Serious problems in the way major public projects are tendered and awarded

It is clear from the spectacular failure of almost all major high profile projects this year that the whole system of tendering and awarding such projects is in disrepair and in need of major overhaul.

First was the Vasilikos LNG import terminal, only to be followed by the Larnaca port/marina development project, with both ending up in the courts.

Much has been written about both. I highlight here only relevant points. The Vasilikos terminal was awarded after a highly dubious process to a consortium, a consortium led by CPP with no serious relevant experience. The many questionable aspects of the project were forcefully made in reports by the auditor-general in 2019 and this year and also at highly critical hearings at the parliament. I also raised the alarm about tendering irregularities and the inexperience of the CPP consortium in articles in this newspaper before it was finally awarded in December 2019, an award made on the pretext of the urgency of the project to the national interest of Cyprus.

During tender evaluation, highly experienced consortia were disqualified on technical grounds, and the project was awarded without competition – a practice that appears to happen regularly with public tenders. A notable example is the Cyprus casino that ended up with a single bidder, with other bidders alleging “foul play”. Another is the Larnaca port/marina project that ended with a single bid after all other bidders pulled out.

Another pretext used to justify questionable project awards is “urgency” and “national interest”. In most cases the state knew about the need for such projects for years but took no action until time ran out, with the inevitable consequences of rushed tenders, often badly prepared due to the lack of time, unfailingly ending up with problems. The same is happening now in the power sector.

It will be interesting to see the outcome of hearings next week on the Vasilikos terminal. First, on Tuesday the House energy committee has asked to be informed by the energy minister about the stage at which the project is, after the latest, much-publicised, developments.

Then on Thursday the House audit committee will continue its hearings in the presence of the energy minister, Defa, the auditor-general and other involved bodies. It should be remembered that the hearings earlier in the year were marked by high tension and acrimony and accusations of scandals involving millions of euros.

It remains to be seen whether these hearings will shed light on how this project will progress and the likelihood that somehow it will be completed. It is imperative that it is, for the benefit of Cyprus’ hard-pressed electricity consumers. Low gas prices and reduction in emissions would lead to electricity price reductions of more than one-third.

It also remains to be seen whether the parliament will initiate hearings on likely scandals and wrong-doings to bring those responsible to account.

What is the normal process for major engineering projects?  

It involves a number of key steps that together lead to the orderly award and execution of projects:

  1. Concept definition and selection: what is the project, its purpose and feasibility and what is the desired end result, followed by concept evaluation and selection
  2. Project specification: specifies project requirements, what the project must achieve, its scope and project roadmap
  3. Basic design: basic configuration of the project
  4. Front-end engineering design (FEED): engineering design to sufficient detail to define project layout, its planning and execution and estimate of cost – it is the stage before engineering, procurement and construction (EPC) and probably the most critical phase of a project; final investment decisions (FID) and approval of capital are made at the end of FEED
  5. EPC tendering, evaluation and selection of contractor
  6. Project detailed design and construction, certification and commissioning

In Cyprus more often than not steps 3 and 4 are omitted, or not carried out properly, with the inevitable result that projects are not defined in sufficient detail, leading to cost and schedule escalation.

It is imperative that the owner’s project team has extensive experience relevant to all stages of the project, and where it does not it retains experts to support it – including project management.

Project tendering, evaluation and selection of contractor

The selection of companies to be invited to submit tenders must be based on relevant experience and past performance, technical and management capability, financial soundness, work quality, reputation, experienced personnel and safety record, reputation, including sub-contractors.

Evaluation must then be made by a competent, experienced team to pre-defined criteria and should not be a box-ticking exercise. The contractor selection process is the most critical activity that could determine project success or failure.

Once companies are selected, they should be invited to submit tenders in two quite separate stages:

  • Technical submission
  • Financial submission and project EPC award

The technical package must include all FEED documents, draft contract terms and conditions, specifications and design standards, all design data and information, etc.

Tender opening must be public, but the evaluation process must be confidential, with detailed written records kept.

The first stage must be evaluation of compliance to specifications and contract conditions. Tenders non-compliant to fundamental requirements must be rejected.

During the technical evaluation process all clarifications and questions asked by the tenderers and responses by the owner – and vice-versa – (Q&A) must be circulated to all bidders.

Once the process is completed, the owner should circulate the final list of all modifications to all technical documents and contract terms and conditions resulting at the end of the Q&A process to all bidders. These will be the final documents that all bidders must accept without any preconditions.

Only those bidders doing so should be invited to make financial submissions, which must contain only prices without any caveats. If less than three companies make it to this stage, the tender must be cancelled, with the process repeated. This is important in order to ensure that tenders are truly competitive.

Selection is then simple: the cheapest wins.

Experience worldwide shows that such an approach avoids protracted disputes during project execution, since everything has been pre-agreed. Only changes to the design requested by the owner, or unforeseen circumstances, should lead to project variations.

Need for radical change

Clearly there are serious problems in the way major public projects are tendered and awarded. And it is not just one or two. It has become the norm. It is time for change – radical change.

I have outlined suggestions on how this could be done. The government should be concerned and must take action – now. Nobody should be able to operate at the expense of the state.

Dr Charles Ellinas is a senior fellow at the Global energy Centre of the Atlantic Council, @CharlesEllinas