Bargaining power and supply base diversification

In this paper, the authors examine a supply base diversification problem faced by a buyer who periodically holds auctions to award short term supply contracts among a cohort of suppliers (i.e., the supply base). To mitigate significant cost shocks to procurement, the buyer can diversify her supply base by selecting suppliers from different regions. The authors find that the optimal degree of supply base diversification depends on the buyer’s bargaining power, i.e., the buyer’s ability to choose the auction mechanism. At one extreme, when the buyer has full bargaining power and thus can dictatorially implement the optimal mechanism, she prefers to fully diversify. At the other extreme, when the buyer uses a reverse English auction with no reserve price due to her lack of bargaining power, she may consider protecting herself against potential price escalation from cost-advantaged suppliers by using a less diversified supply base. The authors find that in general the more bargaining power the buyer has to control price escalation from cost-advantaged suppliers the more she prefers a diversified supply base. This insight is shown to be robust to correlation between regional costs, asymmetry across regions, and intermediate levels of bargaining power.supply base diversification; supplier; buyer; procurement; bargaining

Innovation, competition and public procurement in the pre-commercial phase

Should the supply or the demand side bear the risk connected to innovation? The two polar cases identified in the literature are the supply push and the demand pull. The former is the typical one, with the supplier bearing the costs and obtaining the benefits from innovating. The latter is technology procurement, where the buyer takes the risk, by procuring the innovative good or service. With respect to this, pre-commercial procurement is a peculiar solution that can explain the debate found in the literature relative to its configuration either as a supply-side or a demand-side instrument. The separation from the commercial phase allows the procurer to take only (part of) the risks connected to R&D services. Also, competition among suppliers gives the opportunity of evaluating different solutions and to obtain, in the commercial phase, a lower price for the innovative good. The counterpart of all this is a large portion of risk being left to the supplier. As a consequence, suppliers need to obtain a larger share of the benefits of the innovation process. This economic reason, besides the legal restrictions on State aid, explains the need for a shared risks-shared benefits approach, centred on the agreements on the assignment of IPRs

Defining the dimensions of engineering asset procurement: towards an integrated model

Procuring engineering asset management is a critical activity of all types of government, with optimal approaches to procurement still in need of identification. This paper advances a novel approach of exploring the procurement of engineering assets across a number of dimensions: Project rules, organisational interaction rules and complexity. The dimensions of project rules are held to include cost, quality and time. The dimensions of organisational interaction rules are held to be collaboration, competition and control. Complexity is seen as in the project itself, in the interaction between organisations or in the business environment. Taken together these dimensions seem salient for any type of engineering asset, and provide a useful way of conceptualising procurement arrangements of these assets

The Influence of Trust in Traditional Contracting: Investigating the "Lived Experience" of Stakeholders

The traditional procurement approach is ever-present within the construction industry. With fundamental design principles founded on definitive risk allocation, this transactional based approach fails to acknowledge or foster the cooperative relationships considered to be vital to the success of any project. Contractual design encourages stakeholders to defend their own individual interest to the likely detriment of project objectives. These failings are not disputed, however, given that trust is a fundamental requirement for human interaction the influence of trust is potentially important in terms of stakeholder relationships and ultimate project success. Trust is therefore examined within this context. A conceptual framework of trust is presented and subsequently used to code and analyse detailed, semi-structured interviews with multiple stakeholders from different projects. Using a phenomenological investigation of trust via the lived experiences of multiple practitioners, issues pertaining to the formation and maintenance of trust within traditionally procured construction projects are examined. Trust was found to be integral to the lived experiences of practitioners, with both good and bad relationships evident within the constructs of traditional procurement mechanisms. In this regard, individual personalities were considered significant, along with appropriate risk identification and management. Communication, particularly of an informal nature, was also highlighted. A greater emphasis on project team selection during the initial stages of a project would therefore be beneficial, as would careful consideration of the allocation of risk. Contract design would also be enhanced through prescriptive protocols for developing and maintaining trust, along with mandated mechanisms for informal communication, particularly when responding to negative events. A greater understanding regarding the consequences of lost trust and the intricacies of trust repair would also be of value. 

Public and private roles in road infrastructure: an exploration of market failure, public instruments and government failure

Starting with a 'greenfield' situation, we discuss reasons for market failure in road infrastructure provision. We show why it may not be optimal from a welfare perspective to leave road provision fully to the market and government intervention in this sector can improve welfare. Government intervention comes in different forms, such as financial intervention (taxation, subsidies), regulation (price, quality, environmental), and public provision of roads or road services. The analysis of the literature regarding government instruments allows us to establish a correspondence between different forms of market failure and instruments. Several case studies of particular road infrastructure projects are included to illustrate the use of government instruments.

Contract Design for Biodiversity Procurement

Market based instruments are proving e¤ective in biodiversity procure- ment and in the management of regulatory schemes to preserve biodiversity. The design of these schemes brings together issues in auction design, con- tract theory, ecology, and monitoring. Using a mixed adverse selection, moral hazard procurement model, we show that optimal contract design may di¤er signi?cantly between procurement and regulatory policy environ- mentsbiodiversity; procurement; adverse selection; contract theory

The theory of incentives applied to the transport sector

Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bundling building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects contract design and incentives