PPPs can also deliver additional efficiency benefits as follows:
- PPPs ensure there is an up-front commitment of resources to maintenance and technical reliability: the private sector can improve the reliability of the infrastructure availability and quality by committing dedicated resources to the project in the long term. However, this advantage has to be qualified with the related pitfall of decreased flexibility in budget management;
- PPPs can deliver “demonstration effects”: the private sector may introduce innovations that can then be adopted in other projects or in other government service delivery. For example, prison PPPs in Australia and New Zealand have provided opportunities for the private sector to innovate in prison management, and for the government to learn from them and implement similar innovations in government-run prisons (both non-PPP and DBFM models);
- Transparency: PPPs can bring more transparency and assurance because of the many parties involved in the transaction (government/authority and its advisors, private investor, contractors, lenders, bid side advisors, and so on). See box 1.17.
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BOX 1.17: Key Points Summary: Main PPP Drivers for Incremental Efficiency and Effectiveness in Infrastructure Procurement[42] |
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Cost Management (flexibility to negotiate) |
Higher flexibility in contracting (through flexible negotiations with subcontractors and/or a more flexible labor framework) and the ‘for profit’ nature of the private sector. |
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Life-Cycle Cost Management |
The private partner will assume the risk of cost overruns during the whole life of the contract. Therefore, it has the incentive to design the life cycle to optimize the overall cost of construction and maintenance. |
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Risk Transfer/Risk Management |
Paying on the basis of outputs (availability or use) rather than on costs and requiring the private partner to finance the investment on the basis of such revenuesallows for significant risk transfer.Allocating or transferring risks to the private partner (those risks that are inherent in the scope of the contract and to the extent they are manageable by a competent manager) provides Value for Money, as the private sector is more able to mitigate, assess, price and/or manage the consequences of most risks. |
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Innovation |
Focusing the requirements on output specifications incentivizes innovation to design, construct and manage maintenance in a more cost-effective way. |
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Reliability |
Results in terms of time for construction (time reliability) and achievement of results (technical or quality sustainability) are higher through the revenue regime of a PPP (linked to performance and based on results). |
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Incremental Asset Utilization |
Under the appropriate incentives, the private partner will be interested in maximizing utilization (for instance, in payments by user or per user or through specific bonuses). |
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Upfront Commitment and Predictability and Other General Benefits |
With the necessary caution in terms of exposure to liabilities, PPPs are helpful in organizing and distributing budgets so as to protect long-term quality standards in public infrastructure.
PPPs may also provide demonstration effects and help in decreasing corruption by increasing transparency and assurance. |
[42] When most of these key drivers for efficiency are present in a project, or may be triggered and protected in the project if delivered as a PPP, it may be considered that the project is suitable as a PPP. For another description of signs of PPP suitability, see the “Green Book: Appraisal and Evaluation in Central Government” (HM Treasury UK 2003), box 23, “Considering private provision”.
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