Another potentially valuable tool to reduce information asymmetry inherent to the regulator-firm relationship and to implement a supervision of the firms' performance is the so-called Benchmarking technique and Yardstick Competition (a more formalized version of the benchmarking).103,104 The benchmarking makes calculations with conceptual bases that allow the comparison with other firms in the sector, both domestic and international, highlighting in each case the characteristics of the consumption and the infrastructure of the firm analyzed that may be different and can eventually produce distortions in the conclusions arising from a direct comparison (see BOX 14).
BOX 14 : Benchmarking
| Benchmarking is the process by which the project company contractor compares either its own costs or the costs of its subcontractors against the market price of equivalent services. If the costs are higher than market prices, a reduction in the price charged to the public sector should be made on an agreed cost-sharing basis to reflect the differential. If costs are lower than market prices, the project company must justify any price increase. |
Source: NAO 2007
Availability of good reliable data is in most cases the binding constrain faced in the implementation of this mechanism. Table 9 summarizes some of the problems found in the use of benchmarking in PPPs by the UK National Audit Office.
Table 9 : Benchmarking Problems - UK
| Comparable data may not be available or be expensive to access. Expectations gap between the authority and the private sector over the cost of services may make agreement on the outcome difficult to achieve. Difficulties in finding suitable benchmarking data make it less credible as a transparent and accountable process and therefore harder to justify the value for money outcome. Audit trail not always clear. Private sector may limit benchmarking information due to commercial confidentiality. Potential for disagreement/dispute to drag on. Can strain current relationships. No opportunity to replace an unsatisfactory incumbent. |
Technical capacity of the team in charge of the implementation is also a crucial element to consider. Often a mechanistic approach to the use of these tools is assumed without a clear understanding of the main economic and managerial issues underlying the business. This would certainly result in conflicts with the private party and provide little benefits to the project.
A good governance alternative is to engage in a collaborative process as suggested by 4ps: "the service provider and the local authority should carry out the benchmarking and/or market testing as a joint exercise, as there would be little value in the service provider performing the exercise and simply reporting the results as they both must agree on a value for money outcome. That said, the main focus of this exercise should be on the service provider demonstrating value for money and the local authority using market testing as a means of securing the best deal"105.
This collaborative approach is also suggested by Coelli et al: "… You should show the firms and other stakeholders draft versions of the efficiency analyses and encourage them to criticize the variables selected, the way the variables have been defined and measured and so on. If the firms believe a better model could be estimated, they should be encouraged to supply any extra data that are needed that would permit eh new analysis106. It is important that the stakeholders see the analysis as an iterative process and not as a "take it or leave it" situation"107.
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103 Baiman, S. and Demski, "Economically Optimal Performance evaluation and control systems." Journal of Accounting Research (supp.) 18: 184-234. 1980.
104 Shleifer, A. "A Theory of Yardstick Competition." Rand Jounal of Economics 16:319-327. 1985.
105 4ps A guide to contract management for PFI and PPP projects 2007
106 Note that these can be seen as an information revelation mechanism as discussed above
107 Coelli et al - A Primer on Efficiency Measurement for Utilities and Transport Regulators.