Kerawalapitiya LNG plant tender : Lowest bidder may not necessarily be the right choice | Sunday Observer

Kerawalapitiya LNG plant tender : Lowest bidder may not necessarily be the right choice

15 July, 2018

The latest bid that has caused a lot of controversy in recent times is the 300MW Kerawalapitiya power plant tender where an argument has been presented in which a bidder claims that it should be awarded the tender purely on the basis that they are the lowest. Whilst this seems a sensible route to take, on closer analysis it may not be the wisest route.

Although the lowest bid was from Lakdhanavi, in evaluating Lakdhanavi’s financial proposal, there are two major risks that stand out from the perspective of the Government, that resulted in the rejection of its bid offer twice by the Technical Evaluating Committee (TEC) and by two members of the Standing Cabinet Appointed Procurements Committee (SCAPC) and the Procurement Appeals Board (PAB).

That is, the unrealistically low capital cost proposed by Lakdhanavi and the unrealistically low incremental heat rate.

It is important to note that the capacity charge payable by the CEB is calculated largely based on the capital cost proposed by the bidder and the fuel charge is based on the stated incremental heat rate. This formula is stated in the Request for Proposals (RFP).

Therefore, if the capital cost and incremental heat rate is unrealistically understated, the banks will not finance the project due to risk of completion and an unacceptable return on investment and the inability to meet the quoted incremental heat rates during operations that would result in penalties on the investor.

The financial evaluation criteria in the Request for Proposals (RFP) document assigned a 75% weight to the levelised bid tariff and 25% for the financing plan.

The reason 25% is allocated for the financing plan is to ensure the investor in the power plant can raise the required financing without delay based on the project’s operational and financial viability (bankability) over the 20-year period of power supply to the CEB. For this reason, it is important to examine the financial stability of the private investor and firm commitments by banks to lend to the project and that the tariff paid by the CEB is adequate to provide a reasonable return on investment, meet debt obligations and other operating expenses of the private investor.

Therefore, if the bidder proposes an artificially low price for capital costs and thus suppressed the power tariff it will not be adequate to meet such obligations and there is a risk of failure of the project.

All bidders excluding Lakdhanavi tendered a bid-price for the project cost of around the $300 million mark. Lakdhanavi submitted a capital cost of $175 million, which was conditional on Lakdhanavi being entitled to VAT, PAL and NBT exemptions.

This is a gross violation of the RFP that states “…….Bidders’ Proposals shall not assume or rely on any privileges, concessions or guarantees from the Government or Government Agencies. Any such assumptions may be regarded as a material deviation and may result in the rejection of the Proposal.”

Lakdhanavi is more than 51% government owned and any financial mistakes that it makes could ultimately result in the government coffers bearing the brunt of this deal.

While it would be an absolute plus to the government if Lakdhanavi was to win the tender, as there are many capable engineers in the organisation. But as in any government tender, procedure has to be followed and the various levels of evaluation that it has been sent through has proved that this is not the most responsive bid.

Lakdhanavi track record in another power project also does not leave much to be desired in their performance.

It is important to note that this is a public private partnership (PPP) and in that the private component must be strictly private as much as the public is strictly public. If there are grey areas it will only complicate matters, resulting in indirect burdens to the government and the exchequer. 

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