CAIDP expresses concerns regarding new DFATD Performance Security Requirement on International Development Contracts

This is a letter to Deputy Minister Paul Rochon regarding the New Performance Security Requirement on International Development Contracts clause that recently appeared in several RFPs.  On behalf of its members and based on feedback received from members, CAIDP proposes to send the letter below. If you have any additional comments, please use the comment feature at the bottom of this message or send an email to caidprpcdi@gmail.com.

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February 24, 2014

Mr. Paul Rochon

Deputy Minister

 Department of Foreign Affairs, Trade and Development

200 Promenade du Portage

Gatineau, Quebec K1A 0G4

Canada

 

Re: New Performance Security Requirement on International Development Contracts

 

Dear Mr Rochon;

Several members of our association, the Canadian Association of International Development Professionals (CAIDP), have contacted us recently to express concern about a new clause appearing in Requests for Proposal issued by the Department of Foreign Affairs, Trade and Development (DFATD).  This clause has been introduced without consultation with the community of potential bidders or, we believe, sufficient analysis of its implications.  It will inevitably introduce significant new costs for both Canadian firms and the government itself.

This clause – Section 6. Standard Form of Contract, clause 6.5 Irrevocable Standby Letter of Credit (ISLC), subclause b) – states the following:

(b) To guarantee the Consultant’s performance Within 28 Days of the signature of the Contract the Consultant or any Member must furnish the performance security in amount of 15 percent of the total contract amount as specified in GC 6.1.1 in a form of ISLC acceptable to DFATD. Such ISLC must be valid for 6 months after the completion of the Services.

In response to questions from bidders, DFATD informed our members that the new clause replaces the former clause requiring 10% hold back on fees only, which was released annually based on satisfactory progress against plans. DFATD stated that this new policy is to make its policies and practices more consistent with the policies and practices of the donor community.

We have polled the nearly 900 development professionals nationwide who subscribe to our list serve. The vast majority of our members work for donors other than DFATD, and over 50% of them derive more than half their income from work for non-Canadian donors including the Swedish International Development Cooperation Agency (Sida), the Danish International Development Agency (Danida), the Ministry of Foreign Affairs of Finland, the Australian Agency for International Development (AusAID) the New Zealand Agency for International Development (NZAID), Irish Aid, the United Kingdom’s Department for International Development (DfID), the Austrian Development Agency, and the United Stated Agency for International Development (USAID) as well as international finance institutions – the World Bank, Inter-American Development Bank, Caribbean Development Bank, African Development Bank, Asian Development Bank, many UN agencies (UNICEF, UNDP, UN Women, UNEP, UN OSAGI, UNIFEM, International Fund for Agricultural Development, Food and Agriculture Organization), intergovernmental entities like the Organization of American States, the Nile Basin Initiative, the East African Community and the International Institution for Democratic and Electoral Assistance, as well as international non-governmental organizations like the International Committee of the Red Cross. Our members universally report that use of ISLCs is not a standard policy or practice on consulting services contracts among the donor community: holdbacks are far more common.

Our members are small and medium size firms, all privately held, and largely financed by their owners or bank lines of credit secured by corporate or individual assets such as buildings or receivables. They are deeply concerned about this new contract clause, which will raise costs for all of us, impose a significant burden on cash flow, and lower competition on bids, as few of Canada’s small firms can afford this. Additionally, it is important to note that firms will be paying financing costs on flow through expenses.

Our largest member firms estimate that an ISLC for 15% will cost them $3,000 per year per one million dollars of contracts, and these funds will be transferred to commercial banks, rather than the intended beneficiaries. For smaller firms the financing costs will be higher. In addition, there are bank fees and an administrative cost to setting up and managing each ISLC. While the costs might not be prohibitive on any one contract, the financing requirements will tie up large amount of operating funds for significant periods, and will become prohibitive when multiple contracts are involved. Firms will, of necessity, pass the higher costs on to DFATD as higher fees.

This new policy seems to increase costs without providing any benefit to DFATD, the development delivery community, the intended beneficiaries or the tax payers of Canada. It is not, to the best of our knowledge, in line with other donor policies: most use a hold back on fees or issue payments in tranches based on deliverables, both of which DFATD already uses. It is also not in line with the commitments of the Canadian government to improving opportunities for Canadian business and to reducing the cost of doing business with the government. The ISLC seems unnecessary and unduly complicated.

On the basis of these concerns, we urge you to reconsider use of the ISLC as a replacement for a system that seemed to work to the benefit of both the government and its contractors.  Naturally, we would be pleased to meet with your officials to discuss this further.

Yours sincerely,

 

Richard A. Beattie

President

 

cc.        Mark Lusignan, Director-General Grants, Contributions and Contracts Division