The public cost comparator needs to be assessed to use as a comparison to the private sector bids. In constructing the PCC there are several different costs to consider in the analysis.
According to Akintoye and Beck there are three categories to consider when conducting a PCC: value-based inputs (cost based), risk-based inputs (hypothetical cost based), and competitive neutrality (hypothetical cost based).41 The value-based inputs that make up seventy to eighty percent of a PCC consist of capital, operational, and whole life-cycle costs, of what could be described as the Raw PCC. Risk-based inputs generally consist of ten to twenty percent of the PCC.42 There are several possible models for calculating risk-based inputs. The competitive neutrality elements account for differences between the public and private sector models for providing a service such as taxation and administrative structures.43 These are up to approximately ten percent of the cost calculated using the PCC.44 The different types of costs will be adjusted throughout the PPP, but it is important to calculate these costs prior, when assessing the costs of the project.
The whole-life cycle costs consist of the capital and operational expenditures. These are generated by the base case model without accounting for risk. Risk can be calculated as pure risk and as spread risk. Pure risk is the probability of the occurrence of an event multiplied by the financial consequence if it were to occur.45 The probability of occurrence can be calculated by reviewing similar previous projects and data.46 Spread risk is the uncertainty of the cost estimates of the project, including the markets and the technical capacity.47 Probabilities and hypothetical scenarios can be used to calculate spread risk.
Additional costs that are difficult to calculate, but that should be considered, include the costs incurred outside of the partnership such as those incurred to customers and citizens, as well as the depreciation costs.48 This could consist of conflicts in organizational structure between the public and private sector, resulting in challenges with communication and transparency. The inclusion of depreciation expenses depend on the current assets used in operation. If the assets of the project do depreciate over time, then depreciation expenses should be included unless a maintenance schedule precludes depreciation.49 It must also be decided if the depreciation will be expensed according to Generally Accepted Accounting Principles (GAAP) and current legislation (for tax liability purposes) or the actual, operational life of the asset. Note the chart below for examples of the various costs that would be included.
Direct Capital Costs | Direct Maintenance Costs | Direct Operating Costs |
Design costs | Raw Materials | Inputs |
Indirect Capital Costs |
| Indirect Operating Costs |
Corporate overheads (running costs) |
| Partial use of plants/equipment Partial use of administrative buildings |
_________________________________________________________________________________________
41 Akintoye, A., & Beck, M. (2009).
42 Ibid.
43 Ibid.
44 Ibid.
45 Ibid.
46 Akintoye, A., & Beck, M. (2009).
47 Ibid.
48 Kamensky, J. M., & Burlin, T. J. (2004). Collaboration: using networks and partnerships. Lanham, Md.: Rowman & Littlefield Publishers.
49 McHugh, K. J. (Director) (2002, July 28).