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. Elisabetta.iossa@uniroma2.it www.proxenter.it OECD Hearing on PPPs, 16 June 2014, Paris.

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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