There is no all-encompassing definition for PPP (Department of the Parliamentary Library 2003: p.2; New South Wales Parliament 2006: p.9) within general discourse or scholarly literature (English 2008: p.2; Urio 2010: p.26). There is, however, a plethora of characterisations. Some, in the context of this thesis, highlight the transactional nature of PPP, whereby contracts are entered into between the public and private partners with consortia partners typically providing design, financing and / or construction and the delivery of services in exchange for publically-owned assets or user fees (Bloomfield 2006; Leiringer 2006). Other interpretations, whilst acknowledging the transaction base, broaden the scope to include a 'working together approach' that relies upon co-operation to meet objectives in return for mutual gain through the sharing of risks, costs, resources and responsibilities (Klijn and Teisman 2003; Koppenjan 2005). For this research, PPP is characterised as a collaborative endeavour (Smyth and Edkins 2006) involving public and private partners, developed through the expertise of each partner in order to meet identified public needs through appropriate resource, risk and reward allocation (The Canadian Council for Public Private Partnerships 2009).
These time and cost-specific ventures (English 2007) are normally constituted under long-term contractual arrangements (Infrastructure Australia 2008a: p.3) whereby the private partner agrees to build public infrastructure (or engage in the provision of facilities or services) on behalf of the public sector (Lewis 2001) under specified terms and conditions (Grimsey and Lewis 2004: p.6) and for an agreed concession period. Put another way, PPP is a method of procurement that typically relies upon private sector capitalisation to deliver outcomes for government agencies (Commonwealth Department of Administration and Finance 2006: p.1).
The Public Sector Comparator (PSC) is a hypothetical financial model used by governments to establish advantages (if any) of using private finance (National Audit Office 2009b: p.46; Department of the Parliamentary Library 2003: p.7) including estimating the total cost of a project's construction and operations (Allen Consulting Group 2006: p.19) against the expected costs of using other procurement methods (Grimsey and Lewis 2004: p.137) to determine the best VfM proposition (Infrastructure Australia 2008a: p.35). It is based on the most efficient (New South Wales Government 2001: p.45) and / or recent (Partnerships Victoria 2001b: p.6) method of determining VfM proposals (New South Wales Government 2001: p.45).
PSC assessment which is undertaken alongside the development of a project brief, contract and project specifications (Partnerships Victoria: 2001b: p.6) takes account of the likely project risks that are expected to be transferred to the private partner as well as those anticipated to be retained by the public partner (New South Wales Government 2001: p.45; Partnerships Victoria 2001b: p.7). In terms of operations, this means operating risk is transferred to the service delivery provider(s). The decision to accept these risks by the government's partner may be encouraged through the use of incentives (Commonwealth Department of Administration and Finance 2006: p.2) such as defined quarterly service payments.
The assessment discounts the cash flows to a present value (Allen Consulting Group 2006: p.19) before calculating the Net Present Value or Net Present Costs (Partnerships Victoria 2001b: p.6) associated with the cash flow streams anticipated under a PPP deal (Allen Consulting Group 2006: p.19) on the assumption that the project is capable of being carried out in the public sector (Grimsey and Lewis 2004: p.139). A competitive neutrality adjustment is then made to ensure that no financial advantage exists between public and private sector ownership options (Partnerships Victoria 2001b: p.6). If the PPP option is deemed to be cheaper in comparison with alternative procurement models at the completion of the test, a PPP contract will be awarded to the private consortium that makes the best bid.
