Questions About the Initiative of the European Commission Concerning the Awarding and Compulsory Competitive Tendering of Public Service Concessions

The ruling of the European Commission is that the award of contracts by regional or local authorities for the provision of services of general economic interest must be done by way of competitive tendering. Such contracts must not be awarded to the authority's own public enterprises or to any other enterprise, including by means of unilateral State act, without a call for tenders, a practice that had previously been common in many Member States. Public service concessions are also subject to the competition rules of the EC Treaty. Should the European Commission enact a directive concerning compulsory competitive tendering, this would result, for several Member States, in a serious change of paradigm as regards the awarding of public service concessions. Against this background, this article will attempt to find answers to the following questions: —How is the present relationship of the regional or local authority with its own public enterprise to be considered? —Are there any limits to applying the rules on competition of the EC Treaty to public service concessions? —What kind of positive and negative effects concerning economic efficiency and supply of specific public services result from the awarding of public service concessions and from compulsory competitive tendering? —What kind of, and what amount of, transaction costs result from compulsory competitive tendering and from the awarding of concessions? —Does competitive tendering work properly, and are public tenderers given equal opportunities? —Are there any alternatives to compulsory competitive tendering that would achieve an efficient market performance and provide sufficient supply?     

Contestability, Complementary Inputs and Contracting: The Case of Harbour Towage

It has been argued that competitive tendering for contracts can be used to overcome problems of natural monopoly and to make markets 'contestable'. The recent Productivity Commission (2002) report into harbour towage in Australia noted the potential benefits of competition for contracts. Using the example of harbour towage, we investigate these claims when competitive tendering involves one segment of a vertical production chain. We show that direct customer contracting will not result in a perfectly contestable outcome if there is a complementary input provider with market power. We consider whether this situation improves when customers delegate the contracting process. Delegation only improves the outcome from the customers' perspective if the authority is able to receive side payments from the towage operators. Such side payments a priori would appear to be against the interests of the customers. We show, however, that side payments help the port authority to overcome the problems of market power, benefiting both the port authority and the customers. Further, these contracting outcomes are socially preferred to the unregulated outcome where port authorities and towage operators set prices and quality independently. This analysis sheds light and generally supports the Productivity Commission's recommendations.     

Opening up Public Services to Competition by Putting Them Out to Tender: An Evaluation

This article examines the effects of systematizing tendering procedures when awarding public service concessions. The opening up of the water supply industry to competition is used by way of illustration. Results show that arguments in favour of systematization are not robust when focusing solely on the expected benefits of the liberalization process. The peculiarities of the contract relationship in the delegation of public services, the mobilization of specific assets, and the long duration and incompleteness of the contracts invalidate this type of argument and expose public authorities to the opportunism of operators.
The efficiency of awarding public services concessions relies on cost–benefit analysis, taking into account sectoral aspects as well as specificities of the contracting organizations and structures.
The public service culture of these organizations is in this respect a key factor in the choice of efficient organizations since it conditions their ability to internalize the mission of fulfilling the public interest.     

JOINT BIDDING,GOVERNANCE AND PUBLIC PROCUREMENT COSTS:A CASE OF ROAD PROJECTS*

ABSTRACT *** : To utilize public resources efficiently, it is important to take advantage of competition in public procurement auctions to the maximum extent. Joint bidding is a common practice that potentially facilitates competition. By pooling financial and experiential resources, more firms are expected to enter the market, but it will also directly reduce competition if more than one bidder who is solely qualified makes a coalition. In theory joint bidding may or may not be beneficial to auctioneers, depending on the model. The paper empirically examines the impacts of joint bidding on firms' entry as well as bidding behaviour, using data on public road projects in developing countries. It shows that coalitional bids, in particular by local firms, would be competitive, but foreign joint ventures would undermine competition. It is also found that good governance can encourage firms' entry into the tendering and facilitate joint bidding practices.     

