RESEARCH NOTE: COMPETITION FOR THE MARKET AND ITS

INFLUENCE ON THE PROCURREMENT PROCESESS. CASE OF STUDY:

PPPS REGIME IN COLOMBIA
scar Taborda Velsquez1
ABSTRACT
Our hypothesis is that there is no enough clarity in regards to the scope of competition that the
Colombian Congress wanted to encourage through the PPPs Law and through the Law for
transportation Infrastructure.
This, because neither of both laws (including their motivations) do not describe the scope of
competition desired within the market of infrastructure for transportation, but most important,
because the authorization of incorporation of a regulatory independent commission with the
duty of avoiding the emergence of monopolies, promoting competition, and struggling towards
the abuse of market domination, is something that might be seen incompatible considering that
the same functions are currently been carried out by other organism - and through the
concession contracts - called Agencia Nacional de Infraestructura (ANI), and also, because the
features of the market (natural monopoly).
This might be one of the reasons (the lack of clarity in regards with the features of the market
of infrastructure for transportation and how to encourage competition) why it took almost two
years to run the first auctions for the projects under the PPPs regime, but also, the reason for
the multiple regulatory amendments which have taken place up today.

LL.B Pontificia Universidad Javeriana (Bogot Colombia); LL.M in Economic Law Pontificia Universidad Javeriana (Bogot Colombia);
Msc candidate in Economics and Regulation Barcelona University; Member of the Colombian Asociation of Law and Economics and of the
Center of Studies of Economic Law (Pontificia Universidad Javeriana). Contact: omtabordav[at]javeriana.edu.co
1

In our opinion, this situation is not a minor issue whenever this is one of the core aspects that
shall be considered to structure not only the regulatory aspects, but also the procurement
schemes and the contracts among other aspects.
For the reasons above mentioned, the main objective of the research will be to analyze whether
the structure implemented in Colombia with the PPPs law and complemented with the
Infrastructure Law encourages competition in accordance with the literature on the topic.
INTRODUCTION
On January 10th 2012, Law 1508 of 2012 was issued creating the PPPs regime in Colombia.
The PPPs Law should suppose an important change in the countrys public procurement policy,
as it would encourage through new procurement mechanisms , the closing of the
infrastructure breach including the infrastructure for transportation breach -which since years
ago has been affecting the countrys economy and its competitiveness.
The motivation of the PPPs law pointed out that in order to close the infrastructure breach
competition plays a key role, as from the governments point of view -, it makes possible
efficiency during the projects life cycle and costs reductions, meanwhile, not so much transfers
have to be addressed to infrastructure programs; therefore, more resources can be focused on
other sectors.
The motivations of the PPPs law also highlights other positive features as consequence of
competition in the infrastructure market, for instance, the encouragement of innovation and
modernization, all which would be possible through public procurement competitive processes.2

Body of knowledge on infrastructure regulation. Look

competition/competition-market/ Consulted on November 1 2014.
2

at:

http://regulationbodyofknowledge.org/market-structure-and-

Later, on November 22th 2013, another law was issued as a complement of the PPPs law (Law
1682 of 2013) but focused on infrastructure for transportation, better known as the
Infrastructure Law:
One of the reasons for a complementary regulatory frame was that the PPPs regime is3
applicable to different sort of infrastructures not only to the transportation ones; therefore, a
specific regulation for the market was considered necessary.
The aforesaid Law as the PPPs law did -, also stated as one of its main goals the
encouragement of competition. In fact, it authorized the incorporation of the first independent
regulatory commission for transportation Infrastructure which would be in charge of avoiding
the emergence of monopolies, promoting competition, and struggling towards the abuse of
market domination.
Nonetheless, calls our attention that up today, the PPPs regime has been modified several times
through reglamentary Decrees, (something that is also arguably from the legal technical
perspective but wont be part of this work), as a result of the demands of the private sector who
observed some relevant lacks in the original regulatory frame in regards to transportation
infrastructure, mainly, in regards with some procurement requirements and constraints to
achieve optimal revenues.
Considering the aforesaid issues, our hypothesis would be that there is no enough clarity in
regards to the scope of competition that the Colombian Congress wanted to encourage through
the PPPs Law and through the Infrastructure Law.

