This presentation by the OECD Secretariat was made during a discussion on the use of tenders and auctions at the 58th meeting of the Working Party 2 of the OECD Competition Committee on 15 December 2014. Find out more at http://www.oecd.org/daf/competition/tenders-and-auctions.htm
Auctions and tenders when quality and investment matter - OECD Secretariat - December 2014 discussion
1. OECD SECRETARIAT – 15 DECEMBER 2014
WORKING PARTY N° 2
AUCTIONS AND TENDERS WHEN QUALITY
AND INVESTMENT MATTER
2. Use of Tenders and Auctions
Presentation on the OECD Secretariat issues paper on Auctions and Tenders.
Tenders are used in a variety of contexts (sale of government assets;
concession award; public procurement).
Competitive Tendering can allow for benefits of competition. Empirically
documented scope for cost savings. But mere use of tenders does not
ensure efficient results: design and implementation are crucial.
Often, not only price but also non-price attributes matter for the
government. This is particularly the case when economic or social
infrastructure (an important driver of economic growth) are at stake. Tender
moment: opportunity of getting it right.
The paper (and presentation) address key issues of tender design when
quality and investment matter, namely concerning the awarding rules,
contract design and the duration and retendering of concessions.
Renegotiation is also addressed, as it takes place frequently, it entails
substantial costs, and can jeopardise the gains from competitive tendering.
3. Tenders and Auctions Design
Keys in Design:
• Promoting entry
• Reducing scope for collusion
• Reducing risk of underperformance and default
How do tenders perform in complex procurement and
concession award? Why higher skepticism?
• Role of information exchange between parties for formulating
specifications
• Incomplete contractual design
• Increased ex-post renegotiation risk
4. Quality: Awarding & Contracting
Sometimes governments value multiple attributes (not just price); Quality-
price trade-off. Various procedures have been used (Simultaneous evaluation of
bids on all attributes, 2-Stage Evaluation Procedures, Minimum Quality
Standards, Private Negotiations on all dimensions)
Scoring rules weighting price and non-price attributes
• Theory (e.g. Che 1993; Asker & Cantillon 2008)
• Practice (e.g. MEAT – BPQR; A+B Bidding for Highway Repair)
Flexibility for adjusting quality-price trade-off to align outcome with auctioneer’s
aims
Multidimensionality: entails higher subjectivity
Challenges (Attribute specification, corresponding weights, observability)
Performance monitoring (E.g. timeliness, reliability, survey results)
Concessions ( Technically complex, long lasting, governments’ multiple goals )
Contract provisions to provide incentives to deliver quality
Penalty/Reward scheme - financial or other (e.g. concession duration
extensions – London Bus Tendering)
5. Investment for Concessions
Investment often a central feature of concessions or privatisations
Risk faced by concessioners
• Recoupment? (due to periodic re-tendering);
• Get paid the value of the investment if losing the concession?
• Price regulation implications for adequate return on investment?
Weight quality & investment + penalties/rewards for performance;
Hybrid forms of price caps
Length, rebidding and transfer and value of assets
• Asset Specificity; Hold-up problem; Competition effect
• Compensation for investments?
6. Renegotiation
• Unexpected Circumstance Changes
• Contractual Incompleteness
• Incorrect Cost/Value estimates (“Winners Curse”)
• Strategic Behaviour (e.g. “Low-balling Strategy”)
Main Drivers
• Renegotiation is Frequent (e.g. Guasch et al 2006)
• Adjustments to tariffs, inv. plans, cost components, fees
paid by contractors, contract duration, etc.
• Usually favours contractors
• High Costs of Ex-post Adjustments (Bajari et al 2014)
Outcome
• Reduce Lack of Commitment, Asymmetric Info,
Prospects of Renegotiation:
• Seek information; Expert advice; Time for Bid Prep;
• Ensure compliance: Include Incentive/Desincentive
schemes; Monitoring
• Design Renegotiation Proof Contracts;
Solving