Australian PPP policy presently requires a Public Sector Comparator (PSC) to be developed for all PPPs as a way of testing whether the PPP provides better value for money than traditional procurement methods.
The PSC is an estimate of the whole-of-life risk adjusted cost of a project if delivered by government. Under some Australian PPP policies, a PPP can only proceed if the winning bid is priced below the PSC. The NSW Government also requires procuring agencies to prepare a Shadow Bid Model, being the agency's best estimate of a private party's bid price to deliver the infrastructure and services required under a PPP structure.
PSCs have been strongly criticised as a pass/fail test of value for money. They are inherently uncertain and can be easily manipulated to get the desired result. Indeed, the Australian experience has been that the PSC never wins. While there have been some PPP projects which have stalled during the procurement process when no bid has beaten the PSC, the PSC has been adjusted on account of errors and new information, with the result that the project has been able to proceed as a PPP. Examples include the Victorian Comprehensive Cancer Centre and the Southbank Education and Training Precinct Development Project.
The concept of public provision of the project as the alternative can also be a fiction. The days of public works departments building large infrastructure projects without the assistance of the private sector are largely gone. If government doesn't engage a consortium SPV to design, build, operate and maintain a project under a PPP, then the most likely alternative is to engage a private sector contractor to do so under a DBOM contract, or separate D&C and O&M contracts. In this context, the government's PSC estimate of what it would cost to deliver the works and services under such contracts is unlikely to be more accurate than the prices obtained by the PPP bidders from their proposed D&C and FM contractors. The PSC estimate would need to include an allowance for government-initiated variations and other events that would entitle the contractor to payments additional to the original contract price.
Further, no other delivery model needs to justify its use by having competitively tendered bids beat a theoretical cost estimate for an alternative delivery model. Rather, theoretical cost estimates for various delivery models are used at the business case stage to determine which delivery model is likely to deliver the best value for money outcome. Having made that decision before calling for tenders, it is not revisited once competitively tendered prices have been received.
The use of the PSC as a pass/fail test of value for money was abandoned in the UK in 2003.
It is therefore a welcome development that the Victorian, NSW and ACT Governments have now abandoned the pass/fail test. We expect other Australian governments will ultimately follow suit.