Disincentivising overbidding for toll road concessions

5 │ CONCLUSIONS
Other suggestions include designing a second-price system, whereby the winning bidder would pay the premium
offered by the second-highest bidder, and making the bidding process more open and transparent. In theory, a
second-price mechanism should incentivise bidders to reveal their true valuations. However, such designs are rarely
used in practice and would be likely to result in lower revenues than the existing model.
Structure of bid consortium
Further problems in the bidding process have been created by the misalignment of incentives across bidding
consortia. To overcome this, a requirement of pre-qualification could be to ensure that the bidding consortia are
compliant with a target capital structure (eg, realistic gearing). Bidders might, for example, be required to show
that they have a minimum of, say, 30% equity. While this may be partly required by the current market conditions
anyway, enshrining a proper financing structure would be expected to reduce further the pressure on forecasts. Thinly
capitalised special-purpose vehicles (SPVs) do not sit naturally with projects exposed to income streams that may
vary considerably from expectations.
One element of an appropriately structured concession competition might be an evaluation of the bids that includes
giving credit for the amount of equity, parent guarantees or similar support that are proffered and serve to provide
‘skin in the game’ by the bidder. The more the concessionaire (at the parent level) is on-risk, the lower the incentive to
overstate revenues or ‘overbid’ using an over-leveraged transaction structure.
A number of additional structural features might be considered to ensure that the concessionaire has a long-term
interest in the project, but the key ones are addressed above.
A second possible means of ensuring closer incentive alignment would be to have a longer lock-up period on sponsor
equity and make (real) sponsor equity a meaningful part of the overall equity pool. It would be desirable to prohibit
dividend distributions or the sell-down of equity in circumstances of underperforming projects, and to avoid the
practice of passing equity risk to less-sophisticated third parties or to those unable to exercise full and appropriate
due diligence.
Key principle
Mechanisms should be applied to increase the downside risk of overbidding and to penalise certain bidding
consortia on the basis of their investment objectives and capital structures. This would reduce short-termism and
create better incentive alignment across stakeholders within the consortia.
5.1.4 Bid appraisal
Best practice from international precedent suggests that, in the bid appraisal stage, procurers should scrutinise the
deliverability of bidding parties’ business plans and the robustness of the assumptions behind their financial models.
The UK DfT recently announced its intention to focus more on cost side as well as demand-side considerations in
awarding franchises in the future. This is intended to encourage the realisation of efficiencies over the duration of the
franchise, ensuring that infrastructure assets are efficiently utilised, while also reducing the incentive for parties to
overbid. Similar criteria could be applied to bid assessment in the toll roads sector.
While imposing rules to this effect might reduce the size of the upfront payment, this is a trade-off that the
government might need to accept if it wishes to overcome the overbidding problem. The UK 3G spectrum auction
is an example of a case in which the government agency emphasised that its objective was to maximise the
full economic value of the auctioned resource rather than the revenues received. Since spectrum was a scarce
resource—with only five licences for 13 bidders—the price paid by concessionaires remained high enough for the
taxpayer to receive substantial benefits, but was not so high as to cause irreparable damage to the winning bidders’
finances. This would likely also be the case in toll roads—owing to the infrequent nature of concessions, winning bids
would be likely to remain at an acceptably high level, even if they were required to pass enhanced scrutiny.
If the economic case for a project is sufficiently strong, instead of governments extracting money in the form of
upfront payments, they might more usefully do so in the form of payment instalments over the lease period, which,
even in NPV terms, could be smaller than the upfront payment would otherwise be. In GB rail franchising, the winning
bidder pays annually rather than upfront. This removes some of the political pressure that incentivises the procurer
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