We say that the PPPs regime seemed to be applicable to other sorts of infrastructure projects and not only to the infrastructure for
transportation ones, because formally, the law is applicable to those other sorts of infrastructure. However, up today, not only its application
but also in regards with the scope of the amendments done, in our opinion it seems to be structured in first term thinking on the specific project
of the national government called 4g referring to the next generation of roads concessions.
3

This because neither of both laws (including their motivations) do not describe the scope of
competition for the relevant market, but most important, because the authorization of
incorporation of a regulatory independent commission with the duty of avoiding the emergence
of monopolies, promoting competition, and struggling towards the abuse of market domination,
which is something that might be incompatible considering that the same functions are currently
been carried out by other organism - and through the concession contracts - called Agencia
Nacional de Infraestructura (ANI) and through the concession contracts.
Additionally, bearing in mind that the market of infrastructure for transportation is featured as
a natural monopoly, the new commission with the mission to avoid monopolies also seems to
be incompatible considering that a monopolistic structure of the market is the rule when we are
facing such markets as the infrastructure for transportation market.
For us this situation seems is not a minor issue whenever this is one of the core aspects that shall
be considered to structure the regulatory aspects of the market but also the procurement
schemes.
Therefore, under the considerations above mentioned two questions arise:
1.

What says the literature (including local if there is any) on the competition in the case of
infrastructure for transportation?

2.

Is the current Colombian legal frame and institutions in accordance with the literature
available on competition for the market of infrastructure for transportation?

Based On those questions, the main objective of the research will be to analyze whether the
structure implemented in Colombia with the PPPs law and complemented with the
Infrastructure Law encourages competition in accordance with the literature on the topic.

The secondary objectives of the research would be:

a)

To describe the main features of the nature of the transportation infrastructure market;

b)

To describe the scope of the meaning of competition within the transportation

infrastructure market;

c)

Contrast the main aspects of the literature on competition within the transportation
infrastructure market with the Colombian PPPs scheme for the transportation sector,
specifically considering the structure of the procurement process, the contracts design and
the role of the regulator.

Our work continues as follows: in first term (i) we present a partial overview of the literature
regarding competition for the market (also known as competition for the franchising or
competition for the field). After that, (ii) we present a brief overview of the PPPs procurement
settings under Colombian regulatory frame; and finally (iii) we present some conclusions trying
to present the approach of the on going research.
1

COMPETITION FOR THE MARKET OR COMPETITION FOR THE

FRANCHISING.
Competition in the market refers to the traditional scope of competition which is focused on
the behaviors of the incumbent agents and its interaction with potential entrants. On the other
hand, Competition for the market (or competition for the franchising also known as competition
for the field) refers to the struggle among the agents for been the monopolist through a
competitive processes carried out by the contractor (in our case any public or governmental
agency). 4

GEROSKI P.A. Competition in markets and competition for markets. Journal of Industry competition and trade Vol N 3, Issue N:3
2003.Pag. 1
4

Economists have talked since long time ago about competition for the markets in the context
natural monopoly environments. The infrastructure for transportation market has been
considered one of the representative markets featured as a natural monopoly (which is
characterized by having large up-front investments, wide entry barriers, large sunk costs, and
having economies of scale and subadditivity of Cost).5
Competition in a natural monopoly environment, (in this case the infrastructure for
transportation market) is carried out under the scope of the competition for the market
(whenever competition in the market is not reachable as a consequence of the large sunk costs
and wide barriers of entry) providing the advantages that competition implies when providing
goods or services (for instance productive efficiency). This approach of competition for the
market takes form essentially through the procurement schemes, the contracts signed and the
regulation issued by the government.6
This means that if the government prepares the environment properly in order to incentive the
concurrence of potential competitors, and if the government designs properly the procurement
process and also the contracts, it is possible to encourage firms to compete for the franchise
with less ex post regulation, whenever the whole process will incentive the firms to disclose their
preferences (for instance willingness to pay or costs structure for a specific project).7
One of the first studies on the topic, (using the case of railroads in France) was written by the
French engineer Jules Dupuit in 1853.

GEROSKI P.A. Competition in markets and competition for markets. Journal of Industry competition and trade Vol N 3, Issue N:3. 2003
Pag. 2
6 MOUGEOT et al. Designing a Market Structure When Firms Compete for the Right to Serve the Market. Journal of Industrial Economics.
Vol 53. N3. September 2005. Pag. 2
7 Look at: http://regulationbodyofknowledge.org/market-structure-and-competition/competition-market/ Consulted on November 1 2014.
5

