Bidding for Concessions

Abstract

Privatization of infrastructure ventures in sectors such as energy, telecommunications, transport and water has become popular over the last decade. Often –for good or bad reasons- private firms are given monopoly franchises under some type of long-term concession agreement, for example "Build-Operate-Transfer" schemes. The article surveys the issues arising in designing concession contracts and in awarding them to private parties. It is crucial to define performance specifications as well as incentive and risk-sharing parameters comprehensively and consistently both to achieve efficient performance by the concessionaire and to minimize post-award re-negotiation. Concession award should as a rule be made competitively, unless special requirements of speed, innovation or excessive transaction costs argue otherwise. Typically, competitive concession award is made by first price sealed bids. There are strong arguments, however, to consider open auctions more seriously in a number of cases. Auctions may also be re-awarded by way of auction. However, somewhat arbitrary bid preferences may have to be set. Auctioneers for complex concession contracts should operate at arms-length for all interested parties, including politicians. It may be sensible to let independent agencies that regulate the concession scheme run the auction.