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uk ppp projects

  • Business and industry
  • Trade and investment

Healthcare: Public Private Partnerships

  • Department of Health & Social Care
  • UK Trade & Investment

Published 18 December 2013

uk ppp projects

© Crown copyright 2013

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Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

This publication is available at https://www.gov.uk/government/publications/public-private-partnerships/public-private-partnerships

1. Public private partnerships: innovative approaches to extend healthcare provision

The UK was the first country in the world to develop the concept of public private partnerships (PPPs) for public services projects. Through partnership with the private sector, PPPs enable the delivery of efficient, cost-effective and measurable public services within modern facilities whilst minimising the financial risk.

More than 20 years since the UK launched its first private finance initiative (PFI), the benefits of healthy citizens to a nation’s economy and growth are even clearer. Many countries are experiencing a rising demand for healthcare services, whilst continuing to have constraints on public resources available to fund such developments.

PPPs offer innovative and entrepreneurial approaches to providing the services and facilities demanded of 21st century healthcare. The emphasis is on generating quality service outputs rather than treating building infrastructure as an end in itself. Also, the creation of strong partnerships is moving service delivery away from a project-by-project approach to one that includes strategic and policy developments for long-term results.

2. Definition of PPP and PFI

PPP (Public Private Partnership) is the general term for partnerships which involve everything from operating facilities and providing services on behalf of the public, to flexible methods of financing these services

PFI (Private Finance Initiative) is a particular method of financing capital investment which requires that the private sector design, build, finance and operate specific facilities.

3. Benefits of PPP

  • improved operation and efficiency of public services by accessing private sector processes, technology and innovation
  • long term value-for-money created through appropriate risk sharing throughout the whole life of the project
  • projects delivered on time and budget through incentivisation of private sector partners
  • an alternative source of funding for public infrastructure and services

With such long experience of PPP, the UK has unique expertise in developing PPP projects and continues to evolve the PPP model to optimise value for money through:

  • greater flexibility in the provision of services
  • increased transparency of the liabilities created by long term projects
  • increased transparency of the equity returns achieved by investors
  • speeding up and reducing the cost of the procurement process
  • sharing investor returns between the public and private partners
  • wider sources of equity and debt financing

Countries around the world work with UK organisations to develop their own models of PPP and provide outstanding healthcare facilities and services.

Countries developing their own PPP models using UK expertise

4. The UK – the pioneer of public private partnerships

The UK is the acknowledged world-leader in healthcare PPPs, harnessing the best in public and private sector skills and innovation to provide outstanding healthcare services.

PPP in the UK:

  • 22 years of experience
  • More than 130 healthcare PPP projects
  • £12 billion of capital value

The UK government has successfully implemented a range of PPP programmes for acute, primary, community and mental health services with a high degree of engagement with clinicians and the public.

Projects range from the massive St Bartholomew’s and Royal London Hospitals project, which is the largest single PPP hospital contract in the UK at £1.1 billion to a residential care home costing £2.8m.

The UK’s integrated PPP offering means that it can act as a one-stop service on projects, providing everything required for a successful completion from strategic advice and project management to securing finance.

Since 1991 the NHS, working with British advisors, has developed considerable expertise in managing the process of specifying, procuring, contracting and running a PPP project. This includes developing efficient procurement, with standard form contracts to minimise costs.

At the same time, the UK private sector has gained a wealth of experience in bringing together consortia comprising architects, planners, engineers, building contractors, facilities managers, medical equippers and financiers.

The UK offers a deep knowledge about how to put a deal together, to manage the tender process, to organise delivery of the new facilities during the build phase and to manage the service contract during the delivery phase.

UK professionals excel in the complex working relationships that are common in PPP today. This promotes efficiencies, creativity and innovation not readily to be found in the more restricted practices in many other countries.

The financial knowledge that UK consultants have developed offer a comprehensive understanding of the needs of the investment community, and the ability to interpret this within the local framework of the individual countries in which they work.

