How do you design a competitive tender?
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A competitive tender has the advantage that it can be more cost effective than a fixed price grants scheme. However, it is a complex mechanism that has pitfalls and risks associated with the process.
A competitive tender will only work if the cost of supplying the service varies between landholders. In this way, bid prices differ and you can accept the bids that offer the best value for money.
4 steps to designing a competitive tender
1. Determine the environmental outcome
The environmental outcome is what you want to purchase from landholders. Improved water quality is one example.
To keep the tender easy to manage, choose a single outcome.
2. Decide on the input measure
Decide what input measure will achieve the environmental outcome. For example, riparian management can help to increase water quality. Again, choosing a single input measure will make the tender easier to manage.
3. Determine the management actions
A number of management actions will help to achieve the outcome. For example increasing buffer size, retaining ground cover, and fencing will help improve water quality. If you will not be able to measure the environmental outcome at the paddock or farm level—it may be impossible or too expensive—focus the tender on the management action that can achieve the outcome.
You can allow the landholders to propose the management actions, but developing a metric to compare bids will be more complicated. Keep it simple by prescribing the management actions and allowing the landholder as much flexibility as possible.
Being able to develop your metric in advance of receiving bids will also greatly speed up the process of assessing the bids.
4. Design the metric
The one component of a competitive tender that complicates the whole process is the metrics. Keep in mind that metrics get complex when you have multiple environmental outcomes.
Other things to consider
Consider offering multiple levels of management action
Specifying a single level of management action—for example, retaining a minimum of 40% of grass cover—is useful for reaching a baseline or covering as large an area as possible.
Offering multiple levels—for example, retaining grass cover of 1500–1700kg/ha or 1750–2000kg/ha—or a menu of actions for landholders to choose from may give a better outcome but the metrics are more complicated.
Are you repairing and restoring condition?
If, for example, you want increased native vegetation, you will need to assess the current condition before you can measure improvements. Regrowth might also result in more weeds.
Cooperation between landholders and joint bids
For some outcomes, such as a vegetation corridor across the landscape, cooperation is essential. In other cases, such as riparian management, cooperation is not essential but will give a better outcome. You can offer a bonus to landholders who place a joint bid.
Reserve price
You can set a reserve price-a price below which bids are not accepted. This ensures only bids that represent good value for money are accepted.
Number of bidding rounds
Multiple bidding rounds are more competitive and allow bidders to refine their bids. They could, however, lead to landholders colluding between rounds. The administrative overheads are higher than a single bid round.
Contract length
As a general rule, landholders prefer shorter-term contracts—this allows them to trial new practices and withdraw if necessary. Short contracts are also better for changing landholder behaviour. On the other hand, longer-term contracts are better for improving biodiversity.
Contract type
Contracts are the preferred mechanism for formalising agreements with landholders. Covenants offer certainty but may not be popular because of the perpetual time frame and the perceived loss of rights.
Payment schedule
It is better, as a rule, to spread payments over the life of the contract. Most landholders prefer annual payments. For a once-off activity, or where the landholder will incur upfront capital costs, you can include a large upfront payment followed by smaller payments.
Monitoring and enforcing
Landholders generally enter into agreements in good faith and little follow-up is needed to ensure compliance. So, while monitoring and enforcement are essential, try to make them unobtrusive and easy to carry out. Examples include remote sensing, photos supplied by landholders, and on-site inspections.
Number of bidders
Competitive systems work better with more participants. Ideally, you should have more than 15 bidders. It can still work with fewer participants, but you should have at least eight active bidders. If you are likely to have fewer than 10 bidders in a conservation tender, you can ask each landholder for multiple bids for different parts of their properties.
The pool of potential bidders will be determined by the size of the area that the tender covers. Increasing the size of the area will increase the pool.
Landholder attitudes
The concept of being paid to provide environmental services is new and landholders are not yet familiar with the process. Many landholders do not trust government motives in making such payments. Some think they will lose control of their land, or see it as eroding their property rights. Others fear it could affect the value of their property if they came to sell.
Make the bid process as simple as possible, provide landholders with all the information they need, encourage them to bid, and help them prepare their bid.
Useful resources
- Windle, J and Rolfe, J (2005), Competitive tenders for conservation contracts: A practical guide for regional NRM groups in Queensland, Department of Natural Resources and Water.
- The Designer Carrots symposium booklet includes case studies from Queensland regional NRM bodies explaining how they have trialled market-based incentives.
Related topics
- What incentive mechanisms are available for NRM change?
- How do you choose the right market-based incentive?
- How do you design metrics?
- How do you encourage community participation in NRM activities?
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Last updated 05 January 2009