COVID-19: Procurement Risks for Projects in the Middle East
COVID-19 has induced a sudden stop (or a coronacoma as some commentators have labelled it) to economies across the globe providing both immediate and more enduring challenges for the project finance market (and its key stakeholders) to navigate as we enter a period of deep economic uncertainty.
How long this period will persist is the great imponderable and, whilst this is likely to be different for each jurisdiction, ultimately no country will be immune from economic contagion. In large part, any purposeful recovery will depend on the extent to which governments support economies through the coronacoma and, more hopefully, that recognise the need to take concerted, collective action. Equally important will be the speed with which economies can recover from the crisis when the pandemic diminishes, and we can already see certain countries articulating a strategy for a resumption of (some sort of) normality.
Whilst the pandemic does not respect borders and would, at first glance, appear to impact every project in similar fashion regardless of its jurisdiction, the projects market in the Middle East is configured in a particular way which will require its stakeholders to think differently. In this regard, the Middle East economies (and their projects) are also dealing with the precipitous fall in the oil price. This may necessitate a re-appraisal of projects in the procurement process, which may actually increase the attractiveness of project finance and other PPP structures where the underlying demand for the project remains.
In the face of such uncertainty, it is not surprising that the Middle East project finance market is already experiencing turbulence which is likely to have consequences throughout the procurement, construction and operational phases of every project.
There is wide spread existing commentary examining the impact of COVID-19 on the construction and operational phases of projects, focusing in particular on force majeure provisions and the debt markets. Rather than retreading the same ground, this article explores key aspects of the projects market which have not been the subject of the same level of analysis, but which are equally important. Namely, we look at some of the most frequently asked questions with respect to the key risks and considerations arising for project participants out of COVID-19 during the procurement process of a competitively tendered project in the Middle East – from pre-bid submission phase to commercial close.
This typically involves site visits, submission of letters of intention to bid and clarification rounds by bidders, taking into account the tender requirements of financing, construction and operation of the project.
Site visits: Are there any implications on not conducting site visits to prepare the bid?
Yes. Most request for proposal documents issued by procurers require bidders to satisfy themselves as to the site conditions by conducting initial investigations, studies and/or surveys. If a potential bidder does not conduct a site visit and thereafter raises an issue as to the condition of the site to revisit its bid after submission, it may constitute a breach of the tender requirements.
For newly issued tenders, this risk is predominant throughout the Middle East where most governments have imposed strict lockdown and curfew measures to curb the spread of COVID – 19. This may affect the overall timeline of the procurement process. However, Middle East countries are allowing infrastructure development to continue and therefore it would be worth checking if the relevant country is allowing site visits for the specific project.
Letter of Intention: Does my consortium structure have a local presence?
Bidders are required to submit a letter of intention (LOI) with a proposed consortium structure before submitting their bid. Failure to do so may render the bidder ineligible to bid.
Local presence becomes essential for two reasons: (i) submission of the bid documents; and (ii) incorporation of the project company.
- Submission of bid documents
- Incorporation of project company
Historically projects in the Middle East have required hard copy submissions of the bid documents. Whilst there has been a shift in recent times to the creation of online procurement portals in many Middle East countries, certain important documents still have to be submitted in hard copy originals. These include letters of undertaking, bid bonds etc.
In the event the consortium members do not have local presence in the form of representatives or authorised signatories, and procurers are unwilling to change the submission requirements, in the current climate where travel restrictions are in force, this may lead to disqualification. For countries that still require hard copy submission of all bid documents, adequate resources need to be allocated and permissions for movement of people need to be obtained from the relevant ministries. Companies are encouraged to ensure they have (i) an authorised signatory present in the relevant jurisdiction to provide “wet ink” signatures, and (ii) authorization letters issued in favor of their local representative to collect the bid bond from the bank and deliver it to the procurer.
There are strict timelines within which the project company is required to be incorporated. Whilst this is very likely to be a requirement only post nomination of a preferred bidder, sponsors should, even at this stage, consider the impact in the context of the overall timing of the delivery of the project. In addition, sponsors should note that an inability to do so within the timeframe requires: (i) an extension to financial close (often against a long-stop date for achievement of the same); and (ii) the consortium to take on absolute liability of the project. This is clearly not favorable for any of the project participants.
Many countries in the Middle East have suspended workplace activities in the public sector. To incorporate the project company, the consortium in its capacity as shareholders, are required to legalise documents and submit original constitutional documents. Depending on the legal form of the project company and relevant country, there may also be requirements to conduct a constituent general assembly meeting before the authorities process the incorporation application. Entities already set up in the relevant jurisdiction typically do not have to legalise or attest their documents which is usually required of foreign shareholders.
