Disincentivising overbidding for toll road concessions

2 │ LITERATURE REVIEW
2.3.2 Concessions design
Once a project has been selected it can be delivered, operated and maintained through various means. These
concession designs lie along a continuum, from traditional design, bid, build (DBB) methodologies to full asset
privatisation, according to the level of private sector involvement (in terms of both operations and finance) at each
stage and the extent to which ownership of the asset is transferred to the private sector (see Box 2.3).
Box 2.3 Options for concessions design
Design, bid, build
Under, the traditional DBB method of procurement, the design is fully completed before a contract is tendered
for the construction of the project. The design and construction functions are thus carried out by separate
entities. While this should ensure that the designer produces a design which protects the public sector’s
long-term interests, it typically involves a long process as construction does not begin until the entire design
is in place. There is also less flexibility to adapt the design in response to issues that arise in the early stages
of construction. The design and construction contractors may also point the finger at one another should any
problems arise, making monitoring more problematic.
Design, build
Alternatively, the contract can be integrated such that a single contractor is tasked with undertaking both the
design and construction functions. This is typically associated with significant time savings, since construction
can begin earlier. The fact that there is a single contractor also allows for greater accountability. However, the
designer may no longer have the public sector’s best interests at heart, and may instead be incentivised to
design a project that simplifies the construction phase. Such a design may thus lead to lower quality. 56
Design, build, finance, operate, maintain
More recently, concessions have taken the form of DBFOM contracts. 57 A key provision of this approach is
that the private sector company is granted stewardship of the asset for a period of time, typically 30 years,
subsequent to the construction process being completed. The contractor is also responsible for providing the
upfront debt and equity financing for the project and is remunerated post-completion through unitary payments
(eg, on a shadow toll or congestion-contingent basis) 58 over the duration of the lease. Since the unitary payment
is linked to the contractor’s performance, the contractor has an incentive to deliver the project on time, on
budget and to a high quality.
Ownership of the asset, unlike under full asset privatisation, remains with the public sector, which takes control
of the asset at the conclusion of the lease. To avoid sub-optimal investment decisions being made towards the
end of the asset lease, DBFOM contracts are typically granted with a stipulation as to the condition of the asset
when it is transferred back to the public sector. This gives the contractor an incentive to consider the whole life
cycle of the project, which should result in better quality in design and construction. Indeed, under DBFOM, the
contractor’s profit-maximisation constraint internalises the higher operation and maintenance costs that may
be brought about if corners are cut in the design and construction stages. That is, the contractor realises that
cutting costs in early stages of the project will only serve to increase maintenance costs later on, and thus will
have no incentive to do so.
(continued)
56 Loulakis, M. (2003), Design-build for the Public Sector, New York: Aspen Publishers.
57 These are sometimes alternatively referred to as bid, own, operate, and transfer (BOOT) contracts.
58 Shadow toll payments are based on the number of vehicles using the road, while congestion-contingent payments are related to the level of
congestion on the road, and thus provide the operator with an incentive to carry out maintenance at times which will minimise congestion.
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