Competition Issues in Public-Private
Partnerships
Elisabetta Iossa
University of Rome “Tor Vergata”,
Center of Research in...
2
1.  Bundling of project phases (BOT, DBFO..)
2.  Private finance
3.  Long term contract (typically 25-30 years)
4.  High...
TYPES OF PPP PROJECTS
•  Financially free standing (concession-type)_
- users fees
(highways, roads, bridges)
•  Public se...
Sectors
Water All phases of water treatment and distribution
Waste water and sewerage
Trasport
Environment
Leisure centres...
RATIONALE FOR PPP
(i) Private sector more
efficient?
Megginson Netter
(2001): not always
No; risk premium(ii) Private fina...
SO WHY PPP?
..this can
potentially yield
better and cheaper
infrastructures
Thus, inducing contractor
to take into account...
One	
  facet	
  of	
  PPP:	
  efficiency	
  gains	
  
(UK	
  NAO	
  03;	
  07;	
  HMT	
  06)	
  
	
  
COMPLETION	
  TIME:	
 ...
 
The	
  other	
  facet	
  of	
  PPP:	
  	
  
compeNNon	
  issues	
  
	
  •  	
  The	
  same	
  factors	
  that	
  provide...
PARTICIPATION	
  IN	
  PPP	
  TENDERS:	
  which	
  quesNons	
  
•  Which	
  and	
  How	
  many	
  firms	
  in	
  the	
  PPP...
ISSUE 3. MARKET FORECLOSURE: UNDUE
BUNDLING AND LONG TERM CONTRACTING
•  Bundling + long term contracting creates a long-t...
MARKET	
   FORECLOSURE:	
   UNDUE	
   BUNDLING	
   AND	
   CONTRACT	
  
DURATION	
  
•  Are	
   both	
   core	
   and	
   ...
ISSUE 4. (UN)FAIR ADVANTAGE IN
UNSOLICITED PROPOSALS PROCEDURES
•  Unsolicited proposals are not requested by a government...
THE	
  ADVANTAGE	
  OF	
  ORIGINAL	
  PROPONENT	
  	
  
•  How	
  to	
  deal	
  with	
  unsolicited	
  proposals?	
  	
  
...
LEGAL	
  UNCERTAINTY	
  
•  Is	
  there	
  a	
  harmonized	
  PPP	
  legislaNon?	
  	
  
•  What	
  is	
  the	
  extent	
 ...
ISSUE 6. MISALLOCATION OF CONTRACTS
DUE TO MISALLOCATION OF RISKS
•  Inefficient risk allocation in practice (Iossa, Spagn...
Empirical evidence
•  In UK, output specifications changed during contract negotiations
for 33% Central Government Departm...
Conclusions
•  Identify Red flags and collect data
•  Look at contract design and implementation in
practice: the tricks a...
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Public-private-partnerships – Elisabetta Iossa – June 2014 meeting of the Working Party 2 of the Competition Committee

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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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Public-private-partnerships – Elisabetta Iossa – June 2014 meeting of the Working Party 2 of the Competition Committee

  1. 1. 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.
  2. 2. 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
  3. 3. 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)
  4. 4. 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
  5. 5. 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)
  6. 6. 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.
  7. 7. 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.    
  8. 8.   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  
  9. 9. 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?  
  10. 10. 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)
  11. 11. 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?    
  12. 12. 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
  13. 13. 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?  
  14. 14. 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
  15. 15. 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?  
  16. 16. 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
  17. 17. 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

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