Consortium members should consider either having a direct local presence or at least aim to have local holding companies already set up in the project’s jurisdiction.
Ministries across the Middle East are however undertaking efforts to move some of these processes online. Consistent due diligence is required to ensure the consortium is up to date on what alternatives are available. For instance, in the United Arab Emirates the Dubai Chamber of Commerce and Industry, and Sharjah Chamber of Commerce and Industry have launched online attestation services. Abu Dhabi Digital Authority has recently launched the “Abu Dhabi Connect” project which facilities exchange of individual and companies’ data digitally as opposed to visiting the various ministries with hard copy documents each time. In the Kingdom of Bahrain, the Bahrain Chamber of Commerce and Industry has encouraged use of its e-services for attestation. In the Kingdom of Saudi Arabia, the Ministry of Commerce and Investment cater for many corporate services online in relation to commercial registration certificate issuance and renewal for entities in the process of incorporation, or entities already established. Moreover, companies’ are now trending towards virtual general assembly meetings. In the United Arab Emirates, it was reported that First Abu Dhabi Bank conducted its first fully virtual general assembly meeting.
Clarification rounds: What risks need to be addressed in the agreements at this stage?
Any bids that have not been submitted yet are very likely to need to factor in some, or all of the following COVID – 19 questions and implications:
- Project Agreements
- Do they cover pandemics?
- Who bears the risk associated with evolving circumstances from the date of the relevant bid submission until the achievement of commercial close under the project agreements?
- What relief is available for ongoing consequences (for example, factories shutting down, curfew measures, travel restrictions etc.) of COVID-19?
- Moreover, this then raises the related question of whether it is more correctly characterised as a “Natural Force Majeure Event” or a “Political Force Majeure Event”?
This will depend on the drafting of the force majeure clause.
In almost all cases, it will be the bidding consortia that are normally expected to assume the risk during this period. Whilst in a normal environment this is a risk that sponsors are typically ready to accept, in this unprecedented period sponsors would be far more nervous to accept such risk. In this regard, it is important to note that the force majeure and other protective provisions in the project agreements may only become effective on the signing date and following the satisfaction of certain condition precedents. The difficulty is that satisfaction of these condition precedents are affected by COVID - 19 and the entity bearing the risk prior to effectiveness of the force majeure clause may be left without any relief. Therefore, the only way sponsors can adequately protect themselves is to revisit the drafting and consider whether the procurer should assume all or some of the risk between bid submission and commercial close. Questions of bid compliance and competitiveness will also inform the thinking on the extent to which these risks are allocated between the parties.
The cause and effect nature of COVID-19 opens a huge debate on what was “reasonably foreseeable” and what was not which has a direct impact on the relief available. Procurers may argue that COVID-19 was subsisting and therefore “foreseeable”, whilst developers may argue that the ongoing consequences were not. Any assumptions made at bid stage will inevitably prove to be inaccurate and it is probably not in anyone’s interest for overly conservative – and therefore expensive - assumptions to be made.
COVID-19 on its face would appear to be a “Natural Force Majeure Event” but what about the regulatory changes as a consequence of it? Such measures may qualify as the latter. This again has a direct impact on the relief available and whether it qualifies for no relief, time relief only, or time and cost relief. Developers will therefore have to review this provisions in detail and consider the extent to which they should be amended in order to protect them from any continuing adverse consequences of COVID-19 (and the consequences that flow from such event).
- What is the bid requirement for committed financing?
- What is the scope of the MAC?
In almost all projects, bidders are required, as part of the bid package, to provide commitment letters from banks which need to clearly demonstrate that the bidder will benefit from committed funding for the project (often requiring to cover from 50% - 100% of the overall debt component).
The lenders' commitment will invariably remain subject to a material adverse change (MAC) clause which would permit banks to withdraw their commitments or otherwise revisit pricing. Certain MAC clauses may be drafted to specify events or circumstances that trigger its protection which would have a material adverse effect including, amongst other things, a deterioration in the financial markets.
Given COVID-19 (and the events that have flowed from it) are already in existence, the banks will be nervous that, should there be a continued deterioration in the debt markets, they are able to invoke the MAC. However, MAC clauses will often be drafted on the basis of any events or circumstances which come into existence after the signing of the commitment letter.
