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DEVELOPMENT OF A SECTORAL

INFRASTRUCTURE PROCUREMENT STRATEGY

Sean Phillips

25 March 2010

SUPPORT PROGRAMME FOR ACCELERATED

INFRASTRUCTURE DELIVERY

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Problem Statement: why is a procurement strategy required?

Improved selection of procurement strategy will result in improved delivery outcomes.

CIDB has produced a range of standards, practice notes and guides

Contain large number of options for procurement approaches and contracting options

Currently no overall guide of how to choose from myriad of available options for a

particular expenditure programme

Organs of state (with some exceptions) generally only utilise time honored and

familiar procurement approaches regardless of changing circumstances

Tend to be highly resource intensive-intensive for the client

Implementing agents often cannot cope with workload using these approaches

Leads to poor outcomes: under-expenditure, poor contract management

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Development of a methodology for sector infrastructure procurement

strategies

Support Programme for Accelerated Infrastructure Delivery (SPAID)

Joint project between BT and Presidency

President’s Big Business Working Group requested BT to identify creative ways in which the

public and private sectors could cooperate to support infrastructure delivery

Discussions between BT, NT and DOE led to project to develop social infrastructure

procurement strategy methodology

Limpopo DOE volunteered to be the test site

National steering committee: NT (PPP, IDIP, TAU), LT, LDOE, national DOE and

Health, CIDB

Generic methodology has been developed and tested in Limpopo

Now being implemented in Limpopo and approach is being rolled out to other

provinces (Education and Health), as part of IDIP

A national initiative to develop a methodology for producing a social infrastructure

procurement strategy has been piloted in Limpopo.

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Strategic planning and investment planning

Procurement is preceded by strategic planning and investment planning

Provincial strategic planning is guided by Treasury Regulations and strategic

planning guidelines

Social infrastructure investment planning is guided by CIDB Toolkit for

Infrastructure Delivery Management, developed as part of NT Infrastructure

Delivery Improvement Programme (IDIP)

Limpopo DOE IDIP five-year infrastructure plan was reviewed

Contains prioritised lists of projects to be funded over five years

Findings:

Logical and reasonably robust methodology

Appears to be directing expenditure towards most urgent needs

Infrastructure plan will generally not result in procurement of ‘wrong things’

Project should proceed to next phase of developing procurement and contracting

strategy to enable infrastructure plan to be procured in the right way

The existing education infrastructure plans, planning processes and quality of

underlying data in Limpopo were reviewed.

All procurement and contracting options are considered equally valid

Methodology does not say that some approaches better than others (eg

does not say that some forms of contract document are better than others)

Different options are most suitable under different conditions

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Underlying principle of the generic methodology

“Procurement strategy” = Choosing the most appropriate procurement and

contracting approaches to meet your objectives.

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Gather information on local conditions and formulate objectives

Spend and category analysis – what are the characteristics of what is being procured,

from a procurement point of view?

Categorise needs in terms of types of output and other commonalities

Organisation analysis

What capacity and approach to risk does the organisation have and wish to have?

Market analysis – what capacity is in the market?

What are the organisation’s primary procurement objectives, e.g.

budget / cost

quality and performance characteristics required from the completed work

And secondary procurement objectives, e.g.

BBBEE

The choice of options is dependent on local conditions.

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Meeting needs through a programme of projects or a series of independent projects

Meeting needs through PPP

Meeting needs through implementing agent(s)

Meeting needs through framework agreements

Packaging of the work

Decision tables are used to match options to local conditions.

Match options to local conditions

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Gather information

Formulate objectives

Make strategic delivery

management decisions

Meet needs

through PPP

Meet needs

through

Implementing

AgentMeet needs through own

organisation

Package works

Delivery

management

strategy

Decide on contracting strategy

Decide on procurement arrangements

Contracting

strategy

Procurement

arrangements

Conduct annual evaluation of infrastructure spend

on projects and programmes

Implement procurement strategy

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Identify contracting strategy per procurement category for contractors and PSPs

Contractual arrangements

Pricing strategy

Form of contract

Identify procurement arrangements per procurement category for contractors and

PSPs

Quality strategy

Procurement procedure

Prequalifications

Targeted procurement strategy

Tender evaluation procedure

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Consideration Options Decision criteria for PPP

Non-PPP PPP The pre-requisites for using this option are that:

the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project over time

capability and capacity exist or can be put in place to effectively manage the PPP.

the nature of the service to be provide through the PPP is such that the risks can be clearly quantified and priced with certainty i.e. there must be a low level of intangibles e.g. potential for land claims or latent defects in existing infrastructure

the quantum of payments associated with the level of service to be provided through the PPP for the life of the PPP are affordable in the context of the client’s available and forecast budget and identified needs

there is a high level of certainty that the usage of the facility will be required without alteration over the lifetime of the PPP

the needs to be met are spatially located such that the PPP can be efficiently implemented

Contract outcome

Provide infrastructure

Provide assets and services which extend beyond construction for an agreed outcome over time.

Finance On budget Off budget (i.e. private finance required)

Risk Public body retains substantial risk relating to:

cost of construction, operation and maintenance

level of service

Transfer substantial risk relating to:

costs

level of service

to the private sector party

Decision table for PPP

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Decision table for framework agreements

Consideration Options Decision criteria for framework agreement

Non-framework

Framework Framework agreements are appropriate where:

The budgets available and the detailed scope of the needs are uncertain.

The potential for additional funds to be made available exists

The need involves repetitive work of a similar nature

A quick response time is required

Long term relationships (3 to 5 year) are desirable to achieve efficiencies

The pre-requisites for using this option are that

enabling procurement policies and procedures are in place, and

capability and capacity exist or can be put in place to effectively manage the framework agreements

Contract outcome

Provide specific construction works

Provide broadly defined construction services over a period of time

Procurement Separate procurement process for each transactional contract

Appoint in terms of pre-approved framework or reopen competition between framework contractors

Flexibility Time frames, scope and level of service defined per transactional contract.

