Investigating Public-Private Partnerships
This Article was posted on 04.02.11 in Growth
Public-Private Partnerships (PPPs), where private sector companies are contracted by government to deliver new or refurbished national and local infrastructure projects and services, are becoming an increasingly popular model for infrastructure delivery world-wide.
The textbook definition of a PPP is a service contract between the public and private sector, where the Government pays the selected private sector company to deliver infrastructure and related services over a long period, typically between 20 and 30 years.
PPPs are used where they have the potential to provide better value for government compared to more traditional procurement methods. The value-for-money attraction does not means PPPs are the cheapest option but offer the best design, and highest quality infrastructure and services for the best price.
New Zealand’s National Infrastructure Plan has increased the likelihood of private sector participation in government infrastructure provision, with the belief that the process of selecting PPP partners increases competition and encourages more innovative and cost-effective solutions – and ultimately saves the Government (and tax payers) money.
How do PPPs work?
When the Government identifies an infrastructure gap that would be suited to a PPP, it will scope a project, stating the required outcomes (as opposed to the methods to achieve these) and conditions. Private companies will then submit project proposals, or tenders, for selection.
The private sector company usually carries the risk for the project and is financially responsible for the condition and performance of the asset over its lifetime, or for an agreed period of time; but the responsibility for the delivery of the core services still lies with the Government.
The selected bidder will then finance and build the facility, and operate the facility to provide the service for the agreed period. Ownership of the facility usually passes to the national or local government at the end of the contract. Government will monitor the project and ensure the private sector company delivers as agreed in the contract.
New Zealand has a unit within the Treasury to oversee and support PPPs. All the PPPs from government departments and agencies go through the National Infrastructure Unit, which guides the preparation of PPPs tenders and agreements.
Large PPPs require two levels of approval by Cabinet and substantial or high-risk projects also need to undergo what is known as a Gateway Review Process. This involves six project reviews by independent experts, as detailed by the State Service Commission. The intention of the reviews is to ensure quality assurance for the project, but the six separate reviews are confidential and not publically available.
A public sector comparator is usually used to assess the financial viability of PPPs and compares the PPP cost against what the project would cost if provided by more conventional methods. This ensures all the project risks have been identified and accounted for and provides a common benchmark against which all the PPP bids can be evaluated.
Do PPPs really improve services and reduce costs for government?
The benefits of PPP services are often incorrectly evaluated against public sector service provision, rather than against other methods of private sector procurement.
It is often argued that because the private sector companies carry the financial risk of the project, PPPs don’t require upfront financing by government, and that this often allows projects to be brought forward by years. While this does mean the infrastructure and services are available sooner (and at a cheaper cost, after factoring in inflation) than would otherwise be possible, there are other ways to access private sector finance without entering into a PPP. Where PPP does present an advantage is that it does allow government to go ahead with projects that wouldn’t normally be possible under the gross sovereign-issued debt target.
People who are pro-PPPs also say that the long-term nature and large scale of the projects earmarked as PPPs means that individual government agencies will deal with these infrequently, making the input of private sector companies with experience in these projects invaluable. While research has also shown that PPPs generally provide better value for money, most of this knowledge and management ability can be obtained through other procurement methods as well.
Other pros and cons:
- PPPs are usually optimized for long-term service delivery and generally provide better value for money. This approach usually also ensures the infrastructure is well maintained over the life of the asset.
- PPPs encourage competition in the design stage and usually result in new innovations or new ways to optimize resources or improve services.
- Tendering and negotiating of contracts is usually both lengthy and costly.
- The long-term nature of the contracts reduces the benefit of competition over time.
It is generally accepted that PPPs are best suited to projects that can be specified in terms of the desired outcomes in such a way that performance can be objectively measured. By specifying outcomes, the bidding companies can come up with innovative ways to optimize costs and improve performance, unhindered by design specifications. In addition, the fact that performance can be measured means the contract can be enforced properly, with rewards and sanctions applied as specified.
What do PPPs mean for private sector businesses?
For businesses experienced enough to build and run complex infrastructure projects and with access to finance to fund construction and development, there is the potential to secure a long-term contract, usually by creating a consortium to work on the project.
Innovative and cost-effective solutions will be key to securing a PPP contract.
Bidding in an attempt to secure the project will require a significant capital outlay, including time and resources to research and come up with innovative solutions and designs, identifying all the risks and costs involved in the project and costing these in order to tender. There can also be fees to be paid to government as well.
The successful bidder will also carry the financial risk of the project, and this leaves the winner exposed to the risk of cost variations, which can be significant over a long-term contract. However, there is the possibility to provide a value-for-money service that can improve service delivery, and to make a reasonable return on investment.
Useful Links
To find out more about PPPs have a look at the following links:
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