Disincentivising overbidding in toll road project procurement

Disincentivising overbidding in toll road project procurement

Overbidding, as a result of over-optimistic traffic and revenue forecasts, has damaged investor confidence in the Australian toll roads sector. The extent of over-prediction has been significant, with some assets performing at less than 50% of their original forecasts. The report highlights that overbidding is a phenomenon observed internationally, across a number of sectors.

Through a literature review, case studies and interviews with participants, from both the toll roads and non-toll roads sectors, the report highlights the reasons for overbidding across the five stages of the procurement process: pre-procurement, concession design, the bidding process, bid appraisal and post-contract award. (See bulleted list below for details of these stages.) From these reviews, a framework has been developed to be used as international best practice in each of these stages, to ensure that the penalties for submitting unrealistically high traffic and revenue forecasts are greater than any concessionary benefits attained.

  • In the pre-procurement phase, attention needs to focus on rigorous and transparent project vetting—with an emphasis on value-for-money assessment—such that any public sector or political pressures to oversell projects to the private sector (particularly for short-term gains) are discouraged and neutralised.
  • In terms of concession design, any incentives for excessive risk-taking should be avoided, yet concessionaires should not be insulated from traffic risk. Concession design needs to ensure that a balance of upside and downside risks remains, allowing for normal risk/reward returns.
  • In the context of the bidding process, aggressive price-based competitions allied to deal scarcity clearly drive overbidding. In response, many concession and licence grantors are today placing much more emphasis on efficiency (rather than revenue) maximisation. The use of bidder deposits, with the size of the deposit linked to the size of the bid, may also have a role in terms of incentive realignment.
  • During bid appraisal, far more attention needs to be placed on assessing and testing the deliverability of bidder submissions and plans, and the assumptions embedded in their financial models.
  • Best practice indicates that contract renegotiations should be avoided post-contract award to minimise the potential for opportunistic behaviour.
It is hoped that this research will contribute towards a more effective and fairer procurement process design to facilitate and promote the exchange of ideas between public and private sector players, and provide real—and realistic—opportunities for government and ultimately taxpayers to benefit from private sector initiatives, innovation, experience and efficiency.

View the full report
Posted: 07/09/2012