Flexibility in terms of time frames, scope and level of service

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Options for contracting strategy for construction services (the

methodology contains decision tables for each)

Contractual arrangements

Construction Management

Design and construct

Design, construct, operate and

maintain

Develop and Construct

Design by Employer

Management Contract

Third party management support

Pricing strategy

Priced

contract

Bills of quantities

Activity schedule

Cost

based

Cost reimbursable

Target cost

Standard form of contract

FIDIC –Red Book

FIDIC –Yellow Book

FIDIC – Short Contract

FIDIC –Silver Book

GCC -2004

JBCC Series 2000 – PBA

JBCC Series 2000 - MWA

NEC3 ECC

NEC3 ECSC

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Options for procurement arrangements for construction services

Procurement procedure options

Co

mp

etit

ive

sele

ctio

n

Nominated

Open

Qualified

Quotation

Proposal procedure

using the two-envelope

system

Proposal procedure

using the two-stage

tendering system

Negotiations with a sole

contractor

Competitive negotiations

(open or restricted)

Targeted procurement

procedure options

Preferencing

Incentives for KPI’s

Mandatory subcontracting

Contractual obligations

Tender evaluation options

Method 1: Financial offer

Method 2:

Financial offer and preferences

Method 3:

Financial offer and quality

Method 4:

Financial offer, quality and

preferences

Quality strategy options

Specifications

Life cycle costing

Prequalification

Evaluation criteria

Undertakings at tender stage

Preference

Eligibility criteria

Identified five procurement categories and grouped the 2201 projects in the five

year infrastructure plan into the five categories

Category 1: Greenfields Category (high value new buildings), managed by Head

Office

Category 2: Brownfields Upgrade and Repair Category (medium value)

Category 3: Water and Sanitation Category, consisting of a mix of small civil and

building projects managed by DWAF

Category 4: Routine and Preventative Maintenance Category, managed in

consultation with SGB’s

Category 5: Electrification of schools by Eskom

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Application to LDOE: Spend analysis

Application of the methodology LDOE’s 5 year infrastructure plan resulted in radical

changes to its procurement and contracting strategies.

Developed a procurement strategy for construction services for each category

Identified PSPs required and developed a procurement strategy for each type of

PSP

Introduced framework agreements for small and medium-sized projects and for

some professional service providers

Introduced appropriate targeted procurement procedures including preferencing,

incentives and contractual obligations to meet secondary procurement

objectives

Draws on Ethekwini water mains replacement experience

Introduced competitive tendering for professional service providers

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Application to LDOE: procurement strategy

Application of the methodology LDOE’s 5 year infrastructure plan resulted in radical

changes to its procurement and contracting strategies.

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Benefits of new procurement strategy:

Total 95 contracts to manage over five years for 2201 projects (excluding

professional service providers)

Historically would have had 2201 contracts (excluding professional service

providers), each with its own procurement process

Resulted in severe strain on capacity of department and IAs and delivery problems

Much quicker response times using framework contracts

Officials can spend more time on strategic issues and less time on operational

issues

Anticipating substantial reduction in costs over current fee on cost of construction

pricing strategy – potentially R350 million over five years

LDoE’s new procurement strategy will greatly reduce the workload on officials, reduce

costs, and improve response times.

Summary of benefits for LDOE

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Contractor development using framework agreements

Status of transformation in contractor market

Black owned suppliers make up > 90% suppliers at grades 1 – 5

Supplier market at grades 1 – 5 is probably over supplied

Hence meaningful contractor development entails developing:

Black Grade 6/7 contractors to Grade 7/8

Black Grade 3/4/5 contractors into Grade 4/5/6 using the sub-contractor & mentor model

Strategy supports meaningful contractor development programme by:

Applying preferential procurement to select Limpopo BEE contractors

Large contractors will have to meet contractual obligations

Subcontract a minimum % of work to lower grade BEE contractors

Develop black contractors through a predetermined number of grades

The 3 year framework agreement will ensure continuity of business and mentorship for

the BEE suppliers, ensuring a more sustained learning curve

The CIDB register will be used to track performance and identify sub-contractors

Mentorship by experienced contractors yields best results

Similar model has been applied on the eThekwini contractor development programme

Objective is to develop more black owned contractors at higher grades

National % black owned contractors

Number of Limpopo contractors

Grade General building General building

1 98% 5011

2 94% 253

3 95% 65

4 89% 81

5 89% 75

6 79% 61

7 67% 19

8 51% 0

9 12% 0

Total 5565

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Develop Grade 3/4/5

contractors into Grade 4/5/6

using the sub-contractor &

mentor model

Develop Grade 6/7

contractors to Grade 7/8

Medium sized contractors > 80% black

ownership

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Does not require any special approvals from Treasury – all allowable in terms of the

existing SCM and CIDB frameworks

In-sources professional expertise (apart from programme management)

IA’s do not need large numbers of engineers, architects, QS, or project managers

Just needs small number of open-minded programme managers willing to

familiarise themselves with various contracting and procurement approaches and

forms of contract

Envisaged challenges to rolling out a new approach to social infrastructure

procurement

Client difficulty in deciding on objectives

Resistance to change, particularly from professional service providers

Implications of changes

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Broader roll-out

National workshops to be held this year

One-on-one engagements with key national stakeholders

Integration into IDIP

IDIP technical assistants will help provincial health and education departments to

implement the methodology

SPAID is working with NT, nDOE, nHealth and CIDB to roll out the approach in the social

sector.

THANK YOU

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