OECD SECRETARIAT – 15 DECEMBER 2014
WORKING PARTY N° 2
AUCTIONS AND TENDERS WHEN QUALITY
AND INVESTMENT MATTER
Use of Tenders and Auctions
 Presentation on the OECD Secretariat issues paper on Auctions and Tenders.
 Tenders are use...
Tenders and Auctions Design
 Keys in Design:
• Promoting entry
• Reducing scope for collusion
• Reducing risk of underper...
Quality: Awarding & Contracting
 Sometimes governments value multiple attributes (not just price); Quality-
price trade-o...
Investment for Concessions
 Investment often a central feature of concessions or privatisations
 Risk faced by concessio...
Renegotiation
• Unexpected Circumstance Changes
• Contractual Incompleteness
• Incorrect Cost/Value estimates (“Winners Cu...
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Auctions and tenders when quality and investment matter - OECD Secretariat - December 2014 discussion

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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

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Auctions and tenders when quality and investment matter - OECD Secretariat - December 2014 discussion

  1. 1. OECD SECRETARIAT – 15 DECEMBER 2014 WORKING PARTY N° 2 AUCTIONS AND TENDERS WHEN QUALITY AND INVESTMENT MATTER
  2. 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. 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. 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. 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. 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

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