Disincentivising overbidding for toll road concessions

5 │ CONCLUSIONS
5.2 Discussion
While several best practice principles and lessons from international precedent have been presented, it is perhaps
too early in the life cycle of toll road concessions to reach definitive conclusions on what best practice looks like.
Indeed, as the majority of modern Western concessions are still in the early period of operations, the existing model
has not yet been tested fully. The current difficulties that some toll roads face (and failures in other sectors, including
National Express’s default of the Intercity East Coast franchise in Great Britain) are likely to have been exacerbated
by the volume shock created by the global recession. In particular, given the age of many of the toll road projects
in Australia, financing was likely to have been accessed at, or near, the top of the economic cycle, while the roads
opened at the bottom of it. This might lend credence to the argument that the overbidding problem would be expected
to sort itself out naturally, given time. If the concessionaire defaults due to having made a bid that later proves to be
excessive, the costs are borne by equity first and fixed income second, as with any business that overestimates its
demand. The ‘invisible hand’ should therefore force bids to become more accurate over time, as bidders learn not to
take on too much risk and lose their credibility with the debt markets. This would be expected to be more likely in the
absence of renegotiations.
Even if this is the case, a government may wish to implement current best-practice processes and deliberately test
alternative structures to speed up the learning process.
In closing, it is worth highlighting that the experiences of, and concerns about, overbidding for concessions do not
lead to the conclusion that concessions—or PPPs, more generally—are fundamentally flawed. As stated above,
these arrangements are evolving and most have yet to mature. In such circumstances, it is entirely reasonable for
a government to intervene to push the industry (and itself) further along the learning curve. The key is to actively
search out lessons that can be used to benefit other PPPs specifically and government procurement practices more
generally. In this context, full, proper and constructive engagement with the private sector has a role to play.
Above all, effective concession design should facilitate the exchange of ideas between public and private sector
players, and provide real opportunities for government (and ultimately taxpayers) to benefit from private sector
initiatives, innovation and experience.
Photograph courtesy of Road and Maritime Services, NSW.
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