As a general principle, it is better to select a private concessionaire through a competitive auction of a well-defined project (or a project with clear and enforceable service standards) than through direct negotiations. As discussed above, a competitive auction dissipates the rents that are extracted from users, which can be large, since projects often have substantial market power. A competitive auction is also more transparent than the alternative of selecting the concessionaire via bilateral negotiations, thus avoiding discretionary decisions by public servants.
Next, we discuss our proposals for a competitive auction mechanism, offering separate proposals for the case of projects that are financed mainly via user fees and for those where user fees do not cover the capital cost of the project.