5. A brief history of PPP in the UK

1991: the UK government introduces public private partnerships

1996: First contract signed to design, build, and finance and operate a 1,000-bed hospital in Norwich

2001: The Norwich hospital was completed on budget and 5 months ahead of schedule

2006: The largest single PPP hospital contract in the UK signed for the £1.1 billion for the St Bartholomew’s and Royal London project

2012: More than 130 healthcare related PPP schemes completed, underway or approved since 2001

2016: Planned completion of the St Bartholomew’s and Royal London project

6. Public private partnerships in action

6.1 healthcare planning for a successful ppp bid: hcp social infrastructure (uk) ltd.

Barts Health NHS Trust

The £1.1 billion redevelopment of St Bartholomew’s and The Royal London New Hospitals PFI is the largest private finance initiative hospital scheme to be undertaken in the UK and involves the reconfiguration and re-provision of clinical accommodation across two major inner London acute hospital sites.

In this project, in addition to the design, construction and maintenance of the new facilities, the private sector provides high tech equipment, all facilities management and CSSD services. The concession runs until 2048.

HCP have provided healthcare planning services to the successful bidding consortium Skanska-Innisfree, including advising on the development control plans for the two hospitals, as well as the detailed planning of clinical departments.

HCP have been instrumental in working with the contractor and the design team to ensure that the aspirations and requirements of the Trust’s clinical users have been addressed in the development of the design.

This has included advising on the phasing of the construction of the facilities to ensure that the two sites continue to offer the highest standards of care in the interim period. The two schemes are currently under construction, with facilities being handed over the course of the next three years.

6.2 Alder Hey Children’s NHS Foundation Trust: hospital redevelopment

John Laing, Laing O’Rourke and Interserve

The Acorn consortium, comprising John Laing, Laing O’Rourke and Interserve has begun construction work on the new Alder Hey Children’s Hospital in Liverpool. The new £167m hospital will have a floor area of 51,000 square metres, will contain 270 beds and 16 state-of-the-art operating theatres.

John Laing and Laing O’Rourke will each hold 40% of the total investment equity in the project with Interserve holding 20%.Laing O’Rourke Construction will design and build the new hospital and Interserve will maintain the hospital infrastructure.

The unique, iconic design by architects BDP will integrate the hospital with Springfield Park, ensuring that the majority of bedrooms have natural views and easy access to the park.

Wards have access to play decks so that children who cannot leave the ward can benefit from outdoor space. The official opening of the new hospital is planned for autumn 2015.

6.3 Turks and Caicos Islands hospital: developed with PFI expertise from British advisors

UK advisors were essential partners in the successful implementation of an ambitious and unique PFI in the Turks and Caicos Islands. As is becoming increasingly the case, a strong UK team of designers, advisers and financiers supported an overseas consortium to provide new health services.

The Health Services Renewal Programme for Grand Turk and Providenciales included a strong focus on lifestyle and wellness initiatives with the revitalisation of Public Health facilities and services. PFI was used to construct two new local general hospitals.

Designed by London based Devereux Architects, the hospitals provide a full range of services to the population of the seven islands. This PFI also included the provision of a comprehensive range of health services for the 25 years of the contract.

The Turks and Caicos Islands Government based its procurement requirements on UK practise and the UK office of Interhealth Canada prepared the successful bid, drawing on its UK financial modellers and involving HSBC Infrastructure and UK lawyers Berwin Layton Paisner to finalise the project agreement.

With the direct involvement of UK and other internationally known specialist advisors, the hospital construction was completed in 2009 and the hospitals opened as planned in April 2010.

6.4 State-of-the-art patient-centred hospital leading the regeneration of Montréal: Innisfree

Centre Hospitalier de l’Université de Montréal (CHUM), Montréal, Canada

Innisfree is one of the four equity partners for the CHUM Collectif (alongside Laing O’Rourke, OHL of Spain and France’s Dalkia). The new hospital will provide over 349,000m² floor space and provide 772 single-bed rooms, together with a new energy centre. The project also includes a 30-year maintenance concession.

At CAD$ 2.1bn, CHUM represents the most valuable social infrastructure PPP scheme in Canada’s history and is one of the world’s largest healthcare projects.

