30. Some criticisms of PPPs are undoubtedly true. Interest costs faced by the private sector are higher than those faced by the public sector; PPPs involve the necessity of profit, and arranging and structuring the transactions is complex and costly. However, when managed prudently and with a supportive legal and institution framework, PPPs have been shown to be potentially cost effective and to create value for money for governments and citizens. This requires that savings from developer expertise, from combining responsibility for designing, building, operating and maintenance and from an optimal (least-cost) risk allocation exceed the additional costs of investors' return on equity (profit), a higher cost of capital and transaction costs.
Box 4. Value for Money and the public sector comparator Governments should assess whether or not a project represents value for money. Indeed, the drive to use PPPs is increasingly premised on the pursuit of value for money (OECD, 2008). Value for money is a relative measure or concept. The starting point for such a calculation is the public sector comparator. A public sector comparator compares the net present cost of bids for the PPP project against the most efficient form of delivery according to a traditionally procured public-sector reference project. The comparator takes into account both the risks that are transferable to a probable private party and those risks that will be retained by government. Thus, the public sector comparator serves as a hypothetical risk-adjusted cost of public delivery of the project. However, ensuring the robustness of a public sector comparator can be difficult and it may be open to manipulation with the purpose of either strengthening or weakening the case for public-private partnerships (e.g. much depends on the discount rate chosen or on the value attributed to a risk transferred). In addition to the quantitative aspects typically included in a hard public sector comparator, value for money includes qualitative aspects and typically involves an element of judgement on the part of government. Value for money can be defined as what government judges to be an optimal combination of quantity, quality, features and price (i.e. cost), expected (sometimes, but not always, calculated) over the whole of the project's lifetime. What makes value for money hard to assess at the beginning of a project is that it ultimately depends on a combination of factors working together such as risk transfer, output-based specifications, performance measurement and incentives, competition in and for the market, private sector management expertise and the benefits for end users and society as a whole. Source: OECD (2012), Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships |