PPPs employ a very different approach to project procurement. The state develops an output specification which is a schedule of services or outcomes that are required to be delivered. The focus is on outputs and not the asset that will deliver them. This creates an incentive for private bidders to examine innovative methods of service delivery in a competitive tender situation. The bid process commences with an expression of interest (EOI) process which is designed to provide a project briefing, lay down the government's preferred risk allocation position and test market depth. A limited number of preferred bidder's are selected for the tender and all bids including the variations to conforming bids are measured against a risk-weighted model of traditional procurement (the public sector comparator or PSC). The decision is made to proceed with a PPP only if the bid offers better value for money than the PSC. Value for money is a broadly defined term that includes both quantitative and qualitative criteria. The quantitative analysis includes preparation of a business case for a reference project and a risk-weighted model of traditional procurement (the public sector comparator or PSC). The quantitative analysis requires an evaluation of specific proposal attributes and a comprehensive public interest test that takes into account matters such as public equity, health and safety, access and the impact on particular sections of the community. It is interesting that value for money determinations are not a standard requirement for traditionally procured projects.14
The bidders for a PPP compete on the basis of design and construction innovation, an appetite for absorbing project risks, new technologies and lifecycle costing for the delivery and operation of the service. Construction cost is a factor although innovative design and construction methods are more likely to be a point of difference than outright construction prices. Additionally, bidders will be allocated a number of project risks that may include construction cost and time, patronage (toll roads and some transport projects), operational risk including lifecycle repairs and maintenance and force majeure. The Southern Cross Station project in Melbourne demonstrates how governments can be insulated from the high risk of construction cost overruns. In the UK, construction cost overrun experienced by contractors demonstrates that risk transfer is effective (NAO 2003). The greater the level of design innovation, the greater this risk will be. Some risks cannot be effectively transferred to the private sector. A major reason for the failure of early hospital PPPs was the transfer of case mix clinical services risk to the private sector. The lessons were learnt and subsequent PPPs in the health sector limited risk allocation to non-core services such as the provision of buildings and beds, car parking, catering, cleaning and waste management.
PPPs are mostly delivered on time and within budget. In 2003, the UK National Audit Office surveyed a sample of 39 PPPs across multiple industry sectors and found that 76% were delivered on time and 78% were within delivered on budget (NAO 2003, pp. 8-13).
The PPP process involves a number of clearly defined “gateways” through which the project must progress. Under Partnerships Victoria guidelines, each gateway is conducted with Treasury oversight and independently reviewed. The process is rigorous and ministerial signing-off is required at critical points in the process. The PPP proposal is developed, evaluated and managed by the line agency and it is important for the PPP implementation framework to preserve agency ownership of the project from inception through to delivery and contract management. In the United Kingdom, the Gateway Review process was adapted for use with traditionally procured projects in 2001. The program employed five gateways similar to the first four stages of the development of a PPP project. The Gateway Review has led to significant improvements in traditional procurement and in 2006; most projects were achieving PPP levels of construction performance (NAO 2005). The Gateway Review program was introduced in Victoria in 2004 and evidence from the Uni ted Kingdom and Victoria confirmed both the weakness of traditional procurement practices on the one hand, and the value of risk-weighted rigorous procurement evaluation on the other (see Table 1).
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14 The introduction of the Gateway program in 2004 is introducing more systematic project evaluation methods for traditionally procured projects including value for money (NAO 1999a). However, at the present time, Gateway accounts for a small number of projects in Australia and the program has not yet been introduced in all States.