Disincentivising overbidding for toll road concessions

DISINCENTIVISING OVERBIDDING FOR TOLL ROAD CONCESSIONS
1.2 Background
In the introduction to its recent consultation paper, the DIT states:
Traffic forecasts for some recent Australian toll roads have
proved to be significantly inaccurate and over-optimistic. This
has impacted on investor confidence, reducing the willingness
of the private sector to accept patronage risk on toll projects.
The DIT explains that this (over-optimism) has led to: ‘the diversion
of scarce resources towards underperforming investments and
a dent in confidence to public-private partnerships (PPPs) in
Australia.’ This concern forms the backdrop to this study.
The most recent investigation into, and analysis of, Australian toll
road traffic forecasting performance is contained in the December
2011 GHD/RBconsult report. Readers are directed there for a full
discussion. In summary, the report highlights that:
Photograph courtesy of Road and Maritime Services, NSW.
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general procurement practice has encouraged the submission of optimistic—not accurate—projections of asset
usage;
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with the main concession parameters ‘fixed’ (project design, toll tariffs, tariff escalation formulae, etc), bidding
evaluation centred on traffic and revenue forecasts as the key economic variables (the ‘points of competition’);
••
primary policy objectives of securing the largest upfront payment from the private sector (or requiring the
minimum government subsidy), by themselves, exacerbate the trend for over-prediction;
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the extent of over-prediction has been significant, with some assets performing at less than 50% of their original
forecasts;
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traffic forecasts may have been influenced by aggressive financing structures and the attendant requirements of
financial models;
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over-forecasting has led to financial distress and the high-profile commercial collapse of some urban toll road
concessions;
••
traffic models can be used to produce optimistic projections of demand through a systematic selection of input
variables drawn from the upper ends of their respective ranges;
••
bidding competitions have attracted parties which have a short-term focus, rather than being ‘in it for the long
run’;
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independent ‘peer reviews’ hold the potential to reduce over-optimism, or at least detect it, in advance of
contract award.
The GHD/RBconsult report also points out that over-forecasting for toll road concessions is not restricted to Australia.
As the authors identify through a brief literature review, this is an internationally observed phenomenon. The June
2011 BITRE review, reflecting on additional research and studies, underscores exactly the same point. This suggests
that the international community will also be looking at possible reforms and remedies—hence the international focus
of this report.
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