Disincentivising overbidding for toll road concessions

DISINCENTIVISING OVERBIDDING FOR TOLL ROAD CONCESSIONS
to announce as high an upfront payment as possible, and thus to accept the highest demand forecast. Indeed, in
the case of the Intercity East Coast Line, the DfT awarded the franchise to a party that had not offered the highest
payments over the lease period.
Other options for enhancing the bid appraisal process, highlighted in this report, include:
••
reference class forecasting;
••
explicit optimism bias adjustments;
••
separation of forecasts into an exogenous factor, which is common to all firms, and an endogenous factor which
is unique (and allows for differentiation according to individual bidders’ ability to grow traffic, as evidenced
through delivery plans).
These solutions all suggest that greater independent (technical) oversight is needed of parties’ bid forecasts and
submissions. 123 This could stem from stricter government guidelines on how forecasting should be carried out and the
publication of criteria with which traffic modelling should be compliant. Independent traffic and financial modellers
could then be employed to carry out a third-party review as part of the evaluation process, in order to identify
overambitious forecasts and ensure that realistic traffic forecasts form the basis of the successful bid. Alternatively,
the government could require projects to secure a specified rating from an international credit rating agency, since
this would also involve the demand forecast being subjected to greater external scrutiny.
Key principle
Best practice dictates that far less emphasis (if any) should be placed on any upfront premium offered by
the bidders, since this merely ensures that companies are incentivised to provide high, rather than accurate,
numbers. If NPV-positive, financial flows could instead be spread across the lease period. Bid appraisal should
also include an assessment of the assumptions on which demand and revenue forecasts are based, to ensure
that they are well-justified and deliverable. Such approaches, in combination with many of the other best practice
principles, have the potential to maintain investor confidence by ensuring that concessions are awarded to the
most qualified party and for the correct reasons.
5.1.5 Post-contract award
In terms of contractual design, it is perhaps unrealistic to strive for complete contracts that perfectly cover all
eventualities that might arise over a 30-year period. The default assumption should probably be that some forms
of renegotiation will be required over such a long time horizon—and possibly more value would result from efforts
to ensure that effective partnering arrangements are in place to accommodate and respond to changes that are
inevitable. Contractual renegotiations are usually regarded negatively when, in fact, positive (welfare-enhancing)
outcomes can flow from periodically revisiting the terms and conditions governing service delivery.
In short, there could be good and bad renegotiations. The situation to avoid is a forced renegotiation with, at its core,
a financially distressed project and a concession grantor feeling obliged to step in and solve the problems. Policies
of, and demonstrated commitment to, no renegotiation under such circumstances are essential, but awarding
concessions to the correct parties for the correct reasons goes a long way to avoid such situations arising in the first
place.
Key principle
Best practice indicates that the Australian government’s current position of not renegotiating contracts is
essentially the right one and should thus be maintained. However, consideration might usefully be given to ways
in which long-term partnerships between the public and private sectors could evolve to ensure that the true spirit
of partnership is maintained throughout the concession term.
123 See Appendix 2 for further discussion of potential improvements to traffic and revenue reports.
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