Should the Czech government compensate bidders in PPP projects?

The Czech government has an ambitious public-private partnership (PPP) program that aims to procure nine projects by 2030. As a result, some of these projects will have to be tendered simultaneously or in rapid succession.

It is important to note that PPP projects are significantly more expensive for bidders to bid on than traditional procurement projects. This financial burden can have a significant impact on the competitive landscape and ultimately on the success of the bidding process. To encourage more companies to bid for multiple projects, the government may consider compensating participants for their bidding costs. This article examines the advantages and disadvantages of such a compensation scheme and outlines a proposed way forward.

The Financial Landscape of PPP Tendering

PPP projects are generally more expensive to tender than traditional procurement projects. The costs for PPPs range from 0.5% to 2.5% of the project cost, compared to 0.5% to 1% for traditional contracts. This higher cost is due to the comprehensive nature of PPP bids, which must cover extensive project details, including design, construction, financing, operation, and maintenance. Consequently, costs for PPPs are at least double those of traditional procurements. This factor critically influences potential bidders' decisions to participate in the bidding process. Should the Czech government compensate bidders in PPP projects?

Advantages

• Increased competition: In the case of multiple PPPs, bidders may only focus on the most attractive projects and those with the best chance of winning, while ignoring the rest. By reimbursing bidding costs, governments can encourage more companies to participate in the bidding process. This increased competition can lead to more innovative solutions and potentially lower project costs.
• Broadening the pool of bidders: Smaller or less liquid companies may be discouraged from bidding for PPPs because of the high up-front costs associated with preparing a bid. Reimbursement makes these projects more accessible to a wider range of companies.
• Quality over cost: Reimbursement of bidding costs allows companies to focus on the quality and innovation of their proposals rather than minimizing the costs of preparing bids, potentially leading to better long-term outcomes for the public sector.

Disadvantages

• Increased government expenditure: Reimbursement of bidding costs requires additional financial resources from the government, which may not always be justified by the benefits, especially if the projects do not proceed or do not achieve their objectives.
• Risk of inflated bids: There is a risk that companies will inflate their bid preparation costs in the knowledge that they will be reimbursed, resulting in unnecessary additional costs to the government.
• Administrative complexity: Determining which costs are reimbursable and the process for reimbursement can add administrative complexity and potentially delay the bidding process.

Recommendations

In the light of its PPP program and the above considerations, the Czech government should take a strategic approach to the reimbursement of bidding costs:

• Selective reimbursement: Consider reimbursing bidding costs for projects that are strategically important, have a high degree of complexity, or where the market response is expected to be tepid. This approach balances the need to stimulate competition without placing an undue burden on public finances.
• Cap on reimbursement: A cap on the amount that can be reimbursed to bidders can reduce the risk of inflated bid preparation costs. This will also encourage companies to manage their bid preparation costs efficiently.
• Transparency and accountability: Establish clear guidelines on what constitutes reimbursable costs and require detailed accounting from bidders seeking reimbursement. This will help ensure that the process is transparent and that only legitimate costs are reimbursed.
• Evaluate benefits: Regularly evaluate the results of reimbursing tender costs in terms of competition, innovation, and project delivery. This evaluation will inform future policy as to whether such reimbursements provide value for money.

By carefully considering the implications and setting clear parameters for the reimbursement of bidding costs, the Czech government can improve the effectiveness of its PPP program and ensure that it not only attracts a wide range of bidders, but also delivers value for money and innovation in public projects.