Bidding for Concessions
27 Pages Posted: 20 Apr 2016
Date Written: August 1998
When privatization transforms a public infrastructure monopoly into a private one by means of a long-term concession agreement, how should concession contracts be designed and awarded?
In the past decade it has become popular to privatize infrastructure ventures in such sectors as energy, telecommunications, transport, and water. For good reasons or bad, private firms are often given monopoly franchises through long-term concession agreements (for example, build-operate-transfer schemes).
Klein surveys issues associated with the design of such concession contracts and their award to private parties. The discussion focuses on: - Contract design (what is to be awarded). - Whether to use competitive bidding or negotiation to make the award. - How to structure competitive bidding. - Who conducts the auction and who monitors the concessionaires` performance.
To encourage efficient performance and to minimize post-award renegotiation, it is crucial to consistently and comprehensively define performance specifications and the parameters of incentives and risk-sharing. As a rule the concession award should be made competitively, unless there are good reasons to do otherwise, such as excessive transactions costs (for the size of the contract) or special requirements for speed or innovation.
Typically, competitive concession awards are made by first-price sealed bids. In a number of cases, however, there are strong arguments for open auctions. Concessions may also be re-awarded by way of auction, although somewhat arbitrary bid preferences may have to be set.
Auctioneers for complex concession contracts should operate at arm's length from all interested parties, including politicians. It may make sense to let independent agencies that regulate the concession scheme run the auction.
This paper - a product of the Private Participation in Infrastructure Division, Private Sector Development Department - s part of a larger effort in the department to analyze issues on private participation in infrastructure. The author may be contacted at firstname.lastname@example.org.
Suggested Citation: Suggested Citation