In light of the rise of investments in transportation projects, the Accountant General of the Ministry of Finance, the Director General of the Ministry of Transport, and the Manager of the Government Companies Authority recently issued guidelines for infrastructure companies operating on behalf of the Ministry of Transport, requesting such companies adopt binding standards on several issues regarding contracts and tenders.

The guidelines include several recommendations the companies are required to implement as of June 1, 2019, in order to create standardization in tenders and contracts published by the transport infrastructure companies, both on the part of the commissioners of the work and on the part of the performing parties. The current lack of standardization hinders the submission of bids for tenders and the preparedness for future tenders by contractors and suppliers, as well as complicating and extending the processes of preparing tenders by the companies. These guidelines aim to bridge these gaps, thereby increasing efficiency, certainty, and competition in this industry and leading to lower costs of projects.

A summary of the guidelines is as follows:

Standardized Professional and Financial Prerequisites: The companies were instructed to adopt Netivei Israel’s (The National Transport Infrastructure Company Ltd.) methodology of setting prerequisites, under which projects are divided into six levels according to their scope, and professional and financial prerequisites are set for each level. Such prerequisites fit most projects, but there may be instances where adjustments are made when specific expertise is necessary.

Reducing Guarantee Costs: Funding costs that derive from the requirements to provide various guarantees in the performance stages prevent some contractors from participating in tender processes, compromise competition by reducing the number of competitors, and roll back to the infrastructure companies as part of the project costs in a manner that effectively raises costs. Therefore, companies were instructed to reduce the scope of the guarantees required throughout the stages of a project so that they do not exceed the following rates: bid bond – up to 2.5%; performance bond – up to 5%; and defect liability bond – up to 2%.

Ending the Use of Liens: In light of the heavy cash flow burden on contractors imposed by the use of this tool, infrastructure companies were instructed to end its general use. The companies, however, were left with the discretion to place liens on current sums where there may be concern that offsetting surplus payments by future payments will be impossible. However, they were also tasked with limiting the payments’ rate such that the lien amount plus the performance bond amount does not exceed 7%.

Manner of Selecting the Winning Bid: The inter-ministry team has begun setting up a unified database for rating suppliers in real time by the companies according to standard parameters. Until this step is complete, the companies have been instructed to integrate an automatic disqualification mechanism for extremely low offers in comparison to the average of bids in the tender.

Adjustment Mechanism: Currently, it is customary to compensate contractors only partially for raising indexes, in the event of an increase beyond 4%. In the guidelines, it was recommended that performance contracts include an adjustment mechanism that compensates the contractor for every change in the project’s index, based on the view that it is more appropriate to place the risk for raised prices on the State as the commissioner of the work, as the private sector does not have an advantage in managing such risk.

Specifications and Price Lists: The companies were instructed to use Netivei Israel specifications and price lists for each inter-city road project and Israel Railways specifications for any railway project. In addition, the companies were instructed to formalize specifications and a price list for inner-city projects.

Terms of Payments to Suppliers and Contractors: Though the current terms of payment are standard and comply with the provisions of the Morality of Payments to Suppliers Law, 5777-2017, they constitute a bar to increasing competition in the market because of the cash flow difficulties and funding costs imposed on contractors. Because of this, a target of shortening the payment period of approved invoices to contractors was set at up to 45 days from submission of an invoice, via shortening the time frame for reviewing and approving the invoices by government ministries and infrastructure companies.

In addition to these guidelines, the inter-ministry team has developed recommendations for the second phase of standardizing tenders and contracts in the area of transportation infrastructure. These recommendations are expected to be published by the end of 2019. They will include specifications and a price list for inner-city projects, as well as create an index of tender and contract documents for all infrastructure companies.