Renegotiation on incomplete procurement contracts

This article examines the impact of incomplete contracts on procurement costs in road construction auctions. Ex ante contracts in these auctions often fail to specify all of the potential construction contingencies, and consequently, changes in scope are necessary after construction begins. Using Vermont road construction contract data, this study finds evidence that there is a statistically significant difference in costs of firms between auctions with and without extra work adjustments. Substantial adaptation costs are responsible for the higher procurement outlays in incomplete contract. I also find that bidders inflate their bids to incorporate risk premiums in incomplete contracts; however, my estimates suggest that this bidding behaviour does not affect their profit margins.     

Valuation structure in first-price and least-revenue auctions: an experimental investigation

In many auctions the valuation structure involves both private and common value elements. Existing experimental evidence (e.g. Goeree and Offerman in Am. Econ. Rev. 92(3):625–643, 2002) demonstrates that first-price auctions with this valuation structure tend to be inefficient, and inexperienced subjects tend to bid above the break-even bidding threshold. In this paper, we compare first-price auctions with an alternative auction mechanism: the least-revenue auction. This auction mechanism shifts the risk regarding the common value of the good to the auctioneer. Such a shift is desirable when ex post negative payoffs for the winning bidder results in unfulfilled contracts, as is often the case in infrastructure concessions contracts. We directly compare these two auction formats within two valuation structures: (1) pure common value and (2) common value with a private cost. We find that, relative to first-price auctions, bidding above the break-even bidding threshold is significantly less prevalent in least-revenue auctions regardless of valuation structure. As a result, revenue in first-price auctions is higher than in least-revenue auctions, contrary to theory. Further, when there are private and common value components, least-revenue auctions are significantly more efficient than first-price auctions.     

Tendering procedures and buy-national policies

This paper will examine the possible impact of restricted and negotiated procedures to the industrial structure of sectors operating in public procurement. These two tendering procedures may operate on a given activity with other nontariff barriers or as a means favoring the adjustment process of the sectors dealing with them. In the latter case, their impact is expected to be crucial as to labor productivity, competitiveness, and the like. Despite the approach which defends that the two tendering procedures under examination may represent a deviation from competition, this analysis points out that they have a positive impact on suppliers' industrial performance or that they are at least associated to products that meet an increased labor productivity. (JEL F20)     

The effect of information on the bidding and survival of entrants in procurement auctions

In government procurement auctions of construction contracts, entrants are typically less informed and bid more aggressively than incumbent firms. This bidding behavior makes them more susceptible to losses affecting their prospect of survival. In April of 2000, the Oklahoma Department of Transportation started releasing the internal cost estimates to complete highway construction projects. Using newly developed quantile regression approaches, this paper examines the impact of the policy change on aggressive entrants. First, we find that the information release eliminates the bidding differential between entrants and incumbents attributed to informational asymmetries. Second, we argue that the policy change affects the prospects of survival of entrants in the market. We find that those who used to exit the market relatively soon are now staying 37% longer, while at the median level bidding duration increased by roughly 68%. The policy has the potential to encourage entry in government procurement auctions and thus increase competition.     

Are bid preferences benign? The effect of small business subsidies in highway procurement auctions

Bid preferences in procurement auctions allow firms from an identifiable group an advantage in bidding against unfavored firms. While economic efficiency is expected to fall as a result of bid preferences, government procurement costs may either increase or decrease depending on the competitive response of favored and unfavored firms. This paper uses data from California auctions for road construction contracts, where small businesses receive a 5-percent bid preference in auctions for projects using only state funds and no preferential treatment on projects using federal aid. I show that while firms' bidding behavior matches theoretical predictions, procurement costs are 3.8 percent higher on auctions using preferences. The higher procurement cost in preference auctions is attributed to reduced participation by lower cost large firms.Structural estimates of latent firm costs are then used to evaluate how efficiency and the division of surplus between firms and the government are impacted by bid preferences. Firm profits are 3.1 percent lower under bid preferences, however this is overwhelmed by the efficiency loss due to reduced large firm participation. The efficiency loss conditional on firm participation is estimated to represent around 0.1 percent of overall procurement costs. Including the adverse effect of preferences on the participation of large firms increases the estimated efficiency loss to 3.6 percent, which represents 27 cents for each additional dollar awarded to small businesses through the program. Counterfactual simulations indicate that if participation were instead inelastic to bid preferences, the 5-percent bid preference would be close to the optimal level.     

