This presentation by the OECD Secretariat was made during a discussion on the use of tenders and auctions at the 58th meeting of the Working Party 2 of the OECD Competition Committee on 15 December 2014. Find out more at http://www.oecd.org/daf/competition/tenders-and-auctions.htm

1. OECD SECRETARIAT – 15 DECEMBER 2014
WORKING PARTY N° 2
AUCTIONS AND TENDERS WHEN QUALITY
AND INVESTMENT MATTER

2. Use of Tenders and Auctions
 Presentation on the OECD Secretariat issues paper on Auctions and Tenders.
 Tenders are used in a variety of contexts (sale of government assets;
concession award; public procurement).
 Competitive Tendering can allow for benefits of competition. Empirically
documented scope for cost savings. But mere use of tenders does not
ensure efficient results: design and implementation are crucial.
 Often, not only price but also non-price attributes matter for the
government. This is particularly the case when economic or social
infrastructure (an important driver of economic growth) are at stake. Tender
moment: opportunity of getting it right.
 The paper (and presentation) address key issues of tender design when
quality and investment matter, namely concerning the awarding rules,
contract design and the duration and retendering of concessions.
 Renegotiation is also addressed, as it takes place frequently, it entails
substantial costs, and can jeopardise the gains from competitive tendering.

3. Tenders and Auctions Design
 Keys in Design:
• Promoting entry
• Reducing scope for collusion
• Reducing risk of underperformance and default
 How do tenders perform in complex procurement and
concession award? Why higher skepticism?
• Role of information exchange between parties for formulating
specifications
• Incomplete contractual design
• Increased ex-post renegotiation risk

4. Quality: Awarding & Contracting
 Sometimes governments value multiple attributes (not just price); Quality-
price trade-off. Various procedures have been used (Simultaneous evaluation of
bids on all attributes, 2-Stage Evaluation Procedures, Minimum Quality
Standards, Private Negotiations on all dimensions)
 Scoring rules weighting price and non-price attributes
• Theory (e.g. Che 1993; Asker & Cantillon 2008)
• Practice (e.g. MEAT – BPQR; A+B Bidding for Highway Repair)
 Flexibility for adjusting quality-price trade-off to align outcome with auctioneer’s
aims
 Multidimensionality: entails higher subjectivity
 Challenges (Attribute specification, corresponding weights, observability)
 Performance monitoring (E.g. timeliness, reliability, survey results)
 Concessions ( Technically complex, long lasting, governments’ multiple goals )
 Contract provisions to provide incentives to deliver quality
 Penalty/Reward scheme - financial or other (e.g. concession duration
extensions – London Bus Tendering)

5. Investment for Concessions
 Investment often a central feature of concessions or privatisations
 Risk faced by concessioners
• Recoupment? (due to periodic re-tendering);
• Get paid the value of the investment if losing the concession?
• Price regulation implications for adequate return on investment?
 Weight quality & investment + penalties/rewards for performance;
Hybrid forms of price caps
 Length, rebidding and transfer and value of assets
• Asset Specificity; Hold-up problem; Competition effect
• Compensation for investments?

6. Renegotiation
• Unexpected Circumstance Changes
• Contractual Incompleteness
• Incorrect Cost/Value estimates (“Winners Curse”)
• Strategic Behaviour (e.g. “Low-balling Strategy”)
Main Drivers
• Renegotiation is Frequent (e.g. Guasch et al 2006)
• Adjustments to tariffs, inv. plans, cost components, fees
paid by contractors, contract duration, etc.
• Usually favours contractors
• High Costs of Ex-post Adjustments (Bajari et al 2014)
Outcome
• Reduce Lack of Commitment, Asymmetric Info,
Prospects of Renegotiation:
• Seek information; Expert advice; Time for Bid Prep;
• Ensure compliance: Include Incentive/Desincentive
schemes; Monitoring
• Design Renegotiation Proof Contracts;
Solving