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Preliminary Recommendations

Preliminary recommendations by the Team of Specialists on PPPs to UNOG and member States in using PPP models in the renovation of the Palais des Nations

6 December 2012

The underlying premise
The basic premise is that the PPP model, when procured effectively, may be the more efficient way to renovate the Palais des Nations than the traditional forms of procurement. The evidence from the recent case studies in Europe and in the United States presented in this discussion paper suggests that PPP is an important model to consider in the renovation of public buildings. The presented case studies in this paper have been selected for their similarities to the Palais des Nations, and they clearly demonstrate that PPP is a viable option in carrying out the Strategic Heritage Plan (SHP) for the Palais des Nations. The reasons for this position are as follows:

1.    Value for Money and Efficiency;
2.    Flexibility and likelihood of achieving core objectives of the SHP;
3.    Certainty of outcomes: the ability to ensure that the private partner provides a high
             quality product on time and within budget;
4.    Innovation in a most sustainable way possible; and
5.    A guaranteed high level maintenance and upkeep of the building.

However, not all PPPs lead to such desirable outcomes. The objective going forward is to secure the highest value for money during the life cycle of the project, bearing in mind the critical importance of keeping the aesthetic appearance of the Palais des Nations intact. At the same time ensuring that the contract is suitably flexible to ensure that technological changes can be easily incorporated into the outcomes specified in the contract. To ensure this desirable outcome, there is a need to emphasize in particular the following five aspects:

1.    Models
2.    Financing
3.    Procurement
4.    Implementation
5.    Alignment of interests

1.    Models
The model selected needs to provide flexibility, the ability to obtain external finance, and contractual compliance to guarantee performance. None of the models that transfer ownership to the private sector, even for a short period of time, are acceptable. There is a clear distinction between facilities, renovation and management of the building, and transfer of ownership.

2.    Financing
The main concern of member States is that the amount of money being earmarked for the refurbishment of the Palais des Nations is excessive and that there is a high probability that there would be cost overruns and delays, as evidenced in similar large scale traditional procurement projects.

PPP shows that the refurbishment of the Palais des Nations can be done in a cost effective way with contractual commitments and in-built mechanisms that ensure that the project is delivered on time and within the budget. This is the minimum that can be expected from the PPP approach.

Furthermore, the financing of a PPP is flexible enough to accommodate various sources of financing, including donor grants.

With respect to the financing however the following point should be emphasised as it will demonstrate why the PPP model may be the most attractive in the context of financing the renovation of the Palais des Nations. This is namely the fact that financiers will see in this project some very critically important benefits, namely demand certainly, associational benefits, and extreme low risk. Under such circumstance, the most favourable terms for raising finance including rate, duration and conditions for this project can be attained.

3.    Procurement
It is not well known but it is critically important that cost savings through the PPP approach can be considerably enhanced through the right choice of procurement strategy. It is recommended in this respect the interactive tender process that is being highlighted in a number of countries. Under this approach, a dialogue is opened up between a number of shortlisted bidders (typically three) and the contracting authority. One form of this approach is referred to as ‘Competitive Dialogue’. The basic principle in this approach leads to:
  - lower bid cost;
  - reduced bid time;
  - higher quality outcomes; and
  - the selection of the best possible partner.

This is in part because of the high cost to the private sector to bid in such projects and the give and take in an interactive process versus a more remote technical paper process. In an interactive process the principle objectives of UNOG can be fully conveyed, understood and sincerely endorsed.

4. Implementation
It is essential that business continuity be maintained throughout the renovation process. The procurement process is structured to present the UNOG’s outcomes in terms of output specifications without defining ‘How’. A key aspect of the tender process will be the private sector putting forward their understanding of the UNOG outcomes and detailing ‘How they will deliver those outcomes’.

The interactive tender process will greatly reduce UNOG’s risk to business continuity during refurbishment and establish a clearly defined process for changing the schedule to fit with emerging UNOG requirements.

5. Alignment of interests
Private and public interests have different priorities and motivations. A key underlying critical success factor in most successful alternative finance projects over the last thirty years has been a balanced allocation of risk and reward and a resulting proper alignment of interests.

Concluding comments
In summing up, PPPs can contribute in the three stages of the renovation of the Palais des Nations:
(a)    Delivery of the asset;
(b)    Efficiency in the servicing of the asset; and
(c)    Financing