Public Private Partnerships (PPPs) are a refinement of the private financing initiatives for infrastructure that started in the early 1990s and describe the provision of public assets and services through the participation of the government, the private sector and the consumers. There is no single definition of a PPP. Depending on the country concerned, the term can cover a variety of transactions where the private sector is given the right to operate, for an extended period, a service traditionally the responsibility of the public sector alone, ranging from relatively short term management contracts (with little or no capital expenditure), through concession contracts (which may encompass the design and build of substantial capital assets along with the provision of a range of services and the financing of the entire construction and operation), to joint ventures where there is a sharing of ownership between the public and private sectors. Generally speaking, PPPs fill a space between traditionally procured government projects and full privatisation.

Although many commentators consider PPPs to be a new version of privatisation, in our view PPPs are not privatisation because with privatisation the government no longer has a direct role in ongoing operations, whereas with a PPP the government retains ultimate responsibility. Nor do PPPs involve simply the one-off engagement of a private contractor to provide goods or services under a normal commercial arrangement. Instead, the emphasis is on long-term contracts and strict performance regimes, such as build-operate-transfer (BOT) or design-build-finance-operate (DBFO) projects to design, construct, finance, manage and operate infrastructure under a concession, with revenues (either from government or users) according to services supplied. The private sector partner is paid for the delivery of the services to specified levels and must provide all the managerial, financial and technical resources needed to achieve the required standards. Importantly, the private sector must also bear the risks of achieving the service specification.

There are various reasons as to why governments might undertake PPPs, although paramount is the objective of achieving improved value for money (VFM), or improved services for the same amount of money, as the public sector would spend to deliver a similar project. There is a long history of publicly procured contracts being delayed and turning out to be more expensive than budgeted. Transferring these risks to the private sector under a PPP structure and having it bear the cost of design and construction over-runs is one way in which a PPP can potentially add value for money in a public project.

However, construction risk is not the only aspect of public procurement that needs to be addressed. There are also risks attached to site use, building standards, operations, revenue, financial conditions, service performance, obsolescence and residual asset value, amongst others, to be taken into account when evaluating whether the PPP route to public procurement constitutes good value for money. In fact, based on experience with Private Finance Initiative (PFI) projects in the UK, there is an acceptance amongst public service project managers that there are six main determinants of value for money, namely: risk transfer; the long-term nature of contracts (including whole-of-life cycle costing); the use of an output specification; competition; performance measurement and incentives; private sector management skills. Of these, competition and risk are seen to be the most important.

It follows that what would seem to be required to achieve value for money, defined as ‘the optimum combination of whole life cost and quality (or fitness for purpose) to meet the user’s requirement’, is that

• projects be awarded in a competitive environment;

• economic appraisal techniques, including proper appreciation of risk, be rigorously applied, and that risk is allocated between the public and private sectors so that the expected value for money is maximized;

• comparisons between publicly and privately financed options be fair, realistic and comprehensive.

These considerations are normally examined on a case-by-case basis (although one study does focus on the overall rates of return across a large number of PFI projects),⁵ on the grounds that risk allocation depends on each project’s risk profile, while the competitiveness of the market for bids will vary from project to project and from one time to another. However, while competition and risk allocation are the important pre-conditions, with value for money enhanced by transferring an appropriate degree of risk to the private entity, they do not guarantee value for money. Rather, the possibility of achieving extra value for money by implementing a PPP can be estimated (under the approach in the UK and some other countries) with a two-fold analysis conducted prior to the PPP implementation. It comprises, first, the calculation of the benchmark cost of providing the specified service under traditional procurement and, second, a comparison of this benchmark cost with the cost of providing the specified service under a PPP scheme. This benchmark is known as the public sector comparator (PSC).

This section examines some different approaches to value for money testing applied in different countries. To our knowledge, there is no comprehensive study of the PPP market at a global level. In order to give some perspective on the topic, Table 1 provides details of PPP activity in 29 countries for which information is available, drawing on practitioner and other sources.

Broadly speaking, four main alternative approaches can be discerned. Ordered from the most to the least complex, these are: first, a full cost-benefit analysis of the most likely public and private sector alternatives; second, a PSC–PPP comparison before bids are invited; third, a UK-style PSC–PPP VFM test after bids; fourth, reliance on a competitive bidding process to determine VFM once PPP ‘road-testing’ has been established. Since the third of these, the UK-style PPP–PSC comparison is the one that has been subject to academic critique, it is this with which we commence.

Decisions about options to follow in traditional public procurement are usually based on cost-benefit analysis in which there is assessed the full range of economic costs, risks and benefits, taking account of their timing, with these discounted to obtain an NPV. Other, less quantifiable, impacts are also brought into consideration in the calculation. Normally, the initial cost-benefit analysis does not look at the different ways of procuring a given project but assumes the most likely commercial approach. In most cases, this means provision by the public sector. Once a procurement approach is decided in detail, the public sector then sets in motion a competition between bidders to ensure that value for money is achieved. In effect, the evaluation of competing bids, where price and non-price factors are assessed, equates to a value for money test.

In a situation where a different procurement method, such as a PPP, is under consideration, there is a need to establish that these alternative commercial arrangements deliver good value for money. While a competitive market between bidders will ensure that, for any given commercial deal, the best value options are selected, the choice of the particular commercial arrangement must be tested in some way to ensure that it is capable of delivering value for money.