Innisfree is the leading infrastructure investment group in the UK, sponsoring and making long term investments in public private infrastructure projects. It provides the principal channel for institutional investors to invest in public private infrastructure projects and has to date raised £2.3 billion for these purposes.

Innisfree is the largest investor both the UK’s NHS hospitals and in P3 hospital projects in Canada. Innisfree is providing 40% of the equity investment in CHUM.

7. Why choose UK companies and organisations as partners for PPP projects?

The UK is the world leader for PPP, with more than 20 years of experience from more than 130 PPP projects.

The UK is able to provide a “one-stop-shop” service, providing everything required for the successful completion of a project from strategic advice, securing finance and project management to managing the services and facilities for the life of the contract.

UK companies are experienced in creating the consortium of architects, planners, engineers, building contractors, facilities managers, medical equippers and financiers to bring a PPP project to fruition.

The NHS has considerable expertise in specifying, procuring, contracting and running PPP projects in healthcare.

UK professionals excel in the complex working relationships often required in PPP projects. UK consultants have the experience to offer a comprehensive understanding of the needs of the investment community and interpret this within the local framework of individual countries in which they work.

To find out how Healthcare UK can assist you to access the expertise available within private companies, the NHS and academia, please email us at [email protected]

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Published on Getting Infrastructure Finance Right

Evolving infrastructure models in the uk -- one step forward, two steps back, michael walker, this page in:.

uk ppp projects

Senior Consultant, Caledonian Economics

Very nice project.

Most of the developed countries including the USA, UK, and Western Europe are going forward to strict steps towards the real development of public private partnerships (PPPS) . By supporting private sectors they can enhance their abilities in the total sytucture of development socially and econo0mically. These developed countries can look over the needs of the of the developing world, and encourage it's governments to support private finance according to the local needs and availabilities. These developed countries can use their models of investments after making the suitable modifications to be applied to the developing nations , and using these models of investment socially and economically. One can say that Non -Profit distribution is a luxury in it's design , but profit distribution can be introduced for the benefit of the people and the governments. All these approaches needs transprparency to get the relevant available information . Lawful and legal competition is an essential and a preferable method among all sectors whether private or public. Long term investment can be introduced with short term investment to have fairness in the marketing processes. Yours Very Respectfully, Dr. Mohamed Taher Abdelrazik Hamada, Ph.D Retired Professor at Strayer University, USA Address [redacted]

In fact, the equity funding competition option is not that innovative - we've already seen that in UK PF2 projects, although it wasn't used throughout the PF2 pipeline to date (I think the only project where it was used was the Midland Metropolitan Hospital). I've heard that such competitions are not well liked in some equity sponsor quarters, and personally I haven't seen evidence of it yielding benefits in the form of widening the pool of potential investors. You don't need an equity funding competition to do that; you can always persuade a third party investor to come in at financial close. Certainly there doesn't seem to be enough of a difference between MIM and PFI/PF2 for the model to address most of the concerns about PFI, for example around super profits (yes they can take an equity stake, but there's no requirement to do so and is that really a solution) and lack of transparency (even if a government appointee can see the rate of return and term sheets, the public and media still can't -both those things are deemed confidential under MIM - so the existing problem of government covering up on behalf of the private sector has not been addressed)

To read this content please select one of the options below:

Please note you do not have access to teaching notes, evolution of public-private partnership: the uk perspective through a case study approach.

International Journal of Organizational Analysis

ISSN : 1934-8835

Article publication date: 20 January 2021

Issue publication date: 12 November 2021

Since the 1990s, the National Health Service (NHS)advisory officers have developed considerable expertise in managing the process of specifying, procuring, contracting and running public–private partnership (PPP) projects. However, there has been a relatively consistent trajectory in the findings of studies and evaluation of PPP from its initial introduction in the health sector in 1992 to the present time. Therefore, the purpose of this study is to critically evaluate the PPP experience in the UK context using a case study in the NHS.

