A4.9 In PPP contracts the quality of service provided and performance of the contractor are central to the delivery of VfM. Complexity and change hinder effective risk management. To be successful partnership arrangements need to be thoughtfully designed. Principal-agent theory explains that if the interests of an agent (in this case a private partner) employed by a principal (in this case a public sector organisation) are not aligned, then the agent is likely to act in their own interest. Therefore, from the principal's viewpoint, unintended and undesirable results may occur.38
A4.10 The need to align the interests of agents and principals with minimum complexity means shared objectives need to be high level rather than minutely complex. The need to build in flexibility for future change should be considered. In the longer term, unforeseen changes in the wider environment are likely e.g. the demand or funding for a service may change. Being committed to an inflexible long term contract, that cannot be altered at a realistic cost, should be avoided. It is important to take account of previous evidence and the value of flexibility in longer term commercial arrangements.
A4.11 PPP options are about more than financial issues, although these are important. For example PPPs are cited as potentially offering higher levels of specialist and operational management expertise, greater management flexibility and focus and improved risk management. These issues should be considered on a case-by-case basis to produce realistic and objective estimates of costs and benefits arising from an option involving PPP, to compare against alternative options. The bundling of design, build and maintenance activities can create better value in the right circumstances, by creating an incentive for high quality design and build.
_________________________________________________________________________________
38 Principal-agent theory here refers to the economic and organisational theory only and not to the concept of a principal or an agent in legal terms.