Setting the appropriate level of user fees can be difficult because many infrastructure projects command market power. One option is to have tariffs set by a regulator, which poses a host of well-known problems. Long ago, Chadwick (1859) argued that PPPs can avoid these regulatory difficulties if the firm is chosen via a competitive auction (see also Demsetz 1968). In Chadwick's terms, competition for the field is a close substitute for competition in the field, eliminating economic rents for the provider of the service.
To achieve the benefits of Demsetz auctions, there must be real competition for the contract. This is often not the case. In some countries (Brazil, for example) the PPP legislation biases auctions in favor of domestic participants-for example, by demanding documentation that is only available to domestic firms. In other cases, the government's overt or covert objective is to divide the projects among the main domestic construction firms. Since there is less competition, the cost of infrastructure goes up and the quality may be lower. However, the most important limitation of Demsetz auctions when applied to PPPs is the pervasive use of renegotiations.
The selection process for fourteen out of twenty public-private contracts in the U.S. transport sector during the 1991-2010 period involved competitive bidding (see Table 2). Bidding usually followed a request for qualifications used to determine which firms were technically and financially able to participate in the bidding process. The remaining six contracts, three of which were adjudicated during the 1990s, were unsolicited offers and were assigned to the firm that proposed the project.