Disincentivising overbidding for toll road concessions

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REVIEW OF THE HEAVY VEHICLE SAFETY AND PRODUCTIVITY PROGRAM List of tables Table 2.1 Errors in toll road traffic forecasts 12 Table 2.2 VfM assessment 22 Table 2.3 Summary of the explanations for overbidding in the literature 28 Table 3.1 International examples of flexible-term highway concessions 37 Table 4.1 Delivery plans in rail franchising 48 Table 4.2 Winning bids in the UK 3G spectrum auctions 53 Table 4.3 Ofwat’s CIS matrix 56 List of figures Figure 2.1 Stages in the concessions process 21 Figure 4.1 The Department for Transport’s revenue assessment guidelines 49 Figure 5.1 Potential causes of overbidding 60 Figure 5.2 Stages in the concessions process 61 Figure A2.1 The winner’s curse 69 Figure A2.2 The winner’s curse with bid discounting 70 Figure A2.3 Rational bidding to overcome the winner’s curse 70 List of boxes Box 2.1 Empirical evidence of optimism bias 16 Box 2.2 UK value-for-money assessment guidance 22 Box 2.3 Options for concessions design 23 Box 2.4 Identifying and defining an incentive 26 Box 3.1 UK PPP roads: the rise and fall of availability-based payment mechanisms 31 Box 3.2 Portuguese SCUTs: a lesson in unaffordability 34 Box 3.3 Pass-through tolling: Auto-Estradas do Baixo Tejo 35 Box 3.4 Flexible-term concessions using the least present value of revenues 38 Box 3.5 Construct-then-concession: 407ETR 40 Box 3.6 The North Tarrant Express 42 Box 3.7 The LBJ Express (IH 635) 43 Box 4.1 The Intercity East Coast franchise 51 Box 5.1 Interviews 59 Box A2.1 Empirical evidence of the winner’s curse 71 iv
Executive summary •• This study focuses on the phenomenon of overbidding for toll road concessions. Overbidding refers to bidding beyond an asset’s worth, typically in the transport sector through the submission of over-optimistic projections of traffic and revenue. Overbidding for toll road concessions is internationally observed as bidders compete in many countries to win attractive (and potentially lucrative) long-term concession contracts. However, it can lead to project distress and commercial failure, dampening the enthusiasm for subsequent private sector investment. These are outcomes that concession grantors generally wish to avoid. •• The emphasis in this report is on international experience and practice, within the toll roads sector and beyond. The aim is to build on lessons learned from elsewhere and to make recommendations to state and federal agencies in Australia on how overbidding for future concessions might be disincentivised. Literature review •• A review of the economics literature provides insight into, and some theoretical underpinnings for, the phenomenon of overbidding. The ‘winner’s curse’, for example, suggests that in certain auction situations (with incomplete information) the winner will, by definition, have overpaid. The ‘planning fallacy’ points to decision-makers’ general tendencies to overestimate project benefits and underestimate project costs. ‘Strategic misrepresentation’, on the other hand, reflects the incentives that stakeholders have to manipulate the parameters of the bid in order to reach a desired goal, for example to win the bid or to influence public policy. The phenomenon of overbidding in auction-like circumstances is observed in many situations and has received considerable academic attention in the past. •• The recommendations from the study—reported later—build on some of the solutions proposed in the literature. •• Internationally, procurement environments that appear to exacerbate the phenomenon of overbidding often share a number of the following characteristics: ◦◦ a public sector focused on maximum upfront value extraction from the sale; ◦◦ a public sector with a track record of contract renegotiation; 1 ◦◦ bid evaluation and contract award criteria that reward high—not necessarily accurate—projections of usage and revenue generation; ◦◦ lots of money chasing relatively few assets; ◦◦ lots of bidders chasing relatively few assets; ◦◦ bidding consortia dominated by parties with short-term objectives; ◦◦ financial structuring focused on high leverage and debt maximisation; ◦◦ equity sold to less-sophisticated third-party institutional and retail investors; ◦◦ traffic consultants on sizeable success fees; ◦◦ the absence of rigorous, independent bidder-model and forecast scrutiny. 1 While Australian toll road concession grantors have avoided contract renegotiation, it is important to acknowledge that this remains a central driver of overbidding behaviour in other jurisdictions. 1
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www.infrastructure.gov.au INFRA1452
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