Combinatorial versus sequential auctions to allocate PPP highway projects

Abstract

This article models a procurement process for allocating multiple related public-private partnership (PPP) highway projects. Traditionally, public infrastructure procurement processes have used a sequential allocation mechanism, despite the potential benefits of allocating all projects at once. The main contribution of this research is to address the question whether these projects should be auctioned individually, in sequential auctions, or at the same time, in a combinatorial auction. Our goal is to understand the impact of the allocation process in terms of efficiency and social welfare. In sequential auctions, bidders submit their offers for each project independently. However, in combinatorial auctions, contractors have the ability to bid for their preferred packages (combinations of projects), reflecting synergies or entry costs, if any, in their valuations. We have compared the impact in terms of efficient allocation and social welfare of both mechanisms in order to help policymakers to take future decisions when facing these processes. The methodology used to address these core questions in the multidisciplinary environment described is based on social simulations, which involves conducting analysis by means of computational simulations. For this work we have created a sophisticated valuation model adapted to the public infrastructure sector and we have developed a simulator which includes multiple types of bidders, projects and several scenarios. The experimental setup is based on the second wave of the Colombian 4G program, a case involving the allocation of 9 highway construction projects across the country. We have also included references to multiple examples of real markets in which these mechanisms could be implemented. Therefore, this research provides a valuable reference for policymakers chasing to enhance market design that could be applied in many real-world scenarios. The results reveal that the combinatorial mechanism improves the process in terms of optimal allocation and efficiency, yielding significant savings for all parties.