP projects and the Department for the Promotion of Private Participation is the dedicated department in charge of policy, regulation and systems, collection and announcement of information, professional training, coordination and supervision. Then, authorities (implementing agencies – central government agencies, municipal, county and city governments) are responsible for pre-assessment, planning, bidding, screening, choosing bids and implementation.
There are five types of PPIP available in Taiwan: Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO), Rehabilitate-Operate-Transfer (ROT), Operate-Transfer (OT) and Build-Own-Operate (BOO). The way they are operated is the key differentiating factor.
There are two PPP modes, solicited and unsolicited:
· Solicited: The authority in charge assesses a project suitable for PPP and announces (by public notice) the contents of the infrastructure project, as well as the qualifications of the applicants.
· Unsolicited: Private investors prepare the land utilization, construction, operation, financial plans, the letter of intent for financing issued by a financial institution and the relevant legal documents, and submits them to the authority in charge.
The application procedures are different for each mode.
The government has worked to increase incentives for PPP projects by relaxing various restrictions, assisting with financing and offering preferential land rentals. For example, restrictions have been relaxed on the disposal of government-owned land or the collection of benefits from the disposal, the issuance of new shares or corporate bonds by private institutions. With regard to fund-raising, the authority in charge may cover the portion of costs for self-financing, subsidize part of the interest accrued from the loan needed by the private institution or provide medium-long-term financing. Where the land required for the infrastructure project is government-owned land, rentals in connection with the lease and the creation of superficies may be extended on favorable terms. For major infrastructure projects, the authority may expropriate land. Other incentives include tax incentives (tax holidays, investment tax credits, preferential duties and reductions in other taxes) and loan credits.
The legal framework covers supervision and management of implementation. For example, operating fee standards and the timing and method for fare adjustments are included in the content of the contract. Provisions are also made for transfers, remedies for poor construction or operation and emergencies.
According to statistics provided by Lee, from 2000 until the end of 2013, there were more than 979 PPP contracted projects, worth more than US$22.13 billion in capital investment thereby saving more than US$26.36 billion in government expenditures, increasing government revenues by more than US$12.3 billion, adding 5.3% to GDP growth and creating more than 100,000 jobs.
While the results have been good, the government faces a number of challenges. As in other countries, the government has budgetary constraints. Given Taiwan’s aging population, the need for government and social welfare institutions (such as elderly care) is increasing but these projects often do not generate sufficient profits to attract private investments. There is also growing public scrutiny of the costs of government procurement projects in general, which puts a lot of pressure on authorities concerned to be more transparent. Authorities also sometimes lack expertise on financing. For these reasons, Taiwan authorities hope to learn from the experiences of other countries, particularly European countries, in order to create a friendly investment environment and create a triple-win situation for the public sector, private sector, and the people in Taiwan.
2, Topic: PPP Experience from Spain - Comprehensive solutions for transport
Speaker: Francisco Alcoba, Senior Technician, INECO
Alcoba introduced his company, an engineering and consulting services firm to Spain’s Ministry of Transport, whose shareholders are the railways and airports network managers in Spain.
Spain is a good example for PPP given that the country has a well-established PPP legal environment (developed over two centuries and incorporating European law) and one of the world’s best transportation infrastructures (among the top 10 best countries in the world according to the World Economic Forum) with 47 airports, the world’s second-largest high speed rail network and a world-class metro rail system.
Spanish companies are recognized globally for PPP participation. PPP is a good method to confront the multiple challenges facing governments (such as budgetary constraints and a lack of expertise).
The main goal of PPP projects is to ensure success throughout the life cycle of the project. Projects often fail because parties have not given sufficient consideration as to how end users are going to use the project (particularly for transport projects) and how they are going to pay for the project.
Relationships in PPP projects are extremely complex given the number of stakeholders, often with competing interests and different legal frameworks in different countries, among other factors.
