Often, lack of government funding has been the main reason for considering a PPP option for a project. However, lack of government funding may not be the main reason for deciding a PPP option for the implementation of a project. There are additional costs for PPP projects - usually the cost of borrowing money is higher for the private sector than for the public sector and there are administrative costs for the management of PPP contractual regimes. Transaction costs2 of PPP projects can also be substantial. PPP projects may also impose many explicit and implicit liabilities on the government.
A project may not be considered for being implemented as a PPP project unless efficiency gains from improved project delivery, operation and management, and access to advanced technology can offset the above-mentioned additional costs. In fact, many countries have established value for money as the main criterion in judging the merits of a PPP option for a project.
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2. The development of a PPP project requires firms and governments to prepare and evaluate proposals, develop contract and bidding documents, conduct bidding and negotiate deals, and arrange funding. The costs incurred in these processes are called transaction costs, which include staff costs, placement fees and other financing costs, and advisory fees for investment bankers, lawyers, and consultants. Transaction costs may range from 1 to 2 percent to well over 10 per cent of the project cost. Experts suggest that transaction costs vary mainly with familiarity and stability of the policy and administrative environment and not so much with the size or technical characteristics of a project (See in Michael Klein et al. 1996. "Transaction costs in private infrastructure projects - are they too high?", Public Policy for the Private Sector, Note Number 95, World Bank, Washington D.C. Available at: <http://rru.worldbank.org/Documents/PublicPolicyJournal/095klein.pdf>.)