Introduction
This article was first published in Quantum magazine.
Public–private partnerships (PPP) developed as a convenient and cost-effective way to involve the private sector in public services without busting the budget, but are traditional forms of PPP procurement meeting current market demands and what alternatives are there in the sector to address these issues?
Conventional Public–Private Partnerships
The conventional PPP concession contract, which has evolved over the last 20 years in many developed markets, is increasingly being questioned. In its purest form, the contract provides for the private sector partner (PSP) to design, build, finance, and operate (DBFO) a project over typically 20–30 years, in exchange for the payment of a monthly fee which repays back the costs and provides a return to the PSP.
By incorporating a mechanism that reduces the fee in case of failure to deliver, the public sector should have a guarantee that the PSP maintains the quality of the services provided through the life of the concession. But perfecting such a mechanism is difficult, and it has not always worked. Furthermore, the public sector has tried to use the concession contract to transfer risks to the PSP that it is not best able to manage; this leads to overpricing and in some cases the project’s failure.
Consequently, the contracts and projects have not been able to attract investment-grade status, which makes it more difficult for institutional investors, such as pension funds, to get involved with financing them. Many governments were attracted to these arrangements in the first place because the private sector raised the finance, and public-sector accounting rules kept the projects off its balance-sheet. Now some people question if this was ever the right approach. As governments have tried to rebalance the contracts and allocate the risks more appropriately, costs have had to be added to the public-sector balance-sheet, which is particularly undesirable in the present economic climate.
Governments generally run a tender process on public projects in order to demonstrate value for money. By their very nature, these tenders require bidders to invest considerable time preparing sometimes quite complex proposals, so that ministers and officials are able to assess the best value for money over the concession’s life. The more complex the project, the more complex the proposal—and the more difficult it is to assess the best value option. This can lead to protracted tender periods and delays to projects, as well as significant losses for bidders. It can also tie up significant resources. If governments are to run successful programs, they must be able to offer a decent-sized contract and a transparent streamlined process. Many don’t.
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