In Dupuits opinion, unlimited competition is no possible and it isnt desirable because the high
entrance (sunk) costs constitute an important barrier of entry; therefore, no multiple suppliers
would be available; but also, because if unlimited competition were possible, it is not desirable,
whenever costs will be duplicated which means higher prices for users and a welfare lost (less
consumer surplus); additionally, from the governments point of view, limited competition is
desired as it makes easy to monitor the concessionaire reducing transaction costs.8
Other remarkable study on the topic is dated from 1859 written by Edwin Chadwick published
in the Journal of the Statistical Society of London entitled Results of Different Principles of Legislation
and Administration in Europe; of Competition for the Field, as Compared with Competition within the Field,
of Service.
Chadwicks paper begins by considering the case of urban districts in England were two or three
networks for water supply were operating. Thus, Chadwick stated that it would be more efficient
to establish the service under monopolistic conditions (bearing in mind that he was talking on
state owned monopolies), conducing to a reduction of tariffs as a consequence of less transaction
cost (management does not have to deal with other competitors strategies), plus a better service
quality, and better dividends as a result of market capture by the monopolist. 9 Nonetheless
Chadwick does not seem to consider whether there is a natural monopoly environment, as in his
opinion, even this principle (competition for the market) might be applicable to other state
owned industries including cabs service.10

POINSOT Philippe. Jules Dupuit and the railroads: What is the role of the state? HAL - 00736078> 2012. Pag. 3: In: https://hal.archivesouvertes.fr/file/index/docid/736078/filename/Dupuit_railroads_HES.pdf
9 CHADWICK Edwin. Results of different principles of legislation and administration in Europe: of Competition for the field, as compared
with competition within the field, of service. Journal of statistical society of London. Vol 22 N 3. 1859.Pag. 18
10 CHADWICK Edwin. Results of different principles of legislation and administration in Europe: of Competition for the field, as compared
with competition within the field, of service. Journal of statistical society of London. Vol 22 N 3. 1859. Pag 19
8

On the other hand, we find Arthur Hadleys work published in the Quarterly Journal of
Economics in 1886 under the title Private monopolies and public rights.
Hadleys work links the concept of natural monopoly (in which competition is for the field) as a
feature of large firms with high fixed costs and with outputs under scale economies. In Hadleys
opinion, government intervention through regulation is only required when competition for
been the monopolist is not naturally achieved (regulation ex post)11
This perspective seems to be very distant from Dupuits and Chadwicks approach, and also very
arguable considering that scale economies are not necessary identified with large firms; in other
words, the concept of natural monopoly is not necessary linked with financial straight of the
firm.
Additionally, in our opinion, it seems like if Hadleys approach were suggesting that monopolist
will act as a benevolent agent, so, only when the monopolist tries to set monopolistic prices for
instance, the regulator shall act, something that in fact will always happen considering that the
monopolist firm is always trying to maximize its benefits; plus, in most scenarios we might have
at least some governments intervention (for instance through authorizations to operate such
kind of services or utilities ), hence, some ex ante regulation would be usually settled up in the
form of contract, covenant or constraint.
Close to Dupuits perspective, we can find in 1897 Leon Walras paper named Railroads as public
utilities and economic monopolies introducing the concept of double natural monopoly or how we
can understand it today as a regulatory technique: unbundling.

11

HADLEY. Private monopolies and public rights. Quarterly journal of economics. Vol 1 N 1. 1886. Pag 30

From Walras approach, railroads are a public utility which has to be studied under two different
scopes; the first one, infrastructure as a segment of the market in which competition is not
possible, otherwise, higher costs will arise as a result of the duplication of infrastructures; the
second approach implies that the commercial part of the utility (transportation itself) shall be
subject to competition.
However, different to Hadleys vision, government intervention is required no matter if it is
required ex ante or ex post whenever transportation constitutes an essential service, but most
important, because we face two different but closer markets that might affect each other.12
Following Chadwicks and Walras work, the paper written by Harold Demsetz entitled Why
regulate utilities? published in the Journal of Law and Economics in 1968, proposed a more radical
point of view towards government intervention in utilities regulation, however he does not
discuss extensively the meaning of competition for the market.
For Demsetz, government intervention shall be limited to provide the correct incentives to the
firms in order to struggle for the marketplace making unnecessary ex post regulation, in other
words Demsetz seems to be more inclined to ex ante regulation. 13
However, Demsetz seems to differ from Chadwicks statement in the possibility of application
the concept of competition for the field in a wide range of industries under governments control,
thus, for Demsetz, competition for the market is only applicable in those markets naturally
structured as natural monopolies (large up-front investments wide entry barriers, large sunk
costs, and for been economies of scale).14

NUMA Guy. The infrastructure - superstructure distinction in the railroad industry and the regulation of natural monopolies. Economics
Papers from University Paris Dauphine. 2009 Pag. 12
13 CRAIN et al. Chadwick and Demsetz on competition on regulation. Journal of Law and Economics Vol. 19, No. 1. 1976. Pag. 3
14 CRAIN et al. Chadwick and Demsetz on competition on regulation. Journal of Law and Economics Vol. 19, No. 1. 1976 Pag. 3
12

