Choosing amongst infrastructure procurement approaches

A procurement options approach involves trading off one set of features of a contractual arrangement against those of others in order to choose the contract that best suits the infrastructure services being considered. The chapter begins with a simple example to illustrate the point, drawn from the 2014 Nobel lecture by the French economist Jean Tirole. He compares a ‘cost-plus’ contract with a ‘fixed-price’ one. Incentives are very different: in particular, the cost-plus contract shelters the contracting firm from fluctuations in its cost performance, while the fixed-price contract makes the firm fully accountable for it. In the latter case, the incentives to reduce costs are greater, but so is the potential to benefit from windfall profits. While instructive, the example is much too limited for our purposes, as we compare four ‘bundled’ approaches with five unbundled ones. The framework we propose incorporates five steps: (1) data gathering; (2) assessing the efficiency gains and risks; (3) benchmarking and market soundings; (4) a comparison in terms of price certainty, flexibility, risk transfer and incentive structures; (5) choosing a preferred option based on cost, time, quality and risk. Presentation and discussion of this framework is followed by a case study of a hospital project. Then, the ‘practical realities’ are illustrated by how desalination plants in Australia were procured in the decade of the 2000s.