A significant body of evidence (Mott McDonald 2002, Fitzgerald 2004, Allen Consulting 2007; National Audit Office 2005) points to the advantages of PPPs over traditional procurement methods. The benefits include:
1. The delivery of projects on time and on budget
2. Reduced procurement costs and improved value for money outcomes
3. Improved project management - integration of design and construction processes and full lifecycle costing
4. Adoption of an output specification to encourage design and construction innovation and new technologies
5. Improved public services and qualitative user outcomes
These results are supported by a comparative review of state procurement methods undertaken in 2008 by Bond University (Regan, 2008c). This study identifies the improved performance of PPPs, build own operate transfer (BOOTs) and, to a lesser extent, alliance contracting methods using ex ante measures of value for money, the optimal alignment of incentives and process management.
PPPs also offer a rigorous project selection and evaluation process using a risk-weighted analytical framework that features both qualitative and quantitative measurement techniques (Flyvbjerg, et al, 2003). This process is now being applied to traditional procurement processes and is achieving similar value for money improvements (Infrastructure Australia, 2008c).
The empirical evidence suggests that PPPs are improving government infrastructure performance in three additional ways:
1. PPPs are an important innovation in the evolution of the science of major project procurement and studies suggest they are a more efficient method of project delivery than the alternatives (Regan, 2008c).
2. PPPs are worth preserving - along with alliance contracting and the input specification models, they are driving favourable value for money outcomes and form part of the diverse procurement tool box available to government for appropriate applications (Clark and Evans, 1998; Mott McDonald, 2002).
3. Private capital markets provide an important alternative source of capital for governments hard pressed to meet the high levels of investment needed to renew Australia's ageing infrastructure (Wolf, 1993).
PPP projects are capitalised with high levels of debt which is well suited to long-term capital-intensive projects. Infrastructure is a specialised asset class possessing investment characteristics not commonly found in other asset classes. These characteristics include:
1. Stable, indexed revenue streams
2. Low variable cost structures
3. High earnings before interest tax and depreciation (EBITDA) margins
4. Low demand price elasticity (Regan, 2004).
Infrastructure also features low demand price elasticity although recent evidence from toll roads suggests that this asset group may be the exception. These assets are well suited to high levels of debt which has the effect of lowering the sponsor's weighted cost of capital and improves return on equity. Several early PPP toll road initial public offerings (IPOs) employed stapled security structures and high leverage compared with other capital intensive asset classes such as the resources sector, direct and indirect property. The market appeal of these assets was their robust and indexed revenue stream, strong debt service coverage and the long-term investment horizon which matched the long-dated liabilities of pension and fund managers.