Design/methodology/approach

The partnership literature is primarily focussed on process issues, and the impact of partnerships on improving outcomes cannot be assumed. By conducting a critical review on most updated research studies and innovative approaches in this area, the literature as to the place of PPPs in health in the context of the UK is critically explored and whether they have a role in system resilience is examined. A case study has be used as well to describing the processes of a PPP arrangement.

Health-care PPP is one of the options relating to health system resilience. However, their contribution in the NHS has been mixed, with success noted in short-term clinical and services contracts while in the long-term the value for money argument has not been proven. In theory, the role of PPPs in bringing together ingredients supporting system resilience such as finance, management and innovation in the UK has not always been successful, and NHS providers have taken the approach to exit such arrangements.

Research limitations/implications

More research work is needed to capture the 21st-century challenges and critical success factors during its implementation.

Practical implications

The creation of strong partnerships is moving service delivery away from a project-by-project approach to one that includes strategic and policy developments for long-term results.

Originality/value

This is a fresh discussion in the role of PPP in system resilience in the UK perspective through a case study describing an exit from a PPP arrangement.

  • Public–private partnerships
  • Policy development

Adamou, M. , Kyriakidou, N. and Connolly, J. (2021), "Evolution of public-private partnership: the UK perspective through a case study approach", International Journal of Organizational Analysis , Vol. 29 No. 6, pp. 1455-1466. https://doi.org/10.1108/IJOA-08-2020-2397

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COVID-19 and the impact on Public-Private Partnerships in the UK

United Kingdom |  Update |  March 2020

Introduction

Will project companies suffer deductions for service performance failures or unavailability, isn’t this all just covered by force majeure, could this be an emergency under the project agreement, is there any possibility of relief under the project agreement, what impact will this have on my financing arrangements, impact on supply chains, will insurance cover the losses, next steps.

Across the Republic of Ireland, schools, pre-schools and higher education settings have been closed from 12 March for a period until 29 March 2020, to support efforts to contain the spread of COVID-19.  It is likely, given the announcement by the UK Government that it is moving to the delay phase of managing the spread of the virus, that similar action will be taken in the UK in the coming weeks and that such action may not be limited to the education sector, with healthcare and aged care also likely to be affected.  Other projects are also likely to be impacted as social distancing increases.

With increased concern around the impact of COVID-19, PPP project companies and sponsors need to consider the implications for their rights and obligations under the project agreements to which they are party. The current situation with COVID-19 in the UK is fast moving and we cannot predict what measures will be imposed as Authorities seek to address the risk, but we flag below some questions we’ve been considering this week. Our responses are based on the standard drafting in SOPC and PF2-based project agreements.

Where there has been no specific action taken or instruction given by the authority but the services cannot be provided as required because, for example, staff are taken ill or are told to self-isolate then relief is unlikely to be granted for any unavailability or service performance failures which arise as a result.

The standard definition of force majeure events in SOPC or PF2-based project agreements does not extend to this type of event.

A COVID-19-related shut-down or service failure is unlikely to constitute an emergency under the project agreement, given that this definition is intended to apply to a short-term emergency, requiring mobilisation of emergency services.

Depending on the sector and any action taken by the authority, protection may be available under the provisions relating to compensation events, authority step-in, relief events or excusing provisions in the payment mechanism. Change in law may also be relevant depending on project agreement terms and steps taken by the UK Government.

If deductions are made as a result of service performance failure or unavailability and no protection is available, this will have an impact on a project company’s ability to meet scheduled debt repayments under their financing arrangements. The market is alert to this issue and we expect borrowers and lenders to work together to agree a sensible approach. 

For demand-based projects we might expect significant impact on footfall on roads and transport systems as people are encouraged to work from home or if European models of entire city lockdown is followed. All project stakeholders will be concerned to manage the cashflow implications of a sudden and prolonged drop in project revenues.

The immediate subcontracts usually contain similar back–to-back provisions to the SOPC contract however, supply chain contractors lower down the chain may have the more usual commercial force majeure protections in their contracts. Project companies and their immediate subcontractors may need to prepare to deal with the non-performance of their suppliers in the near- or medium-term as the financial effects of the current circumstances are felt by the economy.