From a public sector perspective, VfM propositions that benefit communities through improved service delivery should be the primary focus of all PPPs (Sampath 2006). As with PPP, there is no single definition that fully encapsulates the concept of 'VfM'. For the private partner, it may simply represent the size of its profit margins in delivering contracted services. However, for government, VfM is based on the delivery of planned social outcomes. The UK Treasury (2006: p.7) offers the following definition: "VfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user's requirement". This depiction of VfM is broadly consistent with the one supplied within an Australian state government context as "getting the best possible outcome at the lowest possible price" (New South Wales Treasury in English 2006) which is the favoured definition for this research. Moreover, Siemiatycki and Farooqi (2012) argue that VfM is defined as a measure against the level of cost savings that could be achieved when compared against more traditional public infrastructure project methodologies e.g. as determined by a PSC. Consideration of price and cost of service delivery is therefore fundamental for public authorities however VfM determination may be beyond mere calculation of monetary units. The need for consideration of intangibles such as 'uncertainty' may, and often does, preclude the adoption of simple economic metrics.
As implied, the achievement of VfM outcomes is considered to be one of the greatest drivers of risk transfer between the partners (Partnerships Victoria 2001a: p.4). Over time, this can lead to considerable cost savings throughout project lifecycles (Commonwealth Department of Administration and Finance 2006: p.2) of between five and 66 % depending on how well the PPP project phases are integrated and the extent to which assets are effectively managed (AECOM 2007: p.41). These claims are complementary to a study undertaken by Cambridge Economic Policy Associates (2005: p.39) which found that 96 % of contractors and 85 % of government officials believed that operational risks had been properly allocated. However, efficient allocation may not always be realised (The Asian Development Bank 2008: p.2). Ergas (2009) claims for instance that poorly allocated risk may unintentionally see potential cost savings turn into profits for project "promoters", whist another commentator argues that the cost of 'transferring' financial risk to the private partner may actually be built into partnership deals (at the tendering stage) (Davidson 2006) which would obviously detract from accomplishing genuine VfM outcomes, particularly during operational phases should ongoing under-performance occur.
Moreover, the concept of VfM is based on hypothetical calculations that may fail to fully account for unforeseen cost overruns or adjustments perhaps due to technical failures, obsolescence or lower than expected service user numbers (Grimsey and Lewis 2004: p.167; National Audit Office 2009b: p.46-48; Edwards et al 2004: p.9). There may also be failure by government to provide comprehensive and realistic pricing of all quantifiable and material risks. Grimsey and Lewis (2004: p.144) state that in their view, these risks are often misjudged and should be part of wider risk management practices. And of course, all procurement relies on human judgement, skills and experience (National Audit Office 2009b: p.47) and thus becomes subject to the errors, imperfections and biases of people.
Another feature of PPPs (from an operational perspective) is the use of the 'payment for performance' principle, whereby payment by the public partner to its private partner is dependent upon the latter achieving specified (and hopefully enforceable (Garvin and Bosso 2008)) performance standards (Commonwealth Department of Administration and Finance 2006: p.2). Failure to meet targets will normally (but not always) result in abatement (Hodge and Greve 2005: p.75) being applied by the public partner. Challenges that have been identified in this area include inadequate contract monitoring and enforcement systems and the exposure of taxpayers to unintended risks. In their study into evaluating operations relating to roads and hospitals, for example, Edwards et al (2004: p.63) highlighted a concern that public partner contract management monitoring skills need to improve in order to achieve intended VfM outcomes.
In recent times, PPP arrangements have become a commonly adopted method of providing infrastructure and services by governments in developed economies (Joyner 2007) including Australia (Jin and Doloi 2008), especially in relation to transportation needs (English and Guthrie 2006: p.3; Department of the Parliamentary Library 2003: p.5). According to Infrastructure Australia (2011: p.1), PPP can be divided into two categories: Economic Infrastructure and Social Infrastructure (although in some instances, individual PPPs may combine selected principles of both models).
Economic Infrastructure projects are based on a demand-risk transfer payment model that typically relate to toll roads but can be applied to a range of other infrastructure that includes water treatment and energy generation facilities (Infrastructure Australia 2011: p.1). Under this type of arrangement, service users and consumers are normally charged by the private partner within a regulated payment framework for the full term of the contract (Infrastructure Australia 2011: p.1).
