PPPs are broadly defined because the term includes a number of similar but not necessarily identical procurement methods. A PPP is a long-term contractual arrangement or franchise under which a private firm finances and manages the production of goods and/or services for, or on behalf of, the state.
The PPP contract is put out to a competitive tender and the successful tenderer (or franchisee) is selected on the basis of the best value for money outcome for the state. Value for money is determined using both quantitative and qualitative criteria. Quantitative analysis involves a comparison of private bids with the risk-weighted model of state procurement (the public sector comparator or PSC) after adjustment for competitive neutrality, risk transfer and retention. The qualitative test looks at the bidding consortium's capabilities and track record, the innovation and new technology bought to the delivery solution and a comprehensive public interest test.
PPP tenders are generally conducted on the following basis:
● The private provision of an asset for state use on a take-or-pay basis (for example, the provision of a serviced hospital bed or a primary school building)
● The private delivery of services to or on behalf of government (for example, a convention centre or public transport system)
● Private provision of an asset on a market-risk user-pays basis (for example, a toll road).
The first two payment methods have two components -a base fee calculated by reference to quantitative service provision under the contract and an incentive fee calculated by reference to service delivery that exceeds key performance indicators. 11 Service delivery failure can result in an abatement of fees or the imposition of financial penalties. At the end of the tenure period, the asset reverts to the state.
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11 PPPs are generally bid on the basis of the fee to the state or the user-pays tariffs. However, bid criteria and non-conforming bids may also include up-front payments to the state (Cross City Tunnel, Sydney), the length of tenure (Eastlink, Melbourne) and the value of up-front state contributions to the project (RiverCity Motorway Prospectus 2007).