On the other side of the ledger, the bidders will be equally nervous to ensure that they have tied the banks into a commitment that cannot be subsequently revisited, thereby exposing the sponsors to a substantial risk of more expensive debt (and the implications this will have for the overall bid economics, including tariff and IRR). Therefore, both developers and lenders will have to review in detail the MAC clause in order to establish the extent to which this would need to be amended.
- What should be done in order to secure a final and binding EPC contract for the project?
Certain agreements, such as the engineering, procurement and construction (EPC) contract may not be submitted during bid submission. In most cases, bidders submit a term sheet signed by the EPC contractor where it commits to sign the EPC contract on terms which are consistent with the term sheet (including the date for delivery and the lump sum price). As with the senior debt analysis above, the reason for this requirement is that bidders need to lock in the EPC price in order to finalise the bid financial model and generate the tariff.
Generally there are very limited grounds set out in the term sheet for the EPC contractor to revisit the contract price, and it would typically be precluded from doing so until the validity period of its offer had elapsed, as described below. However, in the current scenario it may not make sense to force the EPC Contractor to price on the basis of worst case assumptions regarding the development of the pandemic, so a different approach may be required.
Validity Period of Bid: Can I make changes to the bid after submission?
Once bids have been submitted, it is typically deemed final and binding on all parties for the validity period, as specified in the tender documents. Any deviations have to follow the strict requirements in the tender documents or risk rejection of the entire bid and possibly encashment of the bid bond. A large number of projects in the Middle East have bids submitted which have not fully accounted for the COVID – 19 risks. Each project participant will be required to initiate early communication with procurers to address these risks wherever possible, in accordance with the procurement framework and prior to reaching commercial close.
EPC costs: Can the EPC price be revisited because of supply chain disruptions, lockdown, curfews, transport or logistic issues in light of COVID-19?
The continuation of COVID – 19 could, of course, pose a material downside risk in respect of supply, manpower, site visits, project implementation and sourcing long-lead items, to name but a few. Given this, developers may wish to consider whether any specific acknowledgements should be sought at the time the final financial proposal of the EPC contractor is offered, including whether an express acknowledgement should be given that the price and delivery dates remain firm despite the COVID 19 circumstances or alternatively what assumptions should be made regarding the future development of the pandemic. Similarly, EPC contractors may raise this directly with the developers with the key issue being to include a framework that seeks to avoid disputes at a later point (or delays in reaching financial close).
Submission of bid documents: How do project participants cater for submission of bids?
As mentioned above, the tender documents will provide the method of delivery and submission of bid documents. Procurers may need to make arrangements for online delivery and bidders will need to ensure they have local representatives present in the relevant jurisdiction to ensure timely delivery. Moreover, permits may need to be obtained from local authorities for people managing the delivery of bid documents.
If there are no alternative methods other than for the delivery of original, signed documents, bidders will need to have delegation letters in place to ensure they have authorised signatories in the relevant jurisdiction to sign the document on behalf of their company.
Remote execution and availability of signatories: What should parties bear in mind when conducting remote execution?
Availability of authorised signatories is crucial for execution of contracts and ancillary documents that may need to be signed on a day to day basis or as stated above, for submission of signed originals amongst the project participants. If authorised signatories are unavailable, existing authorisations and/or powers of attorney may need to be amended in accordance with the local law requirements or by way of delegation letters if the constitutive documents of the company permits.
Project participants undertaking commercial close remotely will need to ensure compliance with remote execution requirements in accordance with the applicable laws of the relevant agreement to ensure valid execution.
Extension requests: What happens if an extension of time request is rejected that impacts achievement of financial close?
Procurers can expect to see a large number of extension of time requests for submission of material documents, guarantees and/or achievement of financial close citing COVID – 19 (or the consequences of COVID-19).
Certain extensions may necessitate amendments to principal documents such as the core revenue producing contract (i.e. the concession agreement, power purchase agreement or water purchase agreement) or the finance documents, in each case in order to account for the impact on the overall implementation schedule. In some instances, an extension of time request may be rejected if the agreement does not allow for any extension. If the implementation schedule is not extended, the consortium / sponsors may need to issue a limited notice to proceed for certain works to maintain the implementation schedule. Payment obligations, which would have arisen after issuance of a full notice to proceed, will now arise on issue of a limited notice to proceed and the consortium / sponsors will potentially need to fund these payments from their own balance sheets. Whilst this is a strategy that can be considered in the short term, if financial close is delayed for a long period of time it is unlikely to be acceptable.