It is essential for the success of the project to identify, analyse and allocate all risks in each phase of the project. Risk is inherent to the PPP process. When writing the contract, various risks should be allocated according to party who can best bear the risk. For example, construction and operation risks are best borne by the contractor while risks such as political risks should be borne by the government. Contracting authorities should have a good idea of the extent of liability that is bearable for private sector players (otherwise they will struggle to attract bidders).
Prerequisites for success include an open and transparent international tender with prequalification for bidders, a balanced contract in line with the best international practices, fair risk allocation (best done at the beginning of the process) and good market testing (for example, analyzing user demands and expectations, cost benefits, environmental matters and social matters).
Contracting authorities should give bidders as much information as possible in advance. It is also a good idea to provide a common template to all bidders to fill in their expectations. In addition, authorities need to consider the life cycle of the project from the start until it reverts to public sector.
Alcoba suggested some guidelines for Taiwan. Besides using the MEAT criteria, he suggested ranking bids and excluding those that are too far outside the average bid (both those that are too high and too low). In addition, Taiwan authorities would do well to study successful cases from overseas. Regarding contract performance, he said that using international arbitration would make international companies more comfortable in bidding for local projects. Finally, he reiterated the point that both parties should always keep in mind the needs and expectations of the project’s end users since they are ultimately the ones who will pay for it.
3. Topic: Public Private Partnerships in Denmark
Speaker: Marie Gøthgen Clasen, Assistant Attorney, Horten Law Firm
Clasen said that based on experience so far (based on a study in 2012) PPPs allow for innovative solutions and a long term reduction in costs. For example, there is an incentive to use innovative materials which can reduce the use of energy because contract periods are long enough to justify the upfront costs. This would not be possible for short contract periods. The 2012 study also showed that PPP projects were completed either on time or ahead of time. The main reason for this is that payment conditions are designed so that contractors get paid when facilities are ready for use, thereby providing an incentive to get the work done on time.
The downside of a thorough procurement process is that it requires a lot of resources in preparing the contract and project specifications. This unfortunately turns off some potential bidders and results in relatively few bidders. Given the complexity, some resources need to be provided by the government. In Denmark, the “competitive dialogue” process was used in the main part of PPP project and which allows the contracting authority to talk to all tenderers.
For PPPs to be successful, cooperation between the contracting authorities and the private contractors has to be good. They need to have clear roles (private sector parties will have a much greater role in the construction and operation phase). It is very important that both parties have a common goal and feel responsible for cooperation. To facilitate cooperation, it is common practice in Denmark to establish a joint body (made up of representatives from both sides) to discuss issues and challenges during the process, attempt to anticipate and preempt potential problems before they happen, and address actual problems that arise in a timely manner.
Regarding the distribution of risks, the private party takes on the risks of the employer (and associated responsibility for this). In addition, the private party will assume responsibility for fulfilment of functional and service requirements in the operational phase, observe deadlines, risks related to continuous maintenance, compliance with construction and the operating budget. For its part, the public party will assume the risks related to consumption (energy, water, etc), pollution and other circumstances related to the site. The basic principle is that the party closest to the risk will have to bear it.
4. Topic: Public Private Partnership: BOT experience in Taiwan - Shuang Ho hospital
Speaker: Dr Wu Chih-hsiung, Superintendent, Shuang Ho Hospital
According to Wu, the key factors to success in PPP projects are the role of government in the planning, coordination and supervision phases, systematic legislation and regulation, well-designed contracts, and the “devotion” of private entities.
Shuang Ho Hospital is Taiwan’s first Build-Operate-Transfer (BOT) hospital. Given the success of the project two other BOT hospitals are being built. (There are several examples of Operate-Transfer (OT) hospitals in Taiwan).
Wu provided a SWOT analysis of the BOT model for hospitals. For the public sector:
· Strengths include the reduction in investment in building and operating costs, a maximization of public resources and the generation of profit, which benefits the contractor and the government (the government gets a portion of the income). In addition, the public gets a good facility (in this case, a hospital).
