Disincentivising overbidding for toll road concessions

DISINCENTIVISING OVERBIDDING FOR TOLL ROAD CONCESSIONS
Invitation to tender
Actual competition for the franchise takes place once the ITT is published. The most important aspect of the ITT is
the base-service specification, as agreed by the Secretary of State for Transport, which outlines the duration of the
franchise, any franchise-specific contract conditions, and the service and investment requirements that are expected
of the winning bidder. This specification is used as the basis for appraisal of bidders’ submissions, although the DfT
explicitly aims to ensure that it is not over-specified so as to allow for innovation and flexibility in the delivery of train
services over the course of the franchise.
Appraisal
As well as considering the financial aspects of bids, the DfT assesses the deliverability and quality of the bidders’
proposals so as to be confident that the successful bidder is able to deliver on the commitments made in the bidding
process. For this assessment, bidders are required to produce a set of ten delivery plans, as outlined in Table 4.1.
Table 4.1 Delivery plans in rail franchising
Delivery plan Weighting (%)
Organisation, staffing and stakeholder relations, mobilisation and migration 7
Management and delivery of change (including sustainability and the environment) 14.5
Modelling change and profit sharing 7
Marketing and fares 7
Ticket sales and revenue protection 7
Timetabling to accommodate current demand and future growth 14.5
Rolling stock, depots and train maintenance 7
Operational performance improvement 7
Stations and accessing the network 14.5
Improving service quality 14.5
Source: Department for Transport (2012), ‘InterCity West Coast Franchise – Invitation to Tender’, January 20th.
Each bidder’s forecast revenues are split into exogenous and endogenous revenue-affecting factors. The former are
factors, such as national GDP, that would have an impact on the expected revenues of all bidders, but are outside
of managerial control. These are compared against a DfT revenue benchmark. If a bidder’s assessment of these
exogenous factors differs from the benchmark, the DfT assesses the evidence provided in the bidder’s submission,
and either:
••
adjusts the exogenous factor for all bidders to equal that submitted by the bidder (if the bidder has provided
comprehensive evidence for such an adjustment); or
••
adjusts that bidder’s exogenous factor such that it is equal to the DfT benchmark view (if the difference between
the submission and the benchmark is not well-justified).
This means that all bidders end up with a common exogenous revenue factor based on the best available evidence
of the external factors that affect the bidder’s expected revenues—whether the best evidence is the DfT’s initial
benchmark, or a new benchmark adjusted for evidence provided by a bidder.
Endogenous factors, on the other hand, are individual to that bidder, since they are within managerial control. The
bidder’s delivery plans are used to form an assessment of the risk-adjusted, endogenous revenue-affecting factors.
This assessment is then combined with the exogenous revenue-affecting factors to derive an overall, risk-adjusted
revenue. For example, if a company submits a high revenue based on a particular, individual management strategy,
but its delivery plans suggest that there is a high degree of risk associated with this strategy, the endogenous
revenue factor would be revised downwards to reflect this risk.
To summarise, each company’s risk-adjusted revenue is therefore made up of:
••
a common exogenous revenue factor; and
••
an individual, endogenous revenue factor that is adjusted for risk consistent with that company’s delivery plans.
This process is outlined in Figure 4.1.
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