Public private partnerships were introduced in Britain in the mid-1990s as one of several procurement initiatives introduced by the United Kingdom Government to address an infrastructure shortfall in that country and commence the procurement reform process identified in Constructing the Team (Latham Report) in 1994 and the Report of the Construction Task Force (Egan Report) in 1998.24 This was the first significant policy-based procurement reform to be introduced in developed economies although privately financed and operated infrastructure services were in use at the time of Augustus in Roman times, by the Netherlands and British governments in their colonisation efforts during the 17th and 18th Centuries and the industrial revolution in the 19th Century. Several hybrid forms of private participation in local service provision were widely used by local government in France during the second half of the 20th Century and in the 1990s, build own operate transfer (BOOT) procurement methods were widely employed by cash-strapped governments in both developing and developed economies as a substitute for state capital to supply essential government services.
As a policy-based procurement framework sometimes embedded in enabling legislation, PPPs permit a standardised approach to large and complex procurements that incorporate rigorous project selection and evaluation process and best practice performance benchmarking. PPPs in Australia are excluded from traditional procurement policy frameworks and differ from traditional procurement processes in several respects.
First, projects are identified and developed by commonwealth and state agencies and proposals are advanced through a series of qualifying stages or gateways in the approval process. The gateways are based on the following criteria:
1. Project selection - an analysis of the business case for each proposal
2. Project affordability - projects should have an existing capital budget allocation
3. Procurement strategy - an evaluation of different procurement options
4. Selection of a successful proponent and negotiation of the terms of the contract over an exclusive dealing period. This process includes negotiation about the regulatory and contract management arrangements
5. Contract finalisation and financial close.25
Second, the project is put to competitive tender with an output specification.
Third, the construction of a public sector comparator. This is a risk-weighted measure of traditional procurement over the project lifecycle that is used for comparison with proposals submitted by private consortia in a competitive bid market.
The major challenge for governments using PPP procurement is to achieve changes in culture in its dealings with the private sector and undertake the extensive retraining necessary for line agencies to use advanced project evaluation and measurement methods, including:
• Discounted cash flow analysis
• Risk identification, measurement and valuation
• Lifecycle costing
• Project management
• Incentive-based regulation
• Real options
• Negotiations
• Economic and social impact assessment.
PPPs represent one method of major project procurement that is well suited to undertakings involving long-term service delivery, innovation, high levels of risk and, complexity. However, the question of state funding for long-lived infrastructure assets applies to all forms of procurement where there is increasing need to improve procurement efficiency, delivery and operational performance and improve value for money outcomes for the state. The financing sources canvassed in this report apply to all forms of private participation in infrastructure - traditional input-specified construction contracts, outsourcing, alliance contracting and privately financed options such as the BOO, BOT and BOOT models and, PPPs.
A difficulty in recent years was identifying PPP project performance during the early years of a long-term contract and creating ex post measurement techniques that permitted recognition of the broader qualitative benefits arising from service delivery over long service intervals. A number of independent reports in Britain and Australia suggest that PPPs are delivering improved procurement outcomes, value for money and better public services.26 PPPs are also improving state procurement practices in the following areas:
1. The scientific analysis of public procurement including the use of more rigours methods for project selection, analysis and process management
2. Wider use of value for money evaluation methods incorporating quantitative and qualitative measures of output services
3. Wider use of whole-of-life service delivery analysis and costing
4. Greater use of the output specification and tender evaluation criteria that includes both quantitative and qualitative outcomes
5. A move to relationship models of service regulation with the emphasis on relationship management and graduated penalty scales to preserve incentive and encourage consistent performance over long service intervals
6. Greater use of collaborative contracting methods such as alliance contracts and mediation/arbitration mechanisms to minimise costly contractual disputes and encourage shared innovation and cost savings that result from improved project delivery outcomes.
Central to the performance of PPPs is the opportunity that the model presents for harnessing private incentive. This takes three forms:
1. Project delivery to specification, on time and within budget
2. The delivery of services to specification over long service intervals
3. The additional layer of performance monitoring and governance that private financiers provide to ensure compliance with covenants and debt servicing obligations of the consortium.
The incentive mechanism operates at a number of levels. It may apply between members of the consortium. For example, if a building contractor is late with delivery, revenue is deferred for the asset operator and other members. This suggests a group incentive to ensure delivery on time and within budget. There also exists incentive for the contractor who may carry the cost of time overruns and/or liquidated penalties for late delivery. Similarly, poor service delivery may result in penalties and abatements which effects overall investment value, it may delay refinancing or reduce the return for both equity and debt providers. In the case of financiers, the lender to the project will not usually be a member of the consortium. The lender maintains an arm's length relationship to the consortium and will monitor the contract to ensure compliance.
A PPP arrangement may also include a credit insurer who provides a guarantee or credit "wrapping" of the SPV's financial obligations. If the PPP consortium vehicle, (the special purpose vehicle or SPV) defaults, the credit insurer will assume servicing of the project debt. Credit insurance creates an additional web of incentive with both the lender and the insurer monitoring the SPV's operational and financial performance.
__________________________________________________________________________________
24 H.M. Treasury 1995, 2000.
25 Partnerships Victoria 2001a. PPP Policy and Guidelines have been issued by Infrastructure Australia and each of the Australian states and territories. Australia is moving toward a nation PPP policy framework with uniform project evaluation guidelines. Nevertheless, responsibility for PPP policy and approval processes will be the responsibility of Treasury Departments and Ministers in each jurisdiction (Infrastructure Australia 2008a, p. 12). Partnerships Victoria is widely regarded as international best PPP practice and provides the policy and guidance template for many developing economies.
26 Regan 2008b; Fitzgerald 2004; Partnerships UK 2006.