PPP: INCENTIVES IN TENDERS PROCEDURES

Transcription

1 1 PPP: INCENTIVES IN TENDERS PROCEDURES Elisabe5a Iossa Professor of Economics University of Rome Tor Vergata, CEPR, CMPO EIEF

2 2 Unsolicited proposals Private firms identify opportunity for investment in public infrastructure and submit unsolicited proposal to public administration How to deal with these UP from original proponent (OP)? Issues: Development costs difficult to assess Intellectual Property difficult to assign Transparency and Competition needs to be ensured

3 3 Experiment Two stages: investment stage with OP submitting a proposal, bidding stage with bidders submitting a bid for the realization of the OP proposal Groups of 6: one principal, one OP, 3 bidders Principal chooses tender procedure: Right of first refusal No explicit reward Ex ante bonus

4 4 Given the procedure chosen in the group, OP chooses if to invest in stage 1 and bids in stage 2 if allowed. Investment i=0,1. Cost of investment is 5. If i=0, project idea of value V=100 is realized w.p. ½ If i=1, project idea of value V=100 is realized w.p. 1 Investment unobservable 3 bidders bid in stage 2. Costs are iid and range from [0,10,20,30,40,50]

5 5 VARIANTS II stage: participants face cost 1 of participating. This to consider how different procedures may disincentivize participation of non-op Ex post bonuses. Assume that now V=50 or V=100. If i=0, project idea of value V=100 is realized w.p. ½ If i=1, project idea of value V=100 is realized w.p. 1 Investment and V unobservable

6 6 Development costs Development costs are difficult to assess Estimate of development costs sometime included in tender document as an expense to be paid by winning bidder to OP. Empirical evidence shows that reimbursement plays limited role. Concern that frivolous projects will be submitted Such costs will only be reimbursed at the end of the process if a party different than OP is awarded the contract. The proponent will not be entitled to reimbursement of expenses if its proposal is not declared admissible during the evaluation process.

7 Intellectual ProperBes 7

8 Transparency and CompeBBon 8

9 UNCITRAL Approach: no specific reward to OP 9 UNCITRAL considers these issues at paragraphs 96 to 117 of the LegislaOve Guide on Privately Funded Infrastructure Projects. It sets out suggested legislaove language in provisions 20 to 23 of its Model LegislaOve Provisions on Privately Financed Infrastructure Projects in Whenever a host authority receives an unsolicited bid, UNCITRAL recommends that the authority first consider whether the proposal is potenoally in the public interest.

10 10 UNCITRAL Approach: no special procedure If so, the authority then requests further informaoon from OP in order to make a full evaluaoon. If the authority decides to go ahead with the project, it determines whether the project necessarily involves intellectual property, trade secrets or other exclusive rights of the proponent. For projects that do not involve these rights, a full selecoon procedure is followed, with the proponent being invited to take part in the selecoon. If it does necessarily involve the proponent's intellectual property, a full selecoon procedure does not need to be followed.

11 11 Ex post Bonus system Chile has adopted an approach whereby the OP is required to take part in a fully compeoove tender process, but is given bonus points in relaoon to the evaluaoon. Premium to OP in the tender (5-10% or bonus points). The value of the bonus is determined ex post by Govt. (the bonus can be sold) The process to manage unsolioced proposals is found (in Spanish) in a regulaoon (secondary legislaoon) to the law (reglamento) Reglamento 956 Chilean Concession RegulaOons 956.

12 12 Right of first refusal (RFR) SWISS CHALLENGE SYSTEM (Philippine Italy India Taiwan): I stage: I stage: Commitment by PA to evaluate proposal with no deadlines. If OP project seen as valuable, go Stage II. Otherwise no reward. II stage: CompeOOon on the cost to realize OP project OP. OP does not parocipate to this stage but has right of first refusal. A similar approach consists in the BEST AND FINAL OFFER where there are mulople round of tendering with OP automaocally compeong in final round

13 13 RFR CompensaBng innovabon In the two stage procedure, the compensaoon for the investment in innovaove approaches occurs through the use of a right of first refusal in the second stage of the tender The winner of the first round does parocipate to the second round but has a right to make final offer and thus adjudicate the contract if the offer improves upon exisong best offer. But there may be disincenoves for compeotors to parocipate to the II round of tender, due to the disbursement costs and to the winners course.

14 14 CorreNve mechanism to induce parbcipabon If OP exercises the right of first refusal, PA will reimburse the tenderer who has made the best offer in stage II, at the expense of OP, the expenses incurred to parocipate to the tender. The compensaoon is reported in the Business Plan submi?ed by the tenderers as part of their offer and cannot be higher than 2,5 % of the investment value reported in the BP If OP does not exercise the right of first refusal, OP is enotled to receive a compensaoon for the expenses incurred, to be paid by the winning bidder. The compensaoon is given by expenses reported in the BP of promoter and cannot be higher than 2,5 % of the investment value reported in the EFP

15 15 Opportunism by rival bidders ParOcipants to II stage play on reimbursement costs by offering minimal improvements to OP offers but inflaong their costs of parocipaong to tender Promoter has incenove to maximize reported expenses (up to 2.5%) so as to increase cost for parocipants to II stage of the tender. It has been suggested therefore to reimburse costs if and only if offers are significantly be?er than inioal promoter s offer.