Additionally, from Chadwicks point of view, despite whether the procurement process is settled
up as a competitive one, this does not substitute regulation in any case. This because considering
the costs/possibility of having a complete contract versus the cost of traditional regulation might
be higher than issuing regulation as an answer of specific issues; in other words, complete
contracts might not be reachable most time, therefore, regulation will be always the required
complement in order to fill empty areas within the contract15
More recently studies have been focused in the role of the government as a regulator within
natural monopoly environments, in the mechanisms to improve competition through the
schemes to select the monopolist, and also, in contracts design, rather than in the debate on why
is required to split the infrastructure business (competition for the market) from the commercial
business (competition in the market).
1.1

THE EX ANTE AND EX POST ROLE OF THE REGULATOR:

PROCURREMENT PROCESS, AND CONTRACTS DESIGN

In regards to the role of the regulator, despite the previous considerations, we guess that its
functions are crucial and shall be carried out with the purpose of encourage an adequate
equilibrium among the parties who entered into a long term relationship. (Regulation ex post),
and/or, in order to collect information for a correct design of the procurement process and the
contract itself (regulation ex ante).16
Gomez Ibaez argue that natural monopolies do not require government intervention as long
term contracts can protect suppliers and users.

CRAIN et al. Chadwick and Demsetz on competition on regulation. Journal of Law and Economics Vol. 19, No. 1. 1976. Pag. 3
Body of knowledge on infrastructure regulation. Look at: http://regulationbodyofknowledge.org/market-structure-andcompetition/competition-market/ Consulted on November 1 2014.
15
16

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However, contract design depends on the bargaining power of each party, and thus, when we
are facing poor institutional environments, or even the contrary, when governments are
extremely powerful, any of the parties, or both, might have incentives to assume opportunistic
behaviors which might be translated into higher/lower costs and prices depending on who has
greatest bargaining power.17
The aforesaid argument also means that complete contracts are not feasible and always have a
grade of uncertainty, thus, contracts cannot cover all contingences, hence, ex post regulation is
required anyway as a substitute of contract covenants in order to discipline the monopolist and
guarantee the initial conditions offered by the concessionaire through the competitive
procurement process; in other words, ex post regulation tries to maintain the initial conditions
offered by the bidder which were the result of the previous competitive process.18
Additionally to the above mentioned, the procurement process is as important as the regulatory
activity. Procurement processes shall be designed in a way in which transparency and objective
criteria for assessment is crucial (inclusion of rights and obligations of the parties), in order to
avoid future renegotiations and over costs (no doubt this depends on the available information
in the authoritys hands).19
Various methods of auctions have been structured taking into a count experiences of the past
and also the nature of the goods and services contracted which also affects the criteria under the
firm is chosen (English auction, Dutch auction, first price sealed and second price sealed

Gomez Ibaez. Regulating infrastructure: monopoly, contracts and discretion. Cambridge University Press. 2009. Kindle version without
page.
18 Gomez Ibaez. Regulating infrastructure: monopoly, contracts and discretion. Cambridge University Press. 2009. Kindle version without
page.
19
Body of knowledge on infrastructure regulation. Look at: http://regulationbodyofknowledge.org/market-structure-andcompetition/competition-market/ Consulted on November 1 2014.
17

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auctions), in any case the purpose of the mechanisms is to get optimal solutions for asymmetric
information.20
2

THE COLOMBIAN PPPs PUBLIC PROCURREMENT PROCESS

The Colombian PPPs regime states that the concession contracts regulated under the public
procurement statute shall be understood as a specie of a PPPs scheme (Article 2 of Law 1508
of 2012), therefore, under Colombian Law there is no a PPP contract but there is a concession
contract with specific ruling.
In a previous work not yet published we concluded that Colombian PPP schemes are basically
a mixture between traditional concessions and project finance tools.21
Among the specific rules of the Colombian PPP schemes we find the possibility to prequalify a
group of competitors who will be the bidders in the future tender; in other words, previous to
the public auction, a reduced group of bidders can be chosen (no more than 10 suppliers) taking
into account specific features like: legal capacity, financial capacity, technical capacity and
experience among others.
Additionally in order to develop a project under a PPP scheme there are budgetary restrictions
and fixed terms for the contracts, this means that only projects valued above to one million half
dollars can be developed through PPP schemes with a duration of no more than 20 years .
After the closed group is gathered, a reverse auction is carried out, however, according to articles
38 and 30 of Decree 1510 of 2013, prices cannot be the only variable for awarding the contract
whenever a bunch of features shall be considered including prior expertise in similar projects.

