The Australian experience in using
tenders for conservation
John Rolfe
Alternative title:
Conservation tenders: Did
economists win the battle
and lose the war?
The rapid rise of conservation tenders
• BushTender run in Victoria in 2001
– Single round, sealed bid, discriminatory
auction to manage vegetation areas in 2
regions of Victoria
– Introduced the use of MBIs to conservation in
Australia
– Introduced the use of a biodiversity score to
evaluate bids
• In the 12 years that followed, a number of
other programs and trials have taken place
Understanding the background
• In 1970s to early 80s, key environmental
focus was on big ticket items
– e.g. Fraser Island, Franklin below Gordon
• Then more attention paid to general
environmental issues …. + agriculture
• Landcare launched in late 1980s
– Focus on voluntary actions + cooperation
– Lots of small scale issues and limited funding
– The ‘vegemite’ approach
The key trends from late 1990s
• Regional coordination
– Established 56 regional bodies for NRM
– Mostly aligned with catchment boundaries
• Focus on direct incentives
– Information and suasion not enough
• Major increase in funding
– Programs such as National Heritage Trust
committed billions to the environment
The goals of conservation tenders
• Major goal has been to improve funding
efficiency
• Grants have been major allocation mechanism
……..but widely criticised for inefficiencies
• Other goals
• Improve rigor of funding process
• Provide feedback about opportunity costs
• Trial and stimulate new approaches
• MBIs trialled as part of the new mix
Progress since 2001
• Two rounds of major research program
– National Market Based Instruments (2003 – 09)
– About 8 CT projects and trials funded
• National programs
– Environmental Stewardship program (10 rounds)
– Tasmanian Forest Conservation Fund (4 rounds)
– National hotspots program (counted in regional)
• State and Regional programs (c. 48 rounds)
– E.g. Bush Tender
Key regional programs
Some focus on
protecting special
areas
Some on
repairing damage
Approximate # by State and Year
• Victoria is
lead state
• Activity
peaked in
2009 and
2010
• Probably
driven by 2
year lead
time
Share of funding
• Average funding in a CT about $620K
• Estimated funding over 12 years = $32M
– But some put it as high as $200M
• Govt spending > $1B per annum on agricEnvironmental schemes
– e.g. $700M in Caring for Country grants in 2013-14
• Funding through CT is < 1% of total
funding
• Key question – Why so low?
Auction Design
• Most auctions use standard approach
– Sealed bid, discriminatory, single round,
reserve price
– Almost all tenders have worked well
• Other variants
– Multiple bidding rounds – to achieve
coordination, price discovery
– Payment/bonuses by outcomes
– 2 part bid structures
– Combinatorial auctions
Metric design
• Largest source of variation and
experimentation
• Three key reasons
– Auctions vary in terms of scope – the types
and number of environmental benefits that are
covered
– Vary by Input, Output or Outcome measures
– Take varying accounts of the likelihood and
risks of outcomes
Approaches to metric design
• Condition metrics – e.g. Habitat Hectares
– Core is an assessment of the condition
– Other components incorporated
• E.g. scale of management inputs, changes in outputs
• Might also include linkage components, etc
• Can be additive or multiplicative functions
• MCA metrics
– Assess different elements separately
– Combine into a single index with weightings
• Outcome metrics
– Assess by likelihood of outcomes
Contract design
• Feature of CT is that agreements are
formalised with contracts / covenants
– Grant systems seem less rigorous
• Mechanisms largely in place
• Some evidence that:
– covenants appeal to non-producing groups
– producers prefer contracts over covenants
– Most prefer medium terms (e.g. 10 years) over
short terms (e.g. 2 years).
Efficiency gains
• Area of major interest and debate
• Three lines of evidence about differences
between tenders and grants
– Bid heterogeneity
– Variations in bid selection
– Relative efficiency
Heterogeneity – almost all tenders produce
reverse L-shaped bid functions
E.g. Results from Burdekin tender in Qld show large heterogeneity
and make the case for selection of the cheapest bids.
Early evidence provided by Stoneham et al. 2003; Connor et al. 2007
Variation in bid selection between an output-based
measure (metric) and an input based measure (BMP)
Rolfe and Windle 2011: Burdekin tender.
Measuring differences in efficiency
• Most attempts have
focused on comparing
discriminatory bid
selection against
uniform price selection
(A vs A+B)
• Stoneham et al 2003
found that A+B was 7
times bigger than A
• Many studies report
efficiency gains of 2 – 3
times
• But the counterfactual is not
strictly accurate
• Unlikely that the same bids
would be lodged and/or selected
in both tender and grant
schemes
B
A
Other issues with efficiency gains
• Efficiency gains have been limited by
small scale of most tenders
– Limits the number of bids
– High ‘fixed’ costs of design and administration
• Burdekin studies show that efficiency
gains can be increased by:
– Increasing scope of amenities
– Increasing areas involved
– Increasing scale and attracting participation
Participation
• Area of particular research focus in Aust.
• Participation essential for performance
– Shows auctions are successful,
– Demonstrates that landholders understand
the process, are able to construct bids, and
can engage.
– High levels of participation also drive
competitive pressures and limit rent-seeking
Participation - 2
• Many studies report support for landholders in
CT to encourage participation
– Focus on reducing transaction costs
– Some experiments with participation bonuses
• Large dropoff from EOI stage to final bids
lodged in many CTs
• Understanding explanatory factors
– Transaction costs
– Landholder characteristics and attitudes
– Program factors
– Relationships between landholders and agencies
Other issues
• Crowding out – concerns that moves to market
incentives reduces voluntary actions
• Strategic behaviour – concerns that landholders
can capture rents, particularly with repeated auctions
– Most CTs held in different areas each round to help
avoid this
• Perverse incentives – landholders able to make the
largest improvements may be the poor managers who
have caused most damage
– CTs may reward poor behaviour
– Also concerns about unsuccessful bidders in CTs
Why do agencies prefer grants over
tenders? - 1
– Perceptions about the transaction costs involved and
the ongoing monitoring costs
– The difficulties of assessing the biophysical outcomes
of proposals and incorporating them into assessment
metrics.
– The risks of thin markets or problems with
participation
– Lack of skills in governments and agencies to
implement tenders
– Beliefs that landholders are not able to or find it too
difficult to construct bids
Why do agencies prefer grants over
tenders? - 2
– Lack of knowledge about potential gains involved
(sometimes coupled with unwillingness to compare
gains from different instruments and approaches)
– Separation of allocation decisions from the political
process and issues, with subsequent loss of control
by agencies over outcomes
– Mistrust of the competitive process and concern over
any perverse incentives or effects on future
participation
– In line with Public choice theory, agents do not care
about improving efficiency of public spending,
particularly if gains are not too large.
Challenges
• Evaluating findings of CTs in a systematic way
• Increasing the scale of tender to get efficiency gains
without increasing costs of metric design and
transactions
• Using repeated tenders to capitalise on sunk costs in
metric and auction design without causing problems of
strategic behaviour
• Coordinating bids in a competitive framework
• Standardising use of CTs (auctions, metrics and
contracts) to limit transaction costs
• Demonstrating to policy makers the benefits of CTs over
grant mechanisms