along with operations and maintenance over extended periods of time (some- times 25–30 years). By specifying in detail the service outcomes required, the government body signals that it will no longer be responsible for cost and time overruns or systems that are inefficient or fail to work (Smith, 1999).
‘model’, but rather as a variant of earlier models of private sector involvement in infrastructure incorporating a higher level of cooperative cost and risk shar- ing. One of the major differences is that the public sector plays a significantly increased role in providing resources, in effect becoming an actual develop- ment ‘partner’ rather than a ‘client’ (p. 77).
The PPP works as follows. The parties commit themselves at the outset to a more cooperative relationship, with the expectation that they will each contribute something of value to the project. The public sector has command over assets such as land, property and the negotiated right-of-way and brings to the development process the authority to implement the infrastructure acquisition within a planning process. The private sector brings access to outside capital, technical expertise and an incentive structure to develop projects in the most effective manner. As a consequence of the ‘discipline’ of the private capital markets, there is pressure to improve efficiency in construc- tion and operations, and complete projects at the lowest cost and in the short- est time period. There must then be close control of the operational phase of the facility to ensure security of the cash flows that are needed to repay the project finance. As we said in the previous chapter, a PPP is all about putting in place appropriate strategies for appraising and managing the risks. Having equity capital and borrowings at risk introduces into the calculation an element of realism that it is not possible to obtain when the project is being publicly funded.
Rather than there being a ‘model’ of a partnership, PPPs should be thought of as a process, designed to ensure that all the risks are valued and taken into account in a meaningful way. Because both parties have committed resources and prestige to the success of the project, the partnership relies on a detailed step-by-step analysis of cost-sharing arrangements, risk mitigation and risk allocation. Abdel-Aziz and Russell (2001) propose a framework for this process revolving around rights, obligations and liabilities. This threefold clas- sification encompasses key features of any PPP project. Under the agreement, various rights are ceded to the private entity in return for it taking on and committing to a specified set of obligations. Consider first the rights. One set of rights ceded relate to possession, when the public sector transfers owner- ship of land and property in its possession to the private sector. The other right refers to revenues, when the government entity gives the private sector body access to revenues during the operational stage of the contract. In return, the private firm is obliged to undertake certain functions. These obligations relate to planning, design, construction, improvement, operation, maintenance, financing, environmental aspects (biophysical), labour issues and regional and other business impacts. Finally, the liabilities dimension refers to the actual and potential liabilities and risks shared or assumed by parties under the agree- ment. Included under this heading are general liability (tort, third party and
facility damage), liability for taxation, and risk liabilities. The latter arise from the risk allocation process. The various factors are listed in Table 4.5.
Table 4.5 A framework for assessing public private partnerships
Definition Dimensions Characteristics
Rights: the various rights Possession Real assets
given by government to a Intellectual assets
private entity in return for Equity
carrying out a specified Ownership
set of obligations Whole or part
allocation of rights Revenues Basis for generation
Allocation to parties Obligations: the promises Development Planning
that the private entity and Design
the government agree to Construction
be bound to under the Improvements
agreement
Operating Operation
Maintenance
Environment Biophysical (air, marine, terrestrial)
Social (labour issues, regional benefits, business impacts) Financing Extent of financing
Source of security Government guarantee Liabilities: the real and Legal liability Tort liability
potential liabilities and Business interruption
risks assumed by either Physical loss
party under the agreement
Risk Construction
Business Financial Force majeure
Taxes Exemptions
Liability assumption
Source: Based on Abdel-Aziz and Russell (2001).
Using this framework, Abdel-Aziz and Russell examine a number of projects in the UK, Canada and United States. From this investigation, they provide a checklist of recommendations as to attributes of the three dimen- sions that need to be specified in documentation for PPPs. In particular, the authors stress the need for clear articulation of government requirements in such documents and PPP agreements in order to reduce the amount of supple- mentary materials issued to request proposals, help consortia respond with proposals that can fit the requirements, and reduce the amount of time spent in negotiations and perhaps the need for contract amendments to reflect market- place realities not considered at earlier stages. But, unlike in the traditional procurement process, in which all requirements are vested in government, under a PPP they are temporarily or permanently assigned to another entity.
These potential advantages of PPPs over traditional procurement come at a cost, one tangible element being the contracting costs. These contractual issues are not absent from traditional procurement but the agreements are less complex to draw up and are certainly less onerous to implement and monitor.
Nevertheless, this apparently lower cost of traditional procurement methods may be deceptive because the risk analysis may be less thorough – hence the cost overruns and project delays. In this respect, it can be argued that PPPs are formalizing the sort of independent evaluation and scrutiny that ought to have been applied to procurement policies.
There is a real sense in which the application of a partnership agenda can inform other procurement methods, as well as learn from them. It has been argued, for example, by the UK Treasury Committee (1996) that ‘There is no a priori reason why public procurement should not run to time and cost.
Indeed many of the assumed benefits of PFI would appear to be available to better-managed and controlled conventional procurement’ (para 33). As a statement of principle, this may be so. But it ignores the essential ingredient added by a PPP, which is to build in the incentives to avoid delays and cost overruns.