· Opportunities include effective management of a private entity and the creation of non-governmental jobs.
· Weaknesses: The main weakness is a limitation of control.
· Threats: The main threat is the risk that the contractor will not be able to perform as anticipated.
For the private sector:
· Strengths: Advantages for private sector in cooperating with the government include support for the acquisition of land, approvals (such as authorization for the number of hospital beds required in the facility), access to independent financing and HR, more flexibility in operating strategies than public hospitals.
· Weaknesses: The main weaknesses include a lack of funding from the government and the need to comply with certain public policies.
· Opportunities: Opportunities include the acquisition of land, the right to operate in a short period of time and the strong support of the community.
· Threats: The main threats are that service pricing is restricted by the contract and competition from other private hospitals.
The Shaung Ho project started in 1991 following the legalization of the use of the proposed site’s land for health services. There were four bidders for the project, which was awarded to Taipei Medical University (TMU) in 2003. The hospital opened in 2008.
In planning stage, the government was responsible for the coordination of relevant regulations, land conversion and earth removal, related infrastructure (graves had to be removed and a road had to be widened), planning and announcement of the project. After the contract was awarded, the government helped in the coordination and acquisition of licences and provided continuous supervision during the construction process. The project was completed and opened on time and has since been very successful. (It has been widely praised by all stakeholders and won a number of awards.)
Although operations were awarded to TMU, they are supervised by the government (the Ministry of Health and Welfare and the Ministry of Finance).
Wu concluded that the key to his project’s success was authorization and planning by the government and creativity and the provision of resources from private entities.
Session 2 Q&A session
On the question of the degree of public disclosure in Europe, in Denmark and in Spain, tender documents and draft contracts are made publically available. While final contracts are not made public in Denmark (for competitive reasons since it could damage future competition), there cannot be major differences between the contract terms as stated in the draft and the final version. In Spain, while the final contract is not made available, the amount the public will pay is disclosed. Fruhmann noted that, according to new EU rules, fees prices, fines, payments and other details relevant to the value of the concession have to be disclosed. There is therefore an obligation to disclose the costs of PPP projects, including BOT projects.
On the issue of time limits for concessions, Fruhmann remarked that there had been lengthy discussions on this issue in the Council. It was finally decided to reduce time limits but still allow a “reasonable return on investment” for the contractor.
On the question of the level of general public support for PPP projects in Europe, Clasen said that the Danish public has a very positive view of PPP. Alcoba admitted that public perceptions of PPP projects in Spanish hospitals are not positive due political reasons. He attributed this to poor communication on the part of contracting authorities, who did not properly explain the benefits of PPP projects used to build hospitals instead affording them by spending public budget .
On the question as to why there were not many cases of foreigner participation in PPPs in Taiwan, Wu said that a prerequisite was to have good project planning and incentives. He said that his case is a good example because of the high investment costs, which would be difficult for the government to raise. On the other hand, it is also a way to raise revenue for the government because the hospital has to give a percentage of earnings to the government. He noted that a key difference between his project and other PPPs is that TMU is not motivated by profit but wanted to create a facility for students (Shuang Ho is a teaching hospital), CSR and community benefits. However, while the hospital is run as a non-profit, a requirement is that it is self-sustaining and does not lose money.
Session 3: Final panel discussion
Moderator: Mag Dr Michael Fruhmann
All the speakers from sessions 1 and 2 participated in the final panel discussion. Questions were raised by members of the audience as well as the moderator and panelists.
On the question of why life cycle costs are seldom taken into account in Taiwan, it was noted that it is complicated to calculate life cycle costs and that one BOO case in Taiwan regarding an incinerator project, which tried to do this, was not successful. Cases from Europe also show that it is indeed quite difficult to plan a project by taking life cycle costs into account. However, European authorities are getting more skilled at this and Taiwan could learn from Europe in this regard.
Fruhmann made the point that incorporating life cycle costs requires proper planning from the start if it is to succeed. He added that the EU is trying to professionalise the whole procurement process and the people involved in that process. Training is of utmost importance in this regard.