16 16 Winner s curse in an aucbon In buyer- seller aucoons, the RFR reduces the expected revenues for the seller for two reasons. 1) the buyer with the RFR may manage to win the aucoon and purchase the good even when he is not the one with the highest evaluaoon. 2) when the aucooned good has an element of common value, the RFT exacerbates the winner s curse by inducing bidders to submit non- aggressive bids. A buyer who was willing to pay up to his evaluaoon of the good might then win the aucoon when his evaluaoon is opomisoc, thus paying too much. To avoid this, the opomal strategy for a bidder is to present offers that are much smaller than their evaluaoon of the good. The winner s course thus reduces compeoove pressure.

17 17 The winner s course in PPPs when there is RFR The common value component is given by the common cost of realizing the project. Since in the II stage bidders compete on the cost of realizing the same project, the promoter s one, the common component is a high percentage of total cost A tenderer parocipaong to II stage will therefore anocipate that with correlated costs, the promoter will be unlikely to match the best offer when the offer was based on an opomisoc cost evaluaoon. Thus the chance of winning for a tenderer will be higher when he was opomisoc. He risks of losing from winning the contract!

18 18 Therefore a tenderer in phase II will be more likely to win if (i) common cost component is small, the esomaoon was correct but he has significantly lower cost than the promoter, which explains why the promoter does not exercise the RFR. In this case winning is good new: the tenderer wins because it is the best offer and it is a profitable offer. (ii) common cost component is high, the esomaoon was opomisoc and this is why the promoter does not exercise the RFR. In this case winning is bad new: the tenderer wins because it is the best offer but it is not profitable offer.

19 19 PredicBons Therefore the higher the common cost component, the greater the risk to fall in case (ii) and the lower the incenove of a firm to parocipate to stage II or to be aggressive in the offer. Further, since OP was the firm that designed the project, it has be?er informaoon as to the project characterisocs and risks. The winner s curse is therefore stronger the greater the advantage of the promoter and therefore the less standardized is the project As example, consider the extreme case where the promoter and the challenger have the same cost structure, i.e. are equally efficient, but the promoter is be?er informed about the project risks and costs. Then winning for the challenger is always bad news. If it was good news, the OP would match the offer

20 20 Evidence In actuality, challengers are rarely successful in some countries, as demonstrated by the small number of challenges and subsequent victorious counter- proposals to date in Korea, the Philippines, and Taiwan. However, some systems might not have a significant compeoove advantage for the original project proponent because challenges are regularly successful (for example, Chile). Large number of UP in Korea With right to match procedure, most contracts were awarded to OP (Taiwan, Italy). Also li?le parocipaoon in the aucoon.

21 21 Evidence from Italy Considering a sample of tenders in Lombardia al 2007, we see that in ¾ of II phase tenders saw no parocipants. This confirms that RFR discourages parocpaoons to II phase (Panicara, Tidu, 2008). Further, almost all phases were won by the promoter.

22 22 CompeBBon for ideas based on CD ONE STAGE PROCEDURE: The Italian case PA prepares Feasibility study PA examines offers PA ranks offers PA selects an offer as promoter/proponent Approves the preliminary project, by requesting if necessary some modifications to project 3 CASES: 1) Promoter accepts the modifications: the contract is signed with the promoter 2) Promoter does not accept. PA makes same request to next tenderer in the ranking: the contract is signed with the first tenderer who accepts 3) The project does not need modifications, the contract

23 23 Offers include: Preliminary project Contract Economic and Financial plan (EFP) Le?er of credit from bank Output specificaoons List of expenses incurred to parocipate to the tender for a max of 2.5% investment value as reported in EFP.

24 Adjudication criterion: most advantageous economic tender (MEAT) Weights also on non-economic parameters Criteria must be inserted in the tender documents Weights do not need to be given but ranks must be given If Promoter does not win then receives a compensation for expenses incurred For participating to tender. The compensation is given by expenses reported Business Plan of promoter and cannot be higher than 2,5 % of the investment value reported in the BP 24

25 25 Menus and Self Financing aspects Menus PA commits to one or two procedures, but chooses which one based on specific situaoon (Italy: if proposal requires improvements then standard one- stage aucoon. If proposal does not require improvements then Swiss challenge system.) Self Financing aspects: In some countries, e.g. ArgenOna, UP are only considered if the project is self financing.

26 26 Least present value tender PA sets discount factor and tariffs to users Offers are consotuted by present value project revenues (PVR) The least present value offer wins. The length of the contract is endogenous: contract ends when least present value offer meets actual value Es: Queen Elizabeth II Bridge on Thames River UK, Second Severn Bridge UK

27 27 Demand risk is minimum: when current demand is small, the length of the contract increases; if domand is unexpectedly high, the length of the contract decreases Easy to estabilish the compensaoon to the contractor if the public authority terminates the contract: compensaoon given by PVR- total revenue esomaoon cost staving on maintanance and operaoon. But mall incenoves to take acoons to increase demand.

28 28 This procedure encourages innovaove approaches since: In the single tender, the compensaoon for innovaove ideas and investments is made through the points given in the adjudicaoon criterion to the non- economicaspects of the proposal: PA will not just focus on the economic aspects but also on the qualitaove aspects. MEAT with weights on non- economic parameters ensures that innovaove approaches are rewarded.