Broadly speaking, a PPP is a form of procurement that uses a long-term, performance-based contract where appropriate risks associated with a project can be transferred cost-effectively to a private sector partner. These risks can include: construction, schedule, functionality of design, financing, and the long-term performance of the asset through the optimal allocation of responsibility for operations, maintenance and rehabilitation. In some cases, PPPs can also be structured so that the private partner assumes demand and price risk based on the availability of a facility, and they can also assume varying degrees of commercial risk with respect to market rents, tolls and other types of revenue.
Based on experience with existing projects, risk transfer is a key area in PPPs in the determination of value for money. The type, amount and effectiveness of possible risk transfer differs considerably based on the procurement method, contract structure chosen and characteristics of a particular project.
Traditional procurement has typically involved construction management (CM) and design bid build (DBB), representing points along a continuum of possible procurement methods where there is very little or no transfer of project-related risk to a private partner.
The range of procurement options that are generally accepted to be PPP structures include:
• Design build finance (DBF)
• Design build maintain (DBM)
• Design build finance maintain (DBFM) 3
• Design build finance operate (DBFO)4
The options ranging from DB to DBFO are considered to be partnership structures as they can be structured to require some degree of private financing, are longer term, can include responsibility for operations and life cycle performance of the asset, and are enforceable with a performance-based payment mechanism for the duration of the contract term. The financial incentive that is brought to bear through the length and enforceability of the PPP payment mechanism is the key to providing a stronger, more effective means of optimizing the life cycle costs of a project in a way that meets program and performance requirements.
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2 Although not a full PPP in terms of transferring long-term financing and operations, maintenance and rehabilitation responsibility, DB procurement can provide some of the benefits of a PPP, particularly in the areas of design and construction integration and project management. For this reason, DB is included in the spectrum of PPP models as a transitional model that involves greater private sector participation than a DBB approach.
3 The maintenance component of the DBFM is understood to include both ongoing maintenance and rehabilitation of an asset.
4 The operations component of a DBFO is typically understood to include ongoing maintenance and rehabilitation, and is more commonly associated with horizontal infrastructure projects such as roads.