Disincentivising overbidding for toll road concessions

DISINCENTIVISING OVERBIDDING FOR TOLL ROAD CONCESSIONS
Conclusions
••
Over-bidding is a phenomenon observed in many situations in many countries. Opportunities exist to learn
lessons from international toll road procurement practice and from other sectors that share common
characteristics and experiences.
••
Given the unpredictability of traffic projections generally (and opening-year projections for greenfield projects
specifically), the policy goal should be forecasting realism (rather than accuracy), with the elimination of clearly—
and sizeably—biased bid submissions as the core objective.
••
Procurement practice needs to ensure that the downside (penalties) for submitting unrealistically high traffic and
revenue forecasts is greater than any upside (benefits).
••
In the pre-procurement phase, attention needs to focus on rigorous and transparent project vetting—with an
emphasis on value-for-money assessment—such that any public sector or political pressures to oversell projects
to the private sector (particularly for short-term gains) are discouraged and neutralised.
••
In terms of concession design, any incentives for excessive risk-taking should be avoided, yet concessionaires
should not be insulated from traffic risk. Concession design needs to ensure that a balance of upside and
downside risks remains, allowing for normal risk/reward returns. One design avenue worth further investigation
is illustrated through the GB rail franchising case study, which seeks to separate (and treat differently) the
influences of exogenous from endogenous factors in terms of revenue risk exposure. This would require the
procuring client body to assess actively bid deliverability within its assessment criteria.
••
The accounting treatment that different risk-allocation arrangements attract can be problematic. Accounting
‘tricks’ can damage the reputation of companies and of governments.
••
Turning to the bidding process, aggressive price-based competitions allied to deal scarcity clearly drive
overbidding. In response, many concession and licence grantors are today placing much more emphasis on
efficiency (rather than revenue) maximisation. The use of bidder deposits, with the size of the deposit linked to
the size of the bid, may also have a role in terms of incentive realignment.
••
Many commercial collapses of toll roads around the world are a direct result of aggressive financings with too
much debt. This suggests that some attention might usefully be directed at the capital structures being proposed
by bidders, perhaps with a target structure (percentage equity component), equity lock-ups or lock-ins, or
equity ratchets based on the bid size itself. Bid appraisal may seek to differentiate between alternative capital
structuring proposed by bidders and apply weightings to penalise over-aggressive bidders. ‘Skin-in-the-game’ lies
behind many successful international toll road concessions.
••
When considering bid appraisal, far more attention needs to be placed on assessing and testing the deliverability
of bidder submissions and plans, and the assumptions embedded in their financial models. The trade-off—a
possibly reduced sale price—would appear to be worthwhile, particularly over the long run and from a ‘bigger
picture’ perspective. Failed concessions are in no-one’s long-term interest. The recent move away from upfront
payments in Australian concessions is beneficial in this regard.
• • Greater use should be made of independent technical and commercial oversight of bidders’ plans—particularly
their forecasts. Left to the private sector, the role of ‘peer reviewer’ or auditor is often diminished to the point
of being presentational. As such, the public sector needs to take the lead, creating structures that embed
independent reviews in the bid appraisal process.
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