Monday, September 15, 2014

Don’t be fooled – an RFP is not open tender

Don’t be fooled – an RFP is not open tender


Politicians and government officials are fond of using the term “open tender” to lend an air of transparency to their awarding of contracts. But do all so-called open tender projects satisfy the strict definition of an open tender?  
Let’s take a look at the controversial RM6.3 billion roads and tunnel project in Penang. Since March 2008, Chief Minister Lim Guan Eng has been bragging about his implementation of open tender in Penang. What Lim has implemented so far is only a request for proposal (RFP).
What's the difference? An RFP is an invitation to enter into negotiations. When the successful party is chosen, it has been granted the opportunity to negotiate with the owner/developer for the work, but it has not yet been awarded the contract.
In contrast, a call for tenders is a more formal, detailed process that gives the bidders the assurance that if they put forward the best bid, judged according to the criteria set out in the tender, they must, in accordance with the law, be awarded the job.
On Jan 27, 2013, Lim unveiled the RM6.3 billion roads and tunnel project. The project comprises a 4.2km bypass from Gurney Drive to Lebuhraya Tun Dr Lim Chong Eu, a 4.6km bypass between Lebuhraya Tun Dr Lim Chong Eu and Bandar Baru Air Itam, a 12km paired-road from Jalan Tanjung Bungah to Teluk Bahang, and the 6.5km Penang-Butterworth sea tunnel.
Lim claimed that it was a call for tender.
It was reported in the press that China Railway Construction Ltd (CRCL) had initially tied up with IJM Corporation Bhd to bid for the tender but only proposed to build the 4.2km between Gurney Drive and Lebuhraya Tun Dr Lim Chong Eu coastal bypass.
VST Cemerlang, on the other hand, together with China State Corporation submitted its proposal to build all four projects. The other company, WCT Berhad, a Shah Alam-based construction firm, tied up with Korean builder Daewoo Engineering and Construction to bid for the Teluk Bahang and Tanjung Bungah paired-road, and the Gurney Drive coastal bypass projects. 
The state government at a later stage asked CRCL, Beijing Urban Construction Group (BUCG) and Consortium Zenith to form a RM2 special vehicle company, Consortium Zenith BUCG Sdn Bhd, to undertake the project for RM6.3 billion and a land swap deal of 110 acres.
It is clear that the whole exercise was not a call for tender but an RFP as all participants never competed on the same material terms. If it was a call for tender, why were VST Cemerlang and China State Corporation denied an opportunity for a fair and no-favour competition for tender?
The RFP was mired in controversy when Lim’s administration conveniently ignored the need to smooth out cash flow issues.
Without developing an explicit long-term transit project financing plan but hastily plunging into a mega project, the state is ignoring revenue mobilisation, off-budget financing as well as the earmarking of general tax revenues in establishing a secure and stable flow of funds for a transit project.
The risk of project failure due to cash flow problems cannot be ignored, especially when involving a project of this magnitude. More businesses fail due to lack of solid cash flow rather than from a lack of profit.
A capital budgeting risk is the likelihood of a long-term investment failing to generate expected cash flows. Such risks arise from imperfections in future cash flow estimates, especially in speculative property development, a situation that exposes the businesses to the possibility of embracing loss-making capital investments.
The prospect of a possible cash flow problem emerged when Part 1 of the feasibility study of the project was completed without any geological survey. Part 2 of the feasibility study is nowhere to be seen although it was supposed to have commenced in March 2014.
What is more troubling is the RM80 million payment to be paid to Zenith BUCG when no monetary payment or funding should be given by the state for the construction of the projects.
On Aug 1, 2014, the state government awarded a RM9.2 million contract to Public Bike Share Sdn Bhd to design, install, operate and maintain a bicycle-sharing system.
Lim once again claimed that the procurement was done through open competitive tender. Public Bike Share will undertake the project with full private sector funding, with no contribution from the state government.
At a press conference on the matter, Lim failed to reveal the terms and conditions of the project. He didn't disclose that the state needs to subsidise the first 30 minutes of bike usage.
As a matter of comparison, the operating income for the entire YouBike system in Taiwan was NT$123.93 million in 2013. Its operator Giant claimed more than 10 million ridership in 2013 with 5,000 bikes. By May 2014, Giant achieved another 10 million ridership.
The Commonwealth Magazine reported that the Taipei City government announced in July 2012 that it was going to invest NT$228 million (US$7.6 million) to turn YouBike around with the expectation of expanding to nine areas in Taipei City, adding 5,000 bikes and an extra 162 rental stations over three years.
With a size of 500 bikes, the Penang project has no economies of scale to make the necessary profit. Assuming Public Bike Share can perform as well as YouBike, the most the company can claim is one million ridership with only 500 bikes. With the subsidy of RM1 per ridership, the company will not be able to survive as the operating cost of RM750,000 will leave the net operating profit with only RM250,000 per year. Moreover the company needs to pay the Penang Island City Council (MPPP) a concession fee of RM1.5 million.
The cost per bike for YouBike is about US$1,520 or RM5,000 while the cost quoted by Public Bike Share is RM18,400 per bike which is clearly exorbitant. It will take more than 50 years for Public Bike Share to recover its capital investment.

What Lim never revealed is whether the offer of subsidy for the first 30 minutes of bike usage was made available to the other bidders.
Because this procurement is not a call for tender but an RFP, the state has no duty of fairness to let other bidders to compete under the same material terms.
Lim has conveniently ignored the business viability of Public Bike Share's proposal. The whole procurement process was neither fair and transparent nor cost-effective.
On July 5, 2014, The Star reported that the state government is looking for the Project Development Partner (PDP) to oversee the implementation of key components of an integrated transportation plan on Penang island.
Again Lim stressed that the state has decided to go ahead with its plan to call for an open and competitive tender to appoint a Project Delivery Partner (PDP) to help implement the RM27 billion Penang Transport Master Plan.
From news report, we all knew that Gamuda Bhd is the favourite to land the job. We knew for sure that it is not a call for tender but just another RFP.
By calling for an RFP, Lim virtually reserves the right not to uphold basic freedom of contract principles in the tendering context and not to be obliged by the duty of fairness.
- See more at: http://www.theantdaily.com/Outspoken/Don-t-be-fooled-an-RFP-is-not-open-tender/#sthash.fxYSxt0h.dpuf

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