Term Paper

BID COMPENSATION IN PPP BIDDING

- Should Government provide Bid Compensation?

TERM PAPER
APPLIED GAME THEORY

SUBMITTED TO

PROF. SOUMYANETRA MUNSHI

ON
AUGUST 21, 2010

BY
GROUP - 02
PANKAJ RANJAN (0911035)
ROHIT SHARMA (0911043)
UMANG MITTAL (0911067)
PULKIT SINGHAL (0911327)
ANKIT ZATAKIA (0911356)

August 21, 2010 Applied Game Theory

 Term Paper

Introduction
Public–private partnership (PPP) describes a government service or private business venture
that is funded and operated through a partnership of government and private sector companies.
PPP involves a contract between a public-sector authority and a private party, in which
substantial financial, technical and operational risks are shared by both parties.
The public-private partnership model has emerged as a favored model of project execution in
India, especially in infrastructure, health and education. The government is planning to invest
Rs 50,000 crore1 in PPP in infrastructure related projects. However, a significant bottleneck faced
by these projects is limited participation from private players due to (1) high bidding cost, and
(2) winners take it all approach of the bidding process. The Mumbai-Pune Expressway project is
one example that clearly highlights the ineffectiveness of non-competitive bidding process.
The Mumbai Pune Expressway is India’s first six-lane concrete, high speed, access controlled
toll expressway which spans a distance of 93km connecting Mumbai and Pune. Maharashtra
State Road Development Corporation (MSRDC), a wholly owned Government corporation, was
created and entrusted with the task of developing the Mumbai-Pune Expressway. The
Expressway was estimated to cost Rs.1,146 crores (at 1994 prices) 2. However, when a tender was
floated, only Reliance consortium (with a Malaysian partner) came out with a bid, quoting a
price of Rs.3,500 crores to build a 4 lane bitumen expressway. The bid was rejected and MSRDC
was given the responsibility of implementing the project. MSRDC used extensive outsourcing
and was able to complete the project at a considerably lower cost (Rs 2,000 crore) than the
private sector bid (Rs 3,500 crore).
The above case highlights the importance of having competitive bidding environment in Public
Private Partnership (PPP) infrastructure projects. According to the Prime Minister, Manmohan
Singh, the government will revise its bidding norms for awarding public-partnership projects so
as to make the bidding process more competitive3.
Quite often in PPPs, poor administration policies lead to serious problems. The main reason
being that decisions are based on intuition and superficial reasoning rather than on solid
economic ground work. To improve the success rate of project procurement and contract
administration in a PPP the government can look to incentivize bidding based on a “bid
compensation’ model to provide a more rigorous framework for drafting the administration
policies.
Bid compensation, is the stipend or compensation paid by the government to unsuccessful
bidders to compensate for the cost of bid preparation and submission. The bid compensation
can be a problem for the government if not properly implemented. Apart from the monetary
loss due to inefficient processes in implementing bid compensation, the opportunity cost of not
identifying failure in implementation and loss of subsequent improvement in the process, is
very high.

1
Private Partnership in Infrastructure Investment in India, November 2008
2
RITES of India and M/s. West Wilson Kirkpatrick of UK
3
Govt to revise bidding terms for PPP projects: PM, July 2010

August 21, 2010 Applied Game Theory

 Term Paper

In this report, we try to identify game theory strategies for effectively implementing the bid
compensation process. We start with a simple two player game to identify the bid
compensation that should be awarded to private players to promote competitive bidding.
Subsequently we build in complexity by introducing 1) multi-player competitive games 2)
increasing levels of bids and 3) increasing the no of players eligible for compensation.

August 21, 2010 Applied Game Theory