KLEMPER Paul. The Economic theory of auctions. Vol 1. Oxford University Press. 2000. Pag. 5
TABORDA scar. Que son las app a la luz del marco jurdico colombiano: una concesin?, un contrato distinto? ninguna de las
anteriores?. Forthcoming
20
21

12

Nonetheless, excluding the chance of prequalifying competitors and the other specific
requirements above mentioned, the reverse auction is the standard process through which goods
and services are contracted out.
The mechanism that government agencies use to fit specific aspects for the project is the contract
which is structured in two parts: a general or standard part that is the same no matter specific
points of the project or the relationship itself, and the special part through which specific aspects
considering the counterpart is agreed.
Up today, over 9 new concession have been awarded and a next round of 10 new concessions
is expected for 2015. Nonetheless is important to bear in mind that, although the contracts were
awarded there are still some financial constraints as the concessionaries are reaching the financial
closing in order to start.22
3

CONCLUSION

After a first approach to the literature in regards to the concept of competition for the market
we could find that some of the main aspects that shall be studied for the purposes of our
hypothesis and objectives are:
a)

The characteristics of the concept of natural monopoly in order to be able to identify the
main incentives of behavior within this sort of market using as a reference the market of
infrastructure for transportation;

b)

The different ways through competition for the market is possible, this, because
unbundling as a regulatory technique is not the only way through competition for the
market can be achieved; therefore, aspects like kinds of contracts and its design, kinds of

Bancolombia. Research 3T 2014 on PPPs in Colombia. In

http://investigaciones.bancolombia.com/inveconomicas/sid/31585/2014111808435310.pdf Consulted on November 1 2014

22

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public auctions, and ways to regulate ex ante and ex post, constitutes very relevant topics
which should be addressed during the research.
c)

Other aspect that we consider relevant to point out is that during our first approach to the
topic, it seems that there is no local literature on the matter, and we couldnt also find
specific documentation in regards to the reasons the government determined why the
current procurement process under the Colombian PPPs scheme is how it is, and why a
regulatory commission of infrastructure for transportation is required taking into account
the functions that are currently carried out by the ANI..

Other aspect that we consider relevant is to bear in mind is that we should review in detail how
the concessions awarded were carried out in order to determine whether we are facing a
competitive process.
Additionally, it is no enough clear why the concession contract issued by the ANI was structured
as it currently is. For us this is something that even if it is concluded that the new PPPs scheme
encourages competition, is also clear, the lack of understanding of the government in regards to
the market features and thus in regards to the incentives that shall be taken into account in order
to avoid (among other issues), opportunistic behaviors by the firms.

14

PRELIMINARY REFERENCES

Body of knowledge on infrastructure regulation:

http://regulationbodyofknowledge.org/market-structure-and-competition/competitionmarket/
CHADWICK Edwin. Results of different principles of legislation and administration in
Europe: of Competition for the field, as compared with competition within the field, of
service. Journal of statistical society of London. Vol 22 N 3.
CRAIN et al. Chadwick and Demsetz on competition on regulation. Journal of Law and
Economics Vol. 19, No. 1.
ENGEL et al. The economics of public private partnerships: a basic guide. Cambridge
University press. 2014.
GEROSKI P.A. Competition in markets and competition for markets. Journal of
Industry competition and trade Vol N 3, Issue N:3 2003.
GMEZ Ibaez. Regulating infrastructure: monopoly, contracts and discretion.
Cambridge University Press. 2009. Kindle version.
HADLEY. Private monopolies and public rights. Quarterly journal of economics. Vol 1
N 1. 1886.
KLEMPER Paul. The Economic theory of auctions. Vol 1. Oxford University Press.
2000.
MOUGEOT et al. Designing a Market Structure When Firms Compete for the Right to
Serve the Market. Journal of Industrial Economics. Vol 53. N3. September 2005.

15

 NUMA Guy. Dupuit and Walras on the Natural Monopoly in Transport Industries:
What They Really Wrote and Meant. Dukes Journal of History of Political Economy
Vo.44 N 1. 2012.
NUMA Guy. The infrastructure - superstructure distinction in the railroad industry and
the regulation of natural monopolies. Economics Papers from University Paris
Dauphine. 2008.
POINSOT Philippe. Jules Dupuit and the railroads: What is the role of the state? HAL
00736078> 2012.
TABORDA scar. Que son las app a la luz del marco jurdico colombiano: una
concesin?, un contrato distinto? ninguna de las anteriores?. Forthcoming

16