The usual “required insurances” on SOPC projects are unlikely to respond to claims related to personnel not being available to perform the services. However, policies should be reviewed and insurance advisers consulted.

  • In the first instance, assume that the provision of services should continue as normal.
  • Engage with the authority to identify the issue and agree how to deal with it under the project agreement.
  • Keep funders informed of communications with the authority and any likely deductions or protection that may be available. 
  • Please get in touch if you require any specific advice on your project.

Mark Berry

Practice areas:

  • Public-Private Partnerships (PPP)
  • Debt financing
  • Banking and finance

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Exploring Top 10 Pioneering UK-Wide PFI/PPP Projects with Influential Legal Minds

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In the ever-evolving business world, Public Finance Initiatives (PFI) and Public-Private Partnerships (PPP) projects have gained considerable momentum in the United Kingdom and beyond. Government bodies and corporations alike are increasingly relying on such investment methods to finance and implement infrastructure projects. Integral to the successful delivery of these projects are lawyers with special expertise in PFI/PPP issues. In this article, we shine a spotlight on a few such notable lawyers across the UK who have made a significant impact in this sector.

Charlotte L Morgan – Linklaters

Charlotte Morgan, an acclaimed energy lawyer working with Linklaters is renowned for her proficiency across both project financing and regulatory matters in the power sector. She exhibits particular expertise in assisting clients with projects in the nuclear space.

Mark Elsey – Ashurst

Ashurst’s Mark Elsey is highly esteemed for his profound experience in PFI/PPP transactions. He routinely assists funders and municipal authorities with transport and infrastructure matters.

Stephen Gummer – Sharpe Pritchard LLP

Working for Sharpe Pritchard LLP , Stephen Gummer is a seasoned advisor when it comes to projects in regulated industries, including water and district heating. He regularly advises clients on structuring public sector projects with private finance elements.

Andrew Gallagher – Hogan Lovells

Hogan Lovells’ Andrew Gallagher is highly regarded for his expertise in major domestic infrastructure projects, often assisting clients with the development and expansion of PPP and PFI developments in the transport and energy sectors.

James Snape – CMS

At CMS , James Snape is distinguished for his advice on a variety of PFI and PPP transactions, particularly focusing on waste-to-energy projects. In addition to his advisory role, he also serves as co-head of the firm’s projects department.

Simon Mumford – Pinsent Masons

Working for Pinsent Masons , Simon Mumford’s particular experience lies in the waste and biomass sectors. He concentrates particularly on waste-to-energy PFI projects.

David Lee – Allen & Overy LLP

Currently the chairman of Allen & Overy LLP’s global energy resources and infrastructure group, David Lee is known for advising both sponsors and borrowers on the acquisition and financing of infrastructure projects involving both domestic and international transport and energy assets.

Logan Mair – Ashurst

One half of the London office managing partnership at Ashurst is Logan Mair. Bringing a wealth of practical experience to the table, Mair is particularly proficient when it comes to new PPP projects and reconstructing existing contracts, especially in relation to waste-to-energy and transport infrastructure projects.

Alex Carver – Eversheds Sutherland

Representing Eversheds Sutherland , Alex Carver is sought after for his expertise in PFI and PPP projects and infrastructure developments. He brings to the table experience across the natural resources, healthcare, and transport sectors.

Mark Berry – Norton Rose Fulbright

Norton Rose Fulbright’s Mark Berry possesses rich experience in PPP work across a variety of sectors including mining and energy. He is equally adept at handling domestic and international mandates.

Each of these lawyers showcases a commitment to excellence and dedication to their work that is commendable. Their work within the PFI/PPP sector is setting a high bar, paving the way for the future in these intricate, yet vital, infrastructure and development projects.

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Assessing Value for Money of the PPP

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A key objective of governments in implementing PPPs in infrastructure is to achieve value for money (VFM). Value for money means achieving the optimal combination of benefits and costs in delivering services users want. Many PPP programs require an assessment of whether a PPP is likely to offer better value for the public than traditional public procurement—often called value for money analysis .

