Disincentivising overbidding for toll road concessions

2 │ LITERATURE REVIEW
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Literature review
This section contains a review of the academic literature surrounding the problem of overbidding in transport
infrastructure projects. It begins by outlining the nature and incidence of the observed overbidding problem
(section 2.1), before analysing its potential root causes, including the winner’s curse, optimism bias and strategic
misrepresentation (section 2.2). Sub-sections 2.2.4 to 2.2.8 present the factors that are likely to have an impact on
the incentives for bidders to strategically misrepresent their forecasts. Finally, some potential solutions that have
been put forward in the literature are evaluated (section 2.3).
2.1 The problem
In the context of the construction and operation of many infrastructure assets, such as toll roads, the market is
commonly believed to operate more effectively when competition is introduced at the concession award stage,
rather than at the operational stage. Concessions contracting introduces competition ‘for the market’ in the form of
competitive tendering, which should have the effect of ensuring that each contract is awarded to the party, or parties,
that can carry out the contracted functions most efficiently. In public–private partnerships (PPPs) this allows the
taxpayer to get the best value for money.
However, in tendering for construction concessions, there is evidence that firms systematically underestimate the
costs that will be involved in delivering a project 6 or overestimate the demand for the finished product. 7 Both of these
biases lead to cost–benefit ratios that overstate the value of the project.
In the context of cost-side bias, Flyvbjerg, Holm and Buhl (2002) found that costs were underestimated in 86% of
the 258 transport infrastructure projects they studied, and that actual costs exceeded estimated costs by 28%, on
average. 8 The authors reported that:
Estimated costs are biased, and the bias is caused by systematic underestimation… costs are not only
underestimated much more often than they are overestimated or correct, costs that have been underestimated
are also wrong by a substantially larger margin than costs that have been overestimated. 9
6 See, for example, Pickrell, D.H. (1990), ‘Urban rail transit projects: Forecast versus actual ridership and cost’, US Department of Transportation;
Flyvbjerg, B. Holm, M.S. and Buhl, S. (2002), ‘Underestimating Costs in Public Works Projects – Error or Lie’, Journal of the American Planning
Association, 68:3, 279–95.
7 Flyvbjerg, B. Holm, M.S. and Buhl, S. (2005), ‘How (in)accurate are demand forecasts in public works projects The case of transportation’,
Journal of the American Planning Association, 71:2, 131–46; Bain, R. (2009), ‘Error and Optimism Bias in Toll Road Traffic Forecasts’,
Transportation, 36: 5, 469–82.
8 Flyvbjerg et al. (2002), op. cit.
9 Flyvbjerg et al. (2002), op. cit., p. 282.
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