On the question of mediation, Tiffany Huang said that mediation is not compulsory but encouraged in Taiwan in order to solve problems early. She added that, according to statistics, quite a high number of disputes are solved through mediation, although these are usually simple cases.
On a question of fairness in the bidding process for the Shuang Ho hospital, Wu said that one of the competitors had complained to the contracting authority when they did not win the bid and the authority had proceeded to show that TMU’s bid was better, thereby demonstrating that the selection committee had acted fairly.
On a question of discrimination based on nationality, Fruhmann noted that if a company is registered legally in the EU, it has to be treated equally regardless of where the shareholders are from. There are however some Member States which introduced specific provisions in this regard for shell companies (which have been established to circumvent the rules).
On a question as to how most contractual disputes are resolved in the EU, Clasen said that in Denmark there is a joint body made up of representatives of both parties, which is used to try to solve problems. Failing this, the parties go to court or arbitration.
Fruhmann posed the question of what Taiwan authorities are doing to ensure more competitors for PPP projects in Taiwan. Lee Chia-chen replied that the MoF is the competent authority, whose job it is to establish a friendly environment. The authorities help by offering tax incentives to the private sector, assistance in land acquisitions and legal assistance, such as helping to remove legal obstacles. She said that there had been limited interest from foreigners in Taiwan’s PPP projects. She suggested that this may be because annual returns from these projects were in the range of 5-10% while most foreign companies expected 15-20%. Fruhmann countered that 15-20% is defintely not expected in Austria but is Taiwan actively trying to attract foreign investors? He added that to do this requires a lot of information and effort on the part of authorities is needed and that there is now a lot of competition in the EU to offer the best PPP conditions. Lee replied that the government wants to attract more foreign bidders and is now offering information sessions to which both local and foreign bidders are invited (translation is provided). Such a session will be held this year. In addition, every year all cases are collected and those that may be attractive to foreigners will be compiled into a booklet (and also available online).
Clasen noted that in Denmark documentation for large projects is translated into English and that some of these projects had attracted large German companies. She also added that sometimes contracting authorities have to be innovative, such as dividing some contracts into parts if they are too large to be handled by single SMEs.
On a question related to the number of people evaluating tenders (referring to the case in Denmark where a contract was re-awarded because just one person conducted the evaluation), Clasen noted that in that case, because it was a large contract, it needed more experts for documentation and evaluation. She said that there is no regulation in Denmark as to how many people the contracting authority uses to do the evaluation as long as it follows principles of proportionality and fairness.
Fruhmann said that Austria has a regulation requiring that at least two people must evaluate tenders (“four eye principle”), and larger contracts required more people to be involved and more experts from different fields. Alcoba said that in Spain, when evaluating tenders, a committee of 10-12 people is formed comprising representatives from the authority, private experts and other parties, to ensure independence.
Tiffany Huang asked if the government has sufficient budgets for planning? Fruhmann replied that, like in Taiwan, governments in Europe are reluctant to spend money on planning but that spending in the planning stage saves money in the long term. The problem is at the political level to explain the importance of proper planning without budget constraints. That said, the basic regulation in the EU is that the contracting authority has to have good planning and that it needs to get expertise from outside if sufficient expertise is not available internally. European authorities have realised from bad experience how important planning is. Fruhmann added that the budget should include allocations for feasibility studies as well as market research. While spending €1 million in planning and research may seem like a lot, the amount is tiny in comparison to the total cost of a €20 billion procurement project. Spending upfront helps for example to discover what solutions are already available in the private sector and therefore might help to shape the procurement process in an optimal way.
Lee agreed that planning is essential and said that the central government always has a budget that subsidizes central or local agencies.
Clasen said that Denmark does a lot of networking in the planning phase in order to get insights and it is acceptable to use experts. Alcoba agreed that planning is essential and said that the planning phase can last as long as two years in Spain, although it is shorter for unsolicited projects.