A VFM analysis can be done for a specific PPP project, and at a program level, for projects with common characteristics. For example, the United Kingdom Treasury's manual on assessing value for money ( UK 2011b ) described how value for money should be assessed at both the program and project levels (that methodology was later considered biased and recalled by government).

VFM analysis typically involves a combination of qualitative and quantitative approaches. Qualitative VFM analysis consists of sense-checking the rationale for using a PPP. This involves asking whether a proposed project is of a type likely to be suitable for private financing, and whether the conditions are in place for the PPP to achieve value for money—for example, that the PPP has been structured well, and that competitive tension is expected during the bidding process. This often takes place at a relatively early stage of PPP development—as such, qualitative VFM analysis may constitute part of the PPP screening described in Screening for PPP Potential .

Some PPP programs also require quantitative assessment of value for money. This typically involves comparing the chosen PPP option against a Public Sector Comparator (or PSC )—that is, what the project costs would look like if delivered through traditional procurement. This comparison can be made in different ways. The most common is to compare the fiscal cost under the two options—comparing the risk-adjusted cost to government of procuring the same project through traditional procurement, to the expected cost to government of the PPP (pre-procurement) or the actual PPP bids (post-procurement). An alternative is to compare the two options with an economic cost-benefit basis —that is, to quantitatively weigh the expected benefits of a PPP over traditional procurement against its additional costs.

Value for money analysis—particularly using quantitative public sector comparator methodologies—has been widely debated. Some question the value and relevance of a PSC approach, which can appear to be more scientific than is the case, potentially misleading decision-makers; or conversely, may simply come too late in the process to be a genuine input to decision-making. A World Bank report on Value for Money ( WB 2013a ) analysis presents evidence on practices from several countries, and on trends regarding the scope of value for money analysis and the relative advantages of quantitative and qualitative approaches.

For more discussion on approaches to assessing value for money, and their relative advantages and disadvantages, see also:

  • Farquharson et al's section on selecting projects ( Farquharson et al. 2011 , 41–43), which briefly describes value for money and cost benefit analysis, and considers the value of qualitative versus quantitative approaches.
  • Grimsey and Lewis's article on PPPs and Value for Money ( Grimsey and Lewis 2005 , 347–351) includes a section on approaches to value for money describing examples of different countries' approaches.
  • The OECD's publication on PPPs ( OECD 2008a , 71–72), which also describes the range of methods used by different countries, on a spectrum of complexity, from simply relying on competition, to full cost-benefit analysis of different procurement options.
  • The PPIAF Toolkit for PPP in Roads and Highways has a section on value for money and the PSC ( WB 2009a ), which describes the logic behind value for money analysis, and how the PSC is used.
  • The European PPP Expertise Centre (EPEC) value for money assessment report ( EPEC 2015 ) outlines and compares value for money assessment methodologies in several European countries.

The remainder of this section briefly describes and provides further resources for readers on qualitative and quantitative value for money assessment methodologies.

Qualitative value for money assessment

Qualitative VFM analysis involves sense-checking the rationale for using PPP as a delivery mechanism—that is, asking whether a proposed project is of a type likely to be suitable for private financing; as well as whether the conditions that are necessary to achieve value for money are in place, as described in Farquharson et al , ( Farquharson et al. 2011 , 42–43). This often takes place at a relatively early stage of PPP development—as such, qualitative VFM analysis may overlap with the PPP Screening process described in Screening for PPP Potential above—but may be repeated throughout the project development process.

