The cost of a project would need to be assessed over its lifetime, taking into account the entire gamut of expenses linked to financing, construction and transactions related to tendering, negotiations and monitoring projects. In this regard, the evidence provided by various academic researchers and international organizations suggests that PPPs have often tended to be more expensive than the alternative of public procurement.
To elaborate, private sector borrowing costs often tend to be higher than those of their public counterparts (with sovereigns in particular being able to obtain finance on more favourable terms). This is illustrated in studies by Romero (2015) and Hall (2015) which, for example, cite a 2015 review by the UK's National Audit Office (NAO) showing the effective interest rate of all private finance deals (7%-8%) to be double that of all government borrowing (3%-4%), implying a far greater burden on the public purse than if the government had borrowed from private banks or issued bonds directly. At the same time, PPPs are typically very complex to tender and negotiate and this, together with the fact that they are frequently renegotiated, has often entailed higher transactions costs. According to Hall (2015), the transactions costs of tendering and monitoring PPPs add 10-20 per cent to their costs, while the cost of construction is higher under a PPP because the financiers require a turnkey contract, which is about 25 per cent more expensive. The author argues that this is the case in both higher income and developing countries alike.
The above findings of academic researchers are generally consistent with the internal (staff research and independent) evaluations of various institutions or organizations which promote PPPs. For example, a European Investment Bank (Blanc-Brude, Gold-smith and Välilä 2006, p. 2) report, which compares the cost of 227 new road sections across 15 European countries of which 65 were PPPs, "estimate that the ex-ante cost of a PPP road to be, on average, 24% more expensive than a traditionally procured road".
To these costs must be added the potential risks, or contingent fiscal liabilities, relating to PPPs. In particular, infrastructure projects are associated with various types of risks. These include construction risks (e.g., design problems, cost and time over-run); financial risks (e.g., interest rate and exchange rate variations); availability risks (e.g., equipment performance, quality of service); demand risks (variations in the need/use of the service) and residual risks (future value of the project when transferred to the government). The principle underlying a PPP is that such risks which are best managed by the private partner should be allocated to the private partner. However, assessing risk transfer is difficult given the multitude of risks to which PPPs are exposed and the complexity of PPP contracts. If the risk assumed by the private sector partner were to be over-priced, it would increase the cost of the service to the consumer, making PPPs unviable. The IMF has warned that governments may sometimes exaggerate the true value of risk transfer, leading to an overpricing of risk that raises the cost of PPPs relative to direct public investment. On the other hand, quite often the risk assumed by the private partner is under-priced and governments are forced to extend a guarantee to cover the price differential. In doing so, governments can be left bearing an unduly large share of the risk involved in a PPP and facing potentially large fiscal costs over the medium term.
Overall, analyses by both the IMF and World Bank have expressed concerns regarding perverse incentives on the part of governments to treat PPP contingent liabilities as "off balance sheet", which in turn undermines sound fiscal management. According to Romero (2015), the historical experience of several countries in the developed and developing world shows that PPPs can pose a huge financial risk to the public sector. The author cites the much-discussed case of recently built hospital in Lesotho to provide an illustrative example of how a seemingly successful PPP (based on traditional project development criteria) may have negative impacts on the country's non-transparent contingent fiscal liabilities, and hence on overall social development efforts. The newly-built, 425-bed hospital was the result of a public-private partnership, facilitated by the IFC. A recent study (McIntosh et al. 2015, p. 960) of the project, using quantitative measures that reflected capacity, utilization, clinical quality, and patient outcomes, calls the project successful and generally concludes "that health care public-private partnerships may improve hospital performance in developing countries and that changes in management and leadership practices might account for differences in clinical outcomes". However, referring to the very same project, an Oxfam study (2014) asserts that the hospital threatens to bankrupt the impoverished African country's health budget, since more than half the country's entire health budget (51%) is being spent on payments to the private consortium that built and runs the hospital in the capital. The PPP hospital cost US$67 million per year - at least three times what the old public hospital would have cost today, and it consumed more than half of the total government health budget.
The Lesotho hospital case highlights the need to improve the impact assessment of PPPs on sustainable development in the longer term. It also emphasizes the need for caution when replicating seemingly successful PPPs in different contexts. Indeed, the Lesotho hospital was inspired by the 'Alzira model' a hospital PPP in the Spanish town of Alzira that has been labeled a success case and has inspired other (often less successful) PPPs in Spain, Portugal, as well as in developing countries. However, as noted by Acerete et al. (2014), Alzira's success was not the result of a true PPP, but rather that of a deeply rooted political partnership between the regional government and its regional savings banks. Where private sector partners are not bound to the public sector by such close political relationships, risk transfer and affordability are likely to become issues that may very well jeopardize the viability of the project in the long term.