Disincentivising overbidding for toll road concessions

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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. 4
EXECUTIVE SUMMARY In closing •• It is worth emphasising that, throughout the research undertaken for this study, concerns about overbidding for concessions have not led to the conclusion that concessions, or public–private partnerships (PPPs) more generally, are flawed. Many of the concession (and licensing) arrangements are still evolving and most have yet to mature. Under these circumstances it is entirely reasonable for a government to intervene to push industry (and itself) further along the learning curve. The key is to continually search out lessons from international experience which can be used to benefit PPPs specifically, and government procurement practices more generally. • • Effective concession design should facilitate and promote the exchange of ideas between public and private sector players, and provide real—and realistic—opportunities for government and ultimately taxpayers to benefit from private sector initiatives, innovation, experience and efficiency. 5
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www.infrastructure.gov.au INFRA1452
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