Some jurisdictions have clearly-defined criteria for this analysis. For example:

  • The UK Treasury has defined criteria for assessing suitability, and unsuitability, for a Private Finance Initiative (PFI)—the UK’s availability payment PPP model. Suitability criteria include the long-term, predictable need for the service; the ability to allocate risk effectively—including through performance-related payments and ensuring sufficient private capital at risk; the likely ability of the private sector party to manage risk and take responsibility for delivery; presence of stable and adequate policy and institutions; and a competitive bidding market. Unsuitability criteria include projects that are either too small or too complicated; sectors where needs are likely to change or there is a risk of obsolescence (for example, PFI projects are no longer used in the ICT sector in the UK); or where the contracting authority is inadequately skilled to manage PPP ( WB 2013a ).
  • In France , preliminary analysis of a PPP includes checking against several criteria under three categories: PPP relevance—for example, appropriateness of an integrated, whole-of-life approach to managing a project; commercial attractiveness; and the potential for optimal risk allocation ( WB 2013a ).
  • In the Commonwealth of Virginia, United States , assessment of a potential PPP at high level and detailed screening stages also considers proposed road projects against specific criteria to determine if the project is delivered under the Public-Private Transportation Act (PPTA)—that is, as a PPP. These criteria include whether a project is sufficiently complex to benefit from private sector innovation; whether a PPP can achieve appropriate risk transfer; and the degree of stakeholder support. The extent to which a project can generate revenues from tolls is also taken into consideration when assessing possible PPP structures ( WB 2013a ).
  • The Caribbean PPP Toolkit ( Caribbean 2017 , Module 4, Section 8) presents Jamaica ’s methodology for assessing value for money, and other globally-relevant guidance.

The EPEC Guide to Guidance also includes a list of key conditions that should be met to have a higher probability of achieving value for money ( EPEC 2011b , Chapter 1.2.4).

Public Sector Comparator—comparing fiscal cost

The most common quantitative tool for value for money assessment of a PPP project is derived from the approach originally used in the United Kingdom's PFI program in the early 1990s as described in Leigland and Shugart's Gridlines article on the PSC ( Leigland and Shugart 2006 ). It involves comparing the fiscal cost of a PPP delivery option with that of a conventional public delivery option—not a single conventional option, but a range of infrastructure options as noted in the 2011 Treasury Guidance on Valuing Infrastructure Spend ( UK 2015a ). NAO evidence presented in the House of Commons 2014 report ( UK 2014a ) discusses several shortcomings in the identification of PSCs.

The focus of the Fiscal Cost approach to value for money analysis is the construction of a PSC—the cost to government of implementing the project through traditional public procurement. Calculating the PSC can be complicated, as several adjustments are needed to ensure a fair comparison. How the Public Sector Comparator is calculated , highlights some methodological debates.

This type of PSC can be used at two stages of the procurement process, as described in the OECD book's chapter on the economics of PPPs ( OECD 2008a , 71–72). These are:

  • Before the bidding process —the PSC can be compared with a shadow or reference PPP, or market comparator—a model of the expected cost of the project under the PPP option. This can help identify whether the PPP can be expected to provide value for money, before deciding to go ahead with detailed preparation and procurement. The reference PPP model would be the same as the financial model described in Assessing Commercial Viability .
  • During the bidding process —the PSC can also be compared with actual PPP bids received, to assess whether the bids provide value for money. This approach is used in Australia , and is described in a PSC Technical Note ( AU 2016a ).

Despite the appealing logic of the concept, there have been many criticisms of the usefulness of the PSC and fiscal cost comparison approach in countries where it has been used frequently, such as the United Kingdom and Australia. A United Kingdom House of Lords' review of the PPP program ( NAO 2013a ), for example, argued that shortage of relevant data and methodological issues limit the value of the PSC. The government's response to the review agrees that the PSC provides only a partial picture, and highlights that its use is balanced with qualitative analysis, as described above.

Leigland and Shugart's Gridlines article on the PSC ( Leigland and Shugart 2006 , 2–3) summarizes these criticisms, which include the inevitable inaccuracy of estimates over a long-term project, lack of consensus on methodology, and so the possibility of manipulation to reach the desired conclusion. Grimsey and Lewis ( Grimsey and Lewis 2005 , 362–371) describe some of these criticisms in more detail. Given these challenges, Leigland and Shugart's Gridlines article ( Leigland and Shugart 2006 , 3–4) also discusses whether and how the PSC approach could make sense in a developing country context.

