One of the possibilities to reduce information asymmetry inherent to the regulation of public utility infrastructure consists in resorting to the competition for the market. Although, in general, this mechanism is used during the first stage of the life of PPPs, it can also be established in the contract the obligation to contract out certain works or services through mechanisms that ensure the competitiveness of the conditions (see BOX 13).
BOX 13 : Market Testing - UK
| Market Testing means the re-tendering by the project company of the relevant soft service so that the authority can test the value for money of that service in the market. Any increase or decrease in the cost of such a service following market testing should be reflected by an adjustment in the price charged to the authority. |
Source NAO 2007
Its use is relevant not only for the provision of soft services - as in the case of the UK PPPs - but also similar mechanisms can be used to procure some specific assets within a larger PPP contract100.
Clearly, the ability of market testing to deliver its potential benefits depends on effective competition between alternative providers. Two key factors will ensure the competitiveness of any bid or auction: ensuring a large number of bidders and avoiding implicit or explicit collusion among them101.
The implementation of this methodology is costly and time consuming so as with any other tool used, a careful value for money analysis should be made for its use in each particular project. Table 7 summarizes some of the problems associated to this instrument.
Table 7 : Market Testing : Problems
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| • Lengthy preparatory time and usually a costly process. • The incumbent may be in a powerful position to win the market test and so the process may not be as competitive as initially thought. • Lines of communication can become complicated when the replaced incumbent had provided both hard and soft FM. • Requires a sufficient number of alternative suppliers to make it a competitive market. • Tendered price may be non-negotiable. • Process improvement opportunities can be lost. |
Source: NAO 2007
The dynamic nature of contracts and services has to be considered during these exercises. As NAO 2007 points out: "Where service amendments need to be made in conjunction with benchmarking or market testing exercises the amendments need to take into account the needs of users, opportunities for innovation and the ongoing demonstration of value for money and affordability."
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100 For example the obligation of competitive procurement of some of the contractual investments included in the water concession in Buenos Aires.
101 See Klemperer 2004 - Auctions: Theory and Practice