London bus tendering: the impact on costs

Bids for cost contracts in London Regional Transport bus routes between 1986 and 1993 are analysed for three purposes: to estimate costs for different types of bus operation; to test hypotheses about bidding under competition; to estimate cost savings attributable to tendering. There is no statistically significant difference in costs of operation between public and private sector operators on the tendered network. Bidding behaviour conforms to some features predicted by theoretical models. The estimated cost saving from tendering is 20%.     

The Reform of Local Public Utilities in Italy

The Italian system of local public utilities has recently undergone an important reform process. The first round of reforms, introduced in the 1990s, represented a remarkable change in the social welfare function with regard to the management of local public utilities. The legislation was specifically designed to cut costs and reduce deficits. A second round of reforms, required by European directives, started around the mid-1990s. Several laws were passed introducing important innovations and regulating specific sectors: public transport; electricity; and gas. Article 35 of the 2002 Financial Law was the final step in a comprehensive reform of the whole local public utility sector. The main innovations of the Financial Law concerns liberalization. Article 35 states that the general rule for awarding service provision contracts is competitive tendering; the rationale is obviously that of competition for the market. The general rule as expressed by Article 35 is nevertheless limited during the transition period. In the long run, competitive tendering will become the normal way of awarding contracts for local public utility provision. Even if there are doubts that full competition will be introduced into the sector, liberalization does appear to be having an effect, forcing many local public utilities to become more efficient. The changes introduced have brought about a better and a more efficient system with a greater number of large size enterprises and on the average a more active management.
In the future, the liberalization process may come to a standstill due to an insufficient number of competitors. Strong public administrations are therefore needed to prevent opportunistic behaviour by private firms.     

An Ordered-Probit Analysis of Price and Performance in Competitively Tendered Contracts

Abstract
This article adopts an ordered-probit estimation procedure to investigate the influence of competitive tendering on contract price and performance. Using a two-equation recursive system the findings of Domberger, Hall and Li (1995) turned out to be robust to the ordered-probit methodology which confirmed the strong negative effect of competitive tendering on contract price. The evidence also suggested that performance was either enhanced or remained the same in the presence of competition. Overall, the results of this investigation support the view that competitive tendering generates efficiency gains without adverse effects on quality of service .     

A Study of Collusion in First-Price Auctions

This paper examines the bidding for school milk contracts in Florida and Texas during the 1980s. In both states firms were convicted of bid-rigging. The data and legal evidence suggest that the cartels in the two states allocate contracts in different ways: One cartel divides the market among members, while the other cartel also uses side payments to compensate members for refraining from bidding. We show that both forms of cartel agreements are almost optimal, provided the number of contracts is sufficiently large.
In the auction the cartel bidder may face competition from non-cartel bidders. The presence of an optimal cartel induces an asymmetry in the auction. The selected cartel bidder is bidding as a representative of a group and has on average a lower cost than a non-cartel bidder. The data support the predicted equilibrium bidding behaviour in asymmetric auctions in accordance with optimal cartels.     

Bundle and separate sales in auctions with entry

A seller sells dissimilar objects while taking the auction rule as given. Should the seller sell the objects separately or as a bundle? Generally, when the number of bidders is small bundling helps to stimulate the competition and raise revenue. In this paper, we show that if entry is costly enough the process of endogenous participation generates sufficient competition to make bundling unnecessary in auctions. Thus whether a bundle auction generates a higher or a lower revenue ultimately depends first on the level of the entry costs and then, possibly, on the number of potential bidders.     

BIDS AND COSTS IN COMBINATORIAL AND NONCOMBINATORIAL PROCUREMENT AUCTIONS—EVIDENCE FROM PROCUREMENT OF PUBLIC CLEANING CONTRACTS

Combinatorial procurement auctions enable suppliers to pass their potential cost synergies on to the procuring entity and may therefore lead to lower costs and enhance efficiency. However, bidders might find it profitable to inflate their stand‐alone bids in order to favor their package bids. Using data from standard and combinatorial procurement auctions, we find that bids on individual contracts in simultaneous standard auctions without the option to submit package bids are significantly lower than the corresponding stand‐alone bids in combinatorial auctions. Further, no significant difference in procurer's cost as explained by auction format is found. (JEL D44, H57, L15)     

UMTS in France and Europe: How to allocate the licenses?