Calculating a PSC can be complex. The starting point is typically the best estimate of the capital cost and lifetime operations and maintenance cost of implementing the project under public procurement. This is typically adjusted, to enable a fair comparison between the PSC and the PPP. The Infrastructure Australia guidance note on PSC ( AU 2011b , Section 2.3) describes two types of adjustment:

  • Risk adjustments —one of the main differences between traditional procurement and the PPP approach is that the PPP transfers more risks to the private party. The return on investment expected by the private party will consider these transferred risks. This means that to make a fair comparison, the PSC should also consider the cost of these risks.
  • ‘Competitive neutrality’ adjustments —a public sector project or enterprise may have cost advantages or disadvantages compared to a private company, which creates costs or benefits to the government that are not normally considered when considering the cost of a traditionally procured project. For example, the tax liabilities under the two options may be different. These differences should be corrected for in calculating the PSC.

There are also differences in the timing of payments between the PPP option—where payments are often spread over time—and traditional procurement, where the government must meet construction costs upfront. The streams of payments are usually converted into net present values , to give a single value for comparison. This requires defining the appropriate discount rate to apply to future cash flows in both the PPP and PSC models.

The following provide further descriptions and examples of how the PSC is used and calculated in different countries:

  • The Treasury of the United Kingdom’s detailed guidance for quantitative PSC assessment was recalled in 2013, and guidance on qualitative assessment was developed.
  • South Africa’s PPP Manual’s module on the PPP Feasibility Study includes a detailed description of how to calculate and use the PSC ( ZA 2004a , Module 4, 17–49).

Methodological differences and challenges

Although the PSC has been widely used, the methodology differs between countries, and there is ongoing debate on several methodological points. For example, Shugart’s article on the PSC ( Shugart 2006 ) highlights two related issues: which is the appropriate discount rate to use when calculating present values, and how the cost of risk should be considered. Grimsey and Lewis ( Grimsey and Lewis 2004 ) and Gray, Hall and Pollard ( Gray et al. 2010 ) both focus on the choice of discount rate, and its relationship with risk allocation under PPP and traditional procurement. In IFC’s report on lessons learned ( IFC 2010 , 7-13), José Luis Flores presents a concrete case of “value for money” assessment.

Some countries in Latin America, such as Colombia and Peru, have developed guidelines for implementing the PSC methodology. However, due to lack of capacity and or trustworthy information to implement such a complex methodology, none of these countries have implemented the full methodology in practice.

The World Bank report on Value for Money assessment practices ( WB 2013a , 23–28) reviews methodological evolution and practices in several governments with significant PPP experience, including the United Kingdom, France, India, Chile, the U.S. state of Virginia, and British Columbia, Canada.

Economic cost-benefit comparison of PPP and public procurement

One of the criticisms sometimes leveled at the PSC is that it focuses solely on the financial cost to government of PPP or traditional procurement. A more comprehensive approach would also consider the differences in expected benefits, and compare the net economic benefit under PPP or under public procurement. On the other hand, as Grimsey and Lewis note ( Grimsey and Lewis 2004 , 353), this adds further complexity to the value for money analysis over the PSC approach, and could risk making the results even more subjective.

For example, the EPEC's note on non-financial benefits of PPP ( EPEC 2011c ) suggests how some of the benefits of PPP—as described in Infrastructure Challenges and How PPPs Can Help —could be quantified, and added to a more typical PSC analysis.

Few countries have introduced this kind of analysis in practice. New Zealand 's new PPP program is an exception. Cost-benefit analysis is the main tool for assessing procurement options. New Zealand's PPP guidance material ( NZ 2016 , 6–12) asks practitioners to identify the possible benefits of PPP over traditional public procurement and where possible to assign dollar values to each benefit.

In many developing countries' PPP programs, the aim is not just to reduce cost, but to transform service delivery. For example, governments hope that roads will be better maintained, thus delivering additional trade and economic benefits. These changes in service levels and quality cannot be captured by comparing fiscal costs of PPP and public procurement. Where these expected benefits are deemed important, and quantitative value for money analysis is desired, economic cost-benefit analysis may be the better approach.

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Updated: June 24, 2022

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