Any unexpected proposal makes a heart go skittish, but for the sake of Mexico, we hope the answer is yes. Unsolicited Proposals (USP) have been the talk of many countries, and it is beginning to gather force in Mexico. Take for instance Mexico’s hottest road of the moment, the Las Varas – Puerto Vallarta highway, presented by Carlos Slim’s IDEAL. IDEAL’S unsolicited proposal for the construction and operation of this highway for 30 years has gathered the attention of other construction companies such as Pinfra, Prodemex, Omega, and Coconal. This project will require an investment of over MX$7 billion, will be more than 90.2 km long, and will connect tourist destinations in the western part of Mexico. This USP was proposed in 2014, and after careful review, the government decided to begin the bidding processes this year. Each participating company will have to draft a detailed report, and pay a guarantee of MX$25 million. The PPP law in Mexico states that the government will have to pay MX$36.5 million to IDEAL for the studies and the development of the USP, which all of the participants will have to integrate into their own proposals.
What exactly is an unsolicited proposal?
Whenever a company has a mind-blowing idea or project, they can write a proposal and submit it to a government institution in search of acquiring a contract that is not in response to an official solicitation, program, or RFP. For the infrastructure industry, it seems like all companies have these types of projects they would love to pitch. These types of proposals are a way for companies to integrate the creativity, innovation, and flexibility of the private sector into the development of the crucial infrastructure needs of cities and communities.
The Pros & Cons
PPPs are everywhere, and companies are opting for this path as a way to curtail their financial expenses in projects. Although PPPs seem to be working well in Mexico, there is talk within the industry about exploring new methods of building the infrastructure the country needs in order to fully develop, and unsolicited proposals have been creating turmoil. There are many pros to allowing USP to flourish in the country, but there are many factors that alarm investors. Its rising popularity in Latin American countries appears to be positive, yet in Europe, strict regulations stunt its growth.
USP could be the solution the government has been yearning for, and it could provide the country with a pipeline of quality projects that solve the countries must urgent problems. USP increases the government’s capacity to implement PPPs, accelerates the development of projects, and even establishes new fountains of financing. Nevertheless, if these proposals are not managed correctly or handled with complete transparency, the system could discourage competitively within the industry, or give selected elite an excessive amount of benefits. USPs also need to be highly regulated in order to decrease the risk of nontransparent processes and PPPs.
The World’s Choice
Given that many countries across the globe are creating their own USP schemes, it is easy to learn from the mistakes of others and adapt the methods that have been successful to create a more adequate procedure in Mexico. Countries have approached USP in many ways; some have created laws prohibiting them entirely, while others have purchased project concepts, and awarded the project through a rigorous bidding process, showing no favoritism to any bidder.
Countries such as Chile, South Korea, Philippines, and South Africa have been the most successful at carrying out USP. According to the Public Private Infrastructure Advisory Facility (PPIAF), China is leading the USP with 24% successful projects; the rest of Asia has a 39% success rate, followed by Africa with 31%, and Latin American countries with 21%. These countries have opted for offering the original proponent a pre-established advantage throughout the bidding process. This method of approaching USP has been divided into two different types of processes: the bonus system and the Swiss Challenge system.
The bonus system has been adapted by Chile and South Korea, who have successfully carried out USP by awarding a bonus in a bidding procedure to the original creator of the idea. The original creator’s offer is subsequently selected from the procedure, as long as it falls within an established percentage of the best offer. Chile has been the most successful country in Latin America. Although only 19 of the 423 proposals were carried out, it has created positive results due to their well-developed legal framework to ensure transparent processes. By utilizing the bonus scheme, Chile has built eight airports between 1995 and 2002. It would seem as if the bonus holders would have an unfair advantage in the actual bidding process, but thanks to its transparent structure, it has had no effect on who gets to build the actual airport.
The Swiss Challenge is used in Philippines, South Africa, and Guam, and it allows the participation of third parties to enter a bidding process, and then the original developer gets the opportunity to counter the proposal, all to ensure that the best project wins. The federal and local Philippine governments have received countless amounts of proposals, but have only been able to successfully construct the international Passenger Terminal 3 in Manila.
Satisfying Mexico’s Infrastructure Needs
PPPs have been proven to show great results in Mexico, but will this scheme be enough to fulfill the urgent infrastructure needs of the country? It is primordial that the government develops the proper legal framework to ensure transparent and fair processes that will allow the best project to win.
According to the IFC, national and international companies are most concerned about these four topics when it comes to USP:
- There is great uncertainty regarding the identification of priority projects due to the lack of information provided by public entities.
- The lack of information regarding requirements for USP, as well as guides or minimum requirements for the technical, social-economic, financial, legal and environmental studies that must be performed.
- The limited working experience of a great amount of public entities which slows down the approval process.
- The lack of transparency in determining the competitive advantage of each bidder in the evaluation process.
The structural reforms, government financing, and support from development banks will give the industry the boost it needs to fully develop. USP would be a great way to construct new airports, highways, and hospitals throughout the country, but the ultimate question remains:
How will Mexico optimize these unsolicited proposals to foster the development of infrastructure?
With information from: World Bank Group, El Economista, & Forbes.
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