Efficiency through competition?

Submitted by admin on January 1, 1970

The main claim justifying PPPs in spite of their higher financing costs is the increased efficiency from the competitive tender and the private sector’s supposed operating efficiencies. However, in practice, due to their complexity only a few companies can afford to bid for PPPs and there has therefore often been a lack of competition, resulting in increased costs that may have wiped out the 'value for money' justifications for using PPPs in the first place.

In several PPPs in central and eastern Europe, there has not even been a competitive tender, for example in the Czech D47, Croatian Bina Istra and Zagreb-Macelj, and Bulgarian Trakia highway projects.

Lack of competition despite involvement of international financial institutions

While the international financing institutions do not usually finance projects where no competitive tender procedure has been implemented, competition in PPPs has often been limited. For example, in the UK between 2004-2006, 33 percent of tenders attracted only two viable bids, leaving the risk of competition being entirely absent if one of the bidders dropped out.

'Deal creep'

Even if there are several bidders, the ‘preferred bidder’ stage, in which negotiations are carried out with one selected bidder to fine-tune the details of the contract, often opens the possibility for increasing the price or changing the specifications of the project - so called ‘deal creep’ - thus eroding the value for money of the project.

In a UK survey it was found that in one third of projects ‘major changes’ were made during the preferred bidder stage. A survey of the capital costs of 15 English PFI hospitals at the Outline Business Case stage (the stage before the tender procedure at which the PPP option is compared with the public one) and at the contract stage shows an average increase in cost of 114.6 percent.

This appears to contradict Article 29.6 of the EU Directive on procurement, which states that:

“These tenders may be clarified, specified and fine-tuned at the request of the contracting authority. However, such clarification, specification, fine-tuning or additional information may not involve changes to the basic features of the tender or the call for tender, variations in which are likely to distort competition or have a discriminatory effect”.

Public authorities lack experience

Ensuring value for money is a particular problem in central and eastern European countries which often have trouble carrying out fair competitive tender procedures in a straightforward public procurement, not to mention much more complicated PPPs.

Aggravating this issue is the difficulty for inexperienced public authorities to ensure they obtain value for money from negotiations.

Public authorities may either try to save money on expensive consultants at the risk of ending up with an unfavourable deal, or they may try to ensure a good deal by splashing out on experts from large international law and accounting firms. However the same firms may also be working for the private sector player in the same or other projects, and there is no guarantee that they have the public interest at heart.

Reducing the risk of 'deal creep'

While some kind of preferred bidder stage needs to be retained in order to keep the costs and length of the bidding procedure down to a manageable level, much more concrete steps need to be taken to reduce the risk of ‘deal creep’.

The public sector needs to have a clear idea of how much change in the project is too much, and needs to have clear triggers and a clear strategy for walking away from the procedure if the private partner becomes too demanding. The public partner can also request written confirmation that the prices offered will not change for a specified time period, providing the specification remains unchanged.