Economic Infrastructure differs from Social Infrastructure in that the latter are based on an availability payment model. This means that government pays the charges on behalf of service users through regular service payments to its private partner for the duration of the contract term (Infrastructure Australia 2011: p.1) e.g. for the operation of correctional facilities, hospitals, public transport etc. Under this model, and with regard to the risk transfer component of obtaining VfM for government, the arrangement is thought to be beneficial to the public partner because it enables government to focus on delivering its core services (Commonwealth Department of Administration and Finance 2006: p.2) to the public, which are defined by the Victorian Government as services that should not be undertaken by the private partner (judged on a case-by-case basis by the Government). Such core services, for example, are likely to relate to the work of doctors and nurses within public hospitals, the independence and behavior of judges within courts and the activities of teachers within the public education system (Partnerships Victoria 2001a: p.5). In practice, however, neither health nor education services provision has been entirely exempt from attempts at privatisation, and the 'core services' argument is thus substantially weakened; although the power / influence of health and education sector unions should not be underestimated in some countries e.g. the UK and to an extent, Australia.
Within the setting of economic and Social Infrastructure projects, a number of procurement arrangements are available. These include:
- Build Operate Transfer (BOT). This is a form of PPP used to attract capital from the private sector in order to develop public infrastructure (Kumaraswamy and Zhang 2001) and it is suitable for large-scale projects (Shen, Platten and Deng 2006). This type of arrangement involves the temporary transfer of a government-owned asset (e.g. land) into the hands of the private partner who then takes responsibility for financing and constructing the facility as well as operating and maintaining it. Then, after a defined period of time, the developed asset is returned to public sector control (Malone 2005). Ownership (i.e. possession of real property rights) remains in public hands throughout, so the PPP is more like a concessionary or franchising agreement. After the concession period has expired, the public entity is entitled to re-negotiate another agreement with the original private partner, form a new partnership arrangement, or operate the asset itself.
- Build Own Operate Transfer (BOOT). This is a variation of BOT and a dominant form of PPP in Australia (Hodge and Greve 2005: p.64-65). The public partner grants a franchise to its private partner to finance, design, build and operate a project for a defined period of time. This arrangement differs from BOT in that it gives the private party ownership of the facility and land on which it is built i.e. securing long-term property rights under lease (Savas: 2000: p.245) after which ownership is transferred back to government (Partnerships Victoria 2001a: p.43; Deloitte Research 2006: p.5). BOOT has been used in Australia for projects such as the Spencer Street (Southern Cross) Station re-development (PricewaterhouseCoopers 2008: p.21), EastLink (Leighton Holdings 2010), the new Royal Children's Hospital project (Partnerships Victoria 2011) and CityLink (PricewaterhouseCoopers 2008: p.49) in Victoria; and the New Schools Privately Financed Project (New South Wales Department of Education and Training 2003: p.3) and Cross City Tunnel (PricewaterhouseCoopers 2008: p.11) in New South Wales.
- Build Own Operate (BOO). This approach functions similarly to BOOT (Davies and Fairbrother 2003: p.6). It operates under a franchise arrangement that is subject to regulatory constraints on pricing and operations (Savas 2000: p.244) but is akin to outright privatisation as there is typically little to no provision for returning the asset to public sector ownership (Williams 2003: p.10), although according to Smith (in Williams 2003: p.9), existing contracts can potentially be re-negotiated. The operating revenue risks arising from this method rests solely with the private partner (AECOM 2007: p.15).
It should be noted that English (2008: p.2) claims that BOT, BOOT, Partnerships Victoria projects and Privately Financed Projects are all interchangeable with the broader use of the PPP term.
Selected aspects of Infrastructure Investment Policy for Victoria, Partnerships Victoria, Working With Government frameworks (the latter covers Privately Financed Projects) as well as the National PPP Policy and Guidelines are summarised in section 3.5, below.