Review of tender process under WTO guidelines

By Colin Dodd.

Key Points:
Under WTO guidelines, Government procurement bodies should consider possible challenges to the tender process before entering into a binding contract with the preferred tenderer. They should also be transparent in conducting tenders including giving tenderers a chance to revisit tenders if the Government makes a decision that may affect pricing

A recent decision by a Hong Kong Review Panel[1] highlights some of the tensions faced by Government bodies in conducting public tenders, and deals with some of the common day-to-day issues which arise in such tenders including when Government encounters the need to be flexible with the stipulated conditions of the tender.

A consortium involving Leighton Asia was awarded a contract for approximately HK$4 billion for a range of reclamation and associated works on Hong Kong harbour known as Central Reclamation Phase III. However the three other tenderers lodged a bid challenge against the tender conducted by the Territory Development Department (TDD) of the Hong Kong Government.

The Review Panel which heard the challenge upheld the complaint of one other tenderer that the tender process was conducted in breach of the World Trade Organisation Agreement on Government Procurement (GPA). The Review Panel also rejected a number of other complaints.

The Review Panel recommended that the contract be re-tendered. However, the Panel also stated if TDD felt unable to accept that recommendation because it had already entered into a binding contract with Leighton, that nothing be done save to repeat its previous recommendations from the Poltech decision[2] that:

(a) in all tenders subject to the GPA, tenders should not be accepted in a legally binding way until, at the very least, the 10 day period allowed for bringing bid challenges under the Rules of Operation of the Review Body on Bid Challenges has expired;

(b) the above requirement should be made explicit in tender documents; and

(c) that tender documents should also contain some form of 'let out' provision for a procuring entity to deal with the scenario where an unsuccessful tenderer does not discover the breach until more than 10 days after the announcement of the preferred tenderer and a challenge issued on that breach is subsequently upheld.

The last recommendation raises some interesting issues in terms of achieving the correct balance between com-mercial certainty on the one hand and effective bid challenge procedures on the other.

The successful ground of complaint

The successful ground of complaint turned on Special Condition of Tender Clause 2 which appears somewhat ambiguous. On the one hand it required tenderers to ensure that the price of part of the works (a Wan Chai Bypass tunnel (WCB Works)) was greater than or equal to 33.7 per cent of the total price, and on the other hand, and despite the mandatory wording referred to above, it said that "Failure to price the tender in accordance with [this] condition may invalidate the tender".

A tenderer involving China Harbour Engineering Company was the only tenderer to meet this condition, however the final preferment decision was taken by the Government on the basis that the WCB Works would not be included in the contract, thus rendering the condition irrelevant. China Harbour had 'loaded' the cost of the WCB Works to comply with the 33.7 per cent requirement and consequently reduced the cost of the non-WCB Works. But the TDD had the right to excise the WCB Works from the contract which left China Harbour with the risk of receiving only a payment for the artificially underpriced non-WCB Works. China Harbour claimed that as a result of the need to allow for this risk in their tender, their tender was HK$138 million more than it would have been if they knew they didn't have to comply with the 33.7 per cent requirement.

The Review Panel determined that TDD should have reverted to tenderers telling them they proposed to ignore the 33.7 per cent requirement and giving them a chance to reconsider their tenders in the light of this. They decided that the failure to do this was in breach of the transparency principle embodied in the GPA.

In holding that tender processes must be transparent, the Review Panel made the following observation:

"The tender process is in a sense a gamble. It is all about risk. But tenderers are entitled, as a matter of fairness, to ensure that all unnecessary uncertainty is taken out of the equation."[3]

The unsuccessful complaints

The Review Panel rejected a number of other complaints made by China Harbour and the other tenderers, including the following findings:

(a) that an evaluation criterion concerning tenderers' experience with contracts of over HK$1 billion was not discriminatory or unfair, and that even if it was, the tenderers should have complained as soon as they knew about the criterion;

(b) that it was not incumbent on TDD to investigate favourable experience of tenderers but that tenderers should draw this to the attention of TDD;

(c) that, in evaluating tenders, it was fair to attribute the experience of one company to its successor company; and

(d) TDD was entitled to consider the Net Present Value of the tender sum in evaluating tenders even though it was not an express evaluation criterion.

Confidentiality

The Review Panel was critical of TDD's reluctance to disclose confidential information surrounding the tender process, including Leighton's tender itself, to the complainants in order to prepare their complaints. The Review Panel considered that a claim for confidentiality should only be upheld in special circumstances where the 'necessary private and public interest for which confidentiality is claimed outweighs the requirement for disclosure as part of a transparent and fair tender processing bid challenge'[4].

Comment

Although the bid challenge was conducted in accordance with the GPA which is not currently applicable to Australian tenders, to a large extent, the complaints and other issues were dealt with by reference to general principles such as transparency and fairness. In this manner the decision provides interesting discussion on some of the issues that face Government and tenderers every day.

Furthermore, the Australian Chamber of Commerce and Industry point out that there are pressures on Australia to join the GPA, and would itself consider the participation of Australia in negotiations regarding possible accession to a new and high quality GPA.

_______

[1] Review Body on Bid Challenges, Bid Challenge No. 2 of 2003, In the matter of the World Trade Organisation Agreement on Government Procurement and in the Matter of a Bid Challenge
[2] Poltech Case Bid Challenge No. 1 of 2001
[3] At page 28
[4] At page 60

_______

Thanks to Owen Hayford & Stuart Connor for their help in writing this article.