Public-Private Partnerships (PPP) were hype before the crisis. Even if they have seen a reduction of risk capitals in the last couple of years, they remain a powerful instrument for infrastructure development. They need to be managed with caution though.
Here a list of Good practices in the public-private partnership process:
1. Affordability and value for money are the benchmarks for PPP viability. In principle, affordability is about whether or not a project falls within the intertemporal budget constraint of the government. If it does not, then the project is unaffordable.
2. Value for money must be the primary objective in PPP design. Value for money is the optimal combination of quality, features and price, calculated over the whole of the project’s life. A PPP project yields higher value for money compared to traditional procurement or government in-house
production if it provides better features, higher quality or lower whole-of-life cost. Higher value for money is mainly obtained through risk transfer, competition and the use of private sