Generally, the advantages of PPP are considered as follows:
- to remove the responsibility of funding the investment from the government’s balance sheet;
- to introduce competition;
- to adopt managerial practices and experience of the private sector;
- to restructure public sector service by embracing private sector capital and practices; and
- to achieve greater efficiency than traditional methods of providing public services.
The last one, efficiency gain, is the main source of sustainable public savings and, therefore the main objective of and justification for PPP. In the UK, the Treasury estimates that the use of PPPs has produced average savings of 17% to 25% over all sectors during the past 10 years.
Most governments are drawing their decisions for PPP based on greater efficiency the private promoter delivers in comparison to the traditional public procurement. Major drivers for efficiency gains are transfer of risk to the private sector, long-term nature of contracts, incentive structures and payment upon performance, output-oriented service specification, competition between bidders, incorporate feedback and negotiation in the procurement process, innovation and management skills by the private sector, and administrative cost reduction.
For example, in Germany, the basis for the decision whether to adopt a PPP approach or to procure the project conventionally through government resources lies in the evaluation of the Public Sector Comparator (PSC). Each PPP project is, before being tendered, compared to traditional public sector procurement by a so called “value for money test” (or efficiency comparison test), which comprises quantitatively a comparison of the net present value of all cost incurred during the intended contract period, i.e. for design, construction, finance, maintenance, operation etc. for the traditional (PSC) and the PPP option.
Also in many other industrialised countries, efficiency gains have to be proven before the contract award and the governmental agency estimates the cost of traditional public procurement by setting up a PSC. Structuring a PSC, however, bears numerous sources for false estimations. Common critics are the lack of reliable historical data for lifecycle cost estimation, over-optimistic assumptions for public delivery in time and on budget, selection of appropriate discount rates and mechanism applied for risk stress testing.
PSC therefore may not be the only approach in assessing efficiency gains. The key decision criterion for PPP should be determined by a suitable framework to assess and control efficiency gain with respect to a country’s economic and legal conditions. In many Asian countries, no PSC is being set up for determining efficiency gains. Efficiency is achieved by assuming, politically, that the private sector is by nature more efficient than the public sector in delivery services. PPP tendering is done without any PSC test and past experiences have shown that greater efficiency has been achieved through competition among bidders and introduction of the market feedback period.
Remember, no problem has a quick fix solution. Thus, always ensure to consult highly knowledgeable group of professionals whom would provide you with a collective advice, never individual advice. This group advice and approach is unique with CWIIL Group and is based on the overall Management Philosophy of all CWIIL Group Companies.
Consulting CWIIL Group of Companies, for any / all matters relating to Public-Private Partnerships, (PPP), ensures advise based on highest level of knowledge which are given to you by a team of select research-oriented experts whom each will do their own assessment of your matter, and also assess it together, thus ensuring that in case a mistake has been made by one, it will be noticed and corrected even before it is being passed on to you. Receiving incorrect and un-knowledgeable business advise can be disastrous and thus should be avoided.
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