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This presentation by Elisabetta Iossa was made during a session on Competition in Public-Private Partnerships held at the 57th meeting of the Working Party 2 of the Competition Committee on 16 June 2014. Find out more at http://www.oecd.org/daf/competition/competition-public-private-partnerships.htm
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Competition Issues in Public-Private Partnerships Elisabetta Iossa University of Rome “Tor Vergata”, Center of Research in Procurement and Supply Chain, Proxenter CEIS, CMPO, CEPR, and IEFE-Bocconi. [email protected] www.proxenter.it OECD Hearing on PPPs, 16 June 2014, Paris.
2
1. Bundling of project phases (BOT, DBFO..)
2. Private finance
3. Long term contract (typically 25-30 years)
4. Higher risk transfer to private sector (construction; demand/availability risks; etc.)
PPP MAIN CHARACTERISTICS
TYPES OF PPP PROJECTS
• Financially free standing (concession-type)_ - users fees (highways, roads, bridges)
• Public sector as client (PFI-type) - shadow prices; availability & performance fees
(Schools, Hospitals, Prisons) • (Joint ventures companies)
Sectors
Water All phases of water treatment and distribution
Waste water and sewerage
Trasport
Environment
Leisure centres
Museums
Others
Roads– Motorways– Bridges and Tunnels – Aereoports– Ports– Interports – Local public transports
Reciclying
Swimming pools, sport centres etc..
Congress centre- renovation public buildings– Libraries
Hospitals– Prisons– Schools– Public Building, Mililtary accomodation– Parking
RATIONALE FOR PPP
(i) Private sector more efficient?
Megginson Netter (2001): not always
No; risk premium (ii) Private finance cheaper?
(iii) Build infrastructures Off balance?
No accounting tricks: Eurostat (2004,08)
SO WHY PPP?
..this can potentially yield better and cheaper infrastructures
Thus, inducing contractor to take into account how its investment/choices at design and building stage will impact on operational costs/demand
Because bundling of design, building, finance and management in a long term contract..
..creates a single point of responsibility, which makes risk transfer more effective on incentives.
One facet of PPP: efficiency gains (UK NAO 03; 07; HMT 06) COMPLETION TIME: 76% PPP on (me 30% non-‐PPP RISK TRANSFER: 22% PPP price renego(a(on
73% non-‐PPP MANAGEMENT STAGE (survey, PUK, 06) 96% of PS sample were “sa(sfied” or “more than sa(sfied” 66 %: “good” o “very good.
The other facet of PPP: compeNNon issues
• The same factors that provide the ra(onale for PPP may cause compe((on concerns
• ISSUE 1, 2. LIMITED COMPETITION-‐ SMEs PARTICIPATION • Bundling of project phases, risk transfer and long term contrac(ng, make PPP contracts rather complex
• high bidding costs (sunk costs) 5% of project value • long tendering periods: : 34 months average; • Limited par(cipa(on (especially of SMEs) • High risk of collusion
PARTICIPATION IN PPP TENDERS: which quesNons
• Which and How many firms in the PPP tender?
• New entrants?
• SMEs?
• foreign firms?
• Is there an incumbent advantage?
ISSUE 3. MARKET FORECLOSURE: UNDUE BUNDLING AND LONG TERM CONTRACTING • Bundling + long term contracting creates a long-term
monopoly condition
• 20 years long contracts, 30 years…and more!
• Of core service (clinical services, transport services) • Difficult to justify it for ancillary services (restoration,
parking services)
MARKET FORECLOSURE: UNDUE BUNDLING AND CONTRACT
DURATION
• Are both core and ancillary services included in the contract?
• Could some services be unbundle without creaNng
efficiency losses?
• Is the contract duraNon appropriate?
ISSUE 4. (UN)FAIR ADVANTAGE IN UNSOLICITED PROPOSALS PROCEDURES
• Unsolicited proposals are not requested by a government but instead originate within the private sector.
• In a number of countries, national laws encourage the private sector to come forward with potentially beneficial project concepts. Common systems are the “bonus system,” the “Swiss challenge system,” and the “best and final offer system.”
• Trade-off incentives competition/transparency
THE ADVANTAGE OF ORIGINAL PROPONENT
• How to deal with unsolicited proposals? • In countries where the original proponent has an
advantage, do we observe adequate parNcipaNon to
second period tenders?
• And how o_en does the original proponent obtain the contract?
LEGAL UNCERTAINTY
• Is there a harmonized PPP legislaNon?
• What is the extent of cross-‐boarder parNcipaNon?
• Are there naNonal champion advantages?
ISSUE 5 HIDDEN BARRIERS FROM LEGAL UNCERTAINTY
Lack of harmonization causes legal uncertainty that may prevent cross boarder participation
ISSUE 6. MISALLOCATION OF CONTRACTS DUE TO MISALLOCATION OF RISKS • Inefficient risk allocation in practice (Iossa, Spagnolo and
Vellez, 2014). Governments unable to commit
• Undue Renegotiation (Guasch, 2004; Bajari, Houghton and Tadelis, 2013)
• Excessive use of Revenue guarantees
MISUSE OF CONTRACTS
• Are contracts accessible to the general public? • Are there standardized contracts?
Empirical evidence
• In UK, output specifications changed during contract negotiations for 33% Central Government Departments PFI projects in 2004 – 2006
• NAO (2003): 55% of contracts changed after being signed • Changes for £4m per project; 17% project value (NAO, 2007) • PPP unsuitable for fast-moving sectors (IT services, HMT 08) • LAC sample 1,000 concessions 1985-2000, Guasch (2004): 30 %
renegotiated 26 % by PS
Conclusions • Identify Red flags and collect data • Look at contract design and implementation in
practice: the tricks are there. Use standardized contracts.
• Collect and allow access to data: get universities to
analyse them.
• Share information /experience across countries