In a PPP project the public sector invites the private sector, via a bidding process, to design, build, finance and operate an asset in order to provide a service to or on behalf of the public sector. In addition, the project must be affordable, provide value for money, and obtain optimal risk transfer between the public and private sectors.
The payment for this service can either come directly from the public sector (government) or from the end users (general public). Examples of government-pays infrastructure could be schools, hospitals and other accommodation projects. Examples of user-pays infrastructure include toll roads, rails and other transportation systems where the payment mechanism demands the user to pay for the service.
PPPs – key benefits and requirements
The benefits of PPPs are numerous, the main one being obtaining Value for Money. This means delivering a project with a superior quality for the same amount of money than the public sector would spend on the same service in a given fiscal year. There are several components of the Value for Money factor which include: risk transfer, output based specifications, long term nature of contracts, performance measurements and incentives, private sector management skills and other various money drivers.[1] For a PPP to be successful the majority, if not all of the components, must be satisfactorily delivered and concluded. Sometimes, if not often, they are not.
Value for Money – the 5 main pitfalls
Let’s look at the components of the Value for Money and see where are the major pitfalls that occur and most importantly, why? As per Van Herpen (2002), the key pitfalls are as follows:
Risk will be transferred to the party which is best able to manage this risk and at the lowest cost. The risk allocation is produced during the feasibility study of the process while assessing the value for money. If this section of the risk assessment is not done properly and sufficiently right at the beginning and prior to the contract signature, the risk transfer can be diluted and retained by the public sector. Another issue can actually creep up due to insufficiently (badly) written contracts that can omit significant scenarios that can either revert the risk to or be retained by public sector. Finally, during the life of the project, certain engagements are initiated by either public or private parties that shouldn’t be – often leading to risk reverting by default to the party that originally was not supposed to bear the risk. For example, if the public sector gets involved in the decision-making specifically around the design of the asset the risks around the design aspect will by default revert back to the public sector.
Output based specifications can provide many benefits such as giving the Private sector the freedom to produce innovative ideas and ways of delivering at reduced cost without compromising the final output and quality. However, problems might arise when the public sector is not quite certain what it wants to achieve and what exactly the outputs should be. These decisions can be quite costly for the public sector as delays and variations might occur therefore not achieving the anticipated Value for Money.
The Long term nature of contracts allows the service provider (Private sector) more time to recover the cost of the investment. It also provides a learning curve for the service provider and in turn increases efficiency. It also makes it easier to transfer the technology risk to the service provider as they will have better judgement when renewal of assets and capital expenditure is incurred. However, long term contracts come with their pitfalls as well. The main one is the reduction in competitive pressure on the service provider to reduce costs and increase quality, which creates a state of complacency. Therefore it is extremely important that the service provider delivery is closely monitored and at the same incentivised in order to keep up the standard as originally envisaged by the project.
Performance measurement and incentives are a great way to achieve the goal of the project and what is stipulated by the contract, and can be beneficial to both parties if properly implemented. The benefits and rewards can be shared making the project a success. However, on many occasions, the importance of performance monitoring and management is overlooked by the public sector. This results in the Value for Money being completely diminished as the private sector will not invest much to provide for corrective measures. Therefore it is imperative that performance measurement is monitored and measured on a regular basis by the Public sector for obtaining Value for Money.
Private sector management skills are also key benefits that PPPs can provide to the Public sector. Traditionally, project management is not something that the public sector used to undertake due to the nature of their business however, in order to produce quality delivery to the general public, management skills are imperative to success of any project. The Public Sector can learn a great deal from the Private Sector with respect to proper project and programme management through long term partnership projects and implement on other various occasions. This however can be also a pitfall as public sector sometimes is not open to spending time learning new methods and even ignoring the roles and responsibilities of what should be done on the PPP project itself jeopardising projects success due to the improper management.
These are just few examples of how potentially benefits can quickly turn into pitfalls while executing PPPs. To learn more on these and many others, please refer to the recently released APMG Public-Private Partnerships Certification Program produced by APM Group.
[1] G.E.W.B Van Herpen, 2002, Public Private Partnerships the Advantages and Disadvantages Examined, Dutch Ministry of Transport, Public Works and Water Management, AVV Transport Research Centre
Irina is a qualified Quantity Surveyor and holds a Master’s Degree in Building specializing in various Infrastructure Procurement Methods. She has more than 15 years of experience working with both Public and Private sector on various Infrastructure initiatives. Currently, Irina is with Deloitte South Africa, leading Corporate Finance Infrastructure Capital Project Team.
Irina has completed various consulting assignments mostly at National and Provincial Government levels specifically development of infrastructure on PPPs within transport, healthcare and commercial buildings. As a result she is familiar with various vehicles, which could be used in alternative service delivery, be it by National, Provincial or Local Government.
Currently, Irina is developing a methodology for Project Management of existing and operating PPPs which will assist government officials in successful delivery, as well as provide a tool for managing the PPP inception for both Transaction Advisors and government officials. She has been involved in projects of monitoring nature such as Gautrain, as well as assisting clients in the public sector with monitoring and assurance of the adjudication of tenders over R 30bn in value.