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A "STANDBY LETTER OF CREDIT" IS A "BANK GUARANTEE"

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A "STANDBY LETTER OF CREDIT" IS A "BANK GUARANTEE"

Post by DefCon on Fri Feb 20, 2009 1:11 am

REFERENCE:
27.2. The Bid Security shall be in an amount at least equal to a percentage of the Approved Budget for the Contract to be bid/Estimated Contract Cost, as advertised by the concerned procuring entity, in any of the following forms:

a) Cash, certified check, cashier’s check/manager’s check, bank draft/guarantee confirmed by a reputable local universal or commercial bank;

b) Irrevocable letter of credit issued by a reputable universal or commercial bank or in the case of an irrevocable letter of credit issued by a foreign bank, the same shall be confirmed or authenticated by a reputable local universal or commercial bank; or

DISCUSSION:
It is not unusual to see Bid Securities in the form of a "Standby Letter of Credit". This is okay since a "Standby Letter of Credit" is categorized as a BANK GUARANTEE ALSO, hence its form is authorized.

However, a "Standby Letter of Credit" IS NOT A "LETTER OF CREDIT". The significance of this fact will be appreciated when one determines now the SUFFICIENCY OF THE BID SECURITY. Note that these two instruments -- the bank guarantee (SBLC) and Letter of Credit fall into different categories WHICH MAY CALL FOR DIFFERENT percentages of the Approved Budget for the Contract.

QUESTION: Request confirmation by the GPPB. If confirmed, please disseminate for uniform implementation..

Thanks.

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Re: A "STANDBY LETTER OF CREDIT" IS A "BANK GUARANTEE"

Post by engrjhez® on Sat Feb 21, 2009 1:34 am

DefCon wrote:REFERENCE:
27.2. The Bid Security shall be in an amount at least equal to a percentage of the Approved Budget for the Contract to be bid/Estimated Contract Cost, as advertised by the concerned procuring entity, in any of the following forms:

a) Cash, certified check, cashier’s check/manager’s check, bank draft/guarantee confirmed by a reputable local universal or commercial bank;

b) Irrevocable letter of credit issued by a reputable universal or commercial bank or in the case of an irrevocable letter of credit issued by a foreign bank, the same shall be confirmed or authenticated by a reputable local universal or commercial bank; or

DISCUSSION:
It is not unusual to see Bid Securities in the form of a "Standby Letter of Credit"...
Pardon our indulgence. We would like to appeal on the last sentence because we are unfortunate not to have encountered any "Standby Letter of Credit" to this date. If in case we may have encountered it for the first time, we would have disqualified the bidder outright. As to the provisions you have mentioned, it is very clear that there is no option for such. If on the other hand, the adjectives "irrevocable" and "standby" suggest the same or equivalent meaning (as per banking terms) then the requirement is 1%. But from the sound of SDLC, if recognized as a substitute for bid security, the amount required to post is 1.5%. Very Happy
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Re: A "STANDBY LETTER OF CREDIT" IS A "BANK GUARANTEE"

Post by RDV @ GP3i on Sat Feb 28, 2009 2:45 pm

DefCon wrote:It is not unusual to see Bid Securities in the form of a "Standby Letter of Credit". This is okay since a "Standby Letter of Credit" is categorized as a BANK GUARANTEE ALSO, hence its form is authorized.

However, a "Standby Letter of Credit" IS NOT A "LETTER OF CREDIT". The significance of this fact will be appreciated when one determines now the SUFFICIENCY OF THE BID SECURITY. Note that these two instruments -- the bank guarantee (SBLC) and Letter of Credit fall into different categories WHICH MAY CALL FOR DIFFERENT percentages of the Approved Budget for the Contract.

QUESTION: Request confirmation by the GPPB. If confirmed, please disseminate for uniform implementation..

I am not an expert on finance/banking, but a google search of the term Standby Letter of Credit revealed the following meaning:

"Standby letters of credit are often used in international trade transactions, such as the purchase of goods from another country. The seller will ask for a standby letter of credit, which can be cashed on demand if the buyer fails to make payment by the date specified in the contract. The cost to obtain a standby letter of credit is typically 1-8% of the face amount annually, but the letter can be canceled as soon as the terms of the contract have been met by the purchaser or borrower. " http://www.investopedia.com/terms/s/standbyletterofcredit.asp

Therefore, in case of foreign suppliers, his bid/performance security may be in the form of an Irrevocable Standby Letter of Credit.

As to the differences of the rates between L/C and bank guarantee (if SLOC could be considered as a bank guarantee), the same has been addressed in the draft IRR. While both belongs to different categories in the IRR, they are proposed to have the same rates (as percentage of the ABC/Contract), as shown below:D

27.2. The Bid Security shall be in an amount at least equal to a percentage of the Approved Budget for the Contract to be bid/Estimated Contract Cost, as advertised by the concerned procuring entity, in any of the following forms:

a) Cash, certified check, cashier’s check/manager’s check, bank draft/guarantee confirmed by a reputable local universal or commercial bank;

b) Irrevocable letter of credit issued by a reputable universal or commercial bank or in the case of an irrevocable letter of credit issued by a foreign bank, the same shall be confirmed or authenticated by a reputable local universal or commercial bank; or

c) Any combination thereof.

The required amount of the Bid Security for the procurement of goods, consulting services, and infrastructure projects shall be at least two percent (2%) of the Approved Budget for the Contract/Estimated Contract Cost.

Sec. 39.1 - Performance Security
The required amount of the above forms of Performance Security shall be in accordance with the following schedule:

Form At least equal to a percentage (%) of the approved contract cost:

Cash, certified check, cashier’s/manager’s check, bank draft/guarantee (Goods and Consulting Services - Five percent (5%); Infrastructure Projects - Ten percent (10%)

Irrevocable letter of credit (Goods and Consulting Services - Five percent (5%); Infrastructure Projects - Ten percent (10%)

Surety (Goods, Consulting Services, Infrastructure Projects – Thirty percent (30%)
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