The awarding of UMTS mobile licenses in France gave rise to a passionate debate as well as to a rather fluctuating history. A beauty contest with a predetermined price was preferred to an auction mechanism, as opposed to what was decided in most European countries, in particular United Kingdom and Germany where licences' prices reached very high levels. In France, only two candidates could be selected from a first tendering and a second one is now being organized in order to allocate the two remaining licences, after the Government has drastically lowered the price of all four licenses. The purpose of the present contribution is to show that auctions, although refused in France for the sake of "controlability" of the awarding procedure, are indeed an appropriate means of spectrum allocation for mobile services, provided that the mechanism is carefully designed and adapted to the context, which may differ according to the country. We first summarize the main lessons from the auctions theory and then discuss the compared efficiency of different mechanisms and their resistance to predation or collusion. On this basis, we finally analyse the actual process of UMTS auctions in various European countries and we tentatively propose a backward fictitious scenario for France.     

Strategic Innovation with Complete and Incomplete Labour Market Contracts

In a model of strategic R&D competition between two firms that negotiate with independent unions we show that: (i) incomplete labour market contracts may Pareto-dominate complete labour market contracts (ii) even when complete contracts Pareto-dominate incomplete contracts, economies can get stuck in the incomplete contract equilibrium. These conclusions provide additional strategic reasons why complete labour market contracts may not be used—even if they were feasible. We propose two testable predictions to discriminate between complete and incomplete contracts: (i) the variance of wages is lower with complete contracts; (ii) the variance of employment is higher under complete contracts.     

Predicting bid prices by using machine learning methods

It is well-known that empirical analysis suffers from multicollinearity and high dimensionality. In particular, this is much more severe in an empirical study of itemized bids in highway procurement auctions. To overcome this obstacle, this article employs the regularized linear regression for the estimation of a more precise interval for project winning bids. The approach is put to the test using empirical data of highway procurement auctions in Vermont. In our empirical analysis, we first choose a set of crucial tasks that determine a bidder’s bid amounts by using the random forest variable selection method. Given the selected tasks, project bid forecasting is conducted. We compare our proposed methodology with the least square linear model based on the bias and the standard root mean square error of the bid estimates. There is evidence supporting that the suggested approach provides superior forecasts for an interval of winning bids over the competing model. As far as we know, this article is the first attempt to provide reference bids of highway construction contracts.     

The determinants of tendering periods for PPP procurement in the UK: an empirical analysis

The procurement of infrastructure projects via public–private partnerships (PPPs) is rising globally. PPPs are, however, often characterized by lengthy tendering periods, defined as the difference between contract notice and financial close. Tendering periods are important because they account for a significant proportion of overall project delivery time. Slow tendering deters bidders and thus reduces competition for contracts. We source data on 670 PPP projects in the United Kingdom and use a duration analysis model to empirically examine factors that impact tendering period duration. Our results reveal significant sectoral variation with projects in the health and housing sectors taking significantly longer to reach financial close. We also show that, after controlling for other factors, projects with higher capital values and projects that overlap with the timing of general elections are associated with significantly longer tendering periods. We further examine the impact of the competitive dialogue procurement method and find evidence that tendering periods have increased since 2006; the year competitive dialogue was introduced. We do, however, observe a significant reduction in the time between appointment of preferred bidder and financial close post-2006. This suggests that competitive dialogue is effective in reducing the scope for negotiations by preferred bidders holding quasi-monopoly advantages.     

Optimal Conservation Programs, Asymmetric Information and the Role of Fixed Costs

An increasing number of environmental protection programs offers financial compensation to farmers in exchange for conservation services. Incentive-compatible contracts can be designed to mitigate excess compensation, but the extant literature suggests that outcomes are always second-best so that other instruments (such as conservation auctions) may be preferred. We argue that the claim regarding the first-best solution never being incentive-compatible is correct if all conservation costs are variable in nature; if there are fixed costs too, the first-best compensation scheme may be incentive-compatible after all. Given the relevance of fixed costs in conservation issues, we conclude that incentive-compatible contracts should be given a second chance as a policy measure to induce conservation.