As will be seen in §2.4, PPPs are complex structures and complexity normally means higher costs. The question is whether these extra costs are outweighed by any PPP quality and/or volume benefits. When choosing between a PPP and traditional public procurement, there are a number of issues to be considered :
Capital Budget Traditional public procurement investments depend on the availability of an appropriate capital budget. If capital budgets are constrained, it may not be possible to implement economically desirable investments. PPP investments are less dependent on capital budgets and may be "off-balance sheet" depending on the balance of risk between the public and private sectors.
Recurring Budget In a PPP, the private-sector Provider needs to be paid - either by end-users through real tolls, or by the public-sector Promoter through shadow tolls, asset availability fees, etc. These payments have to cover the costs of funding the project, plus Operating and Maintenance (O&M) costs.
Risks There must be some sharing of risk in a PPP, e.g. project completion risk (costs/time/ specification), operating risk (demand/operating/performance/continuing quality), etc., and the Provider has to be paid a premium to accept these risks. The argument is that the private sector is better at managing some of these risks than the public sector and therefore the risk premium is lower than the cost to the public sector of carrying the risk itself.
Complexity Premium A PPP is an inherently more complex operation than public procurement. Some countries, e.g. the UK, carry a higher "complexity premium" than others, e.g. Spain. The argument is that private-sector disciplines will generate sufficient savings to offset the complexity premium, at least in the longer term, once the parties are fully experienced and standardised methodologies and documentation have become available.
Skills Transfer It is argued that the public sector should benefit from exposure to the skills of the private sector.
Flexibility PPPs are normally less flexible than traditionally procured projects and may therefore be better suited to projects where the public sector does not anticipate frequent or substantial changes to the asset specification or how it is used, e.g. roads.
Innovation PPPs can bring innovation through the private sector finding new ways of achieving "output" targets, as opposed to meeting "input" or "design" specifications which normally form the basis of public-procurement contracts.
It is clear from the above that any rational decision between PPP and public procurement will involve a complex analysis. It is further complicated by the need to consider a range of non-project issues, e.g. the maturity of the financial sector, taxation, level of sophistication of potential bidders, etc.
One option is to apply a common, structured decision tool such as a Public Sector Comparator (PSC). A typical PSC will compare the likely costs and benefits of the two processes and generate a Net Present Value for the public and PPP cases. However, the PSC approach can be rather artificial and, in practice, it is used in relatively few countries.
Whether or not a PSC is used, or any other test for Value for Money (VfM), it is clear that using a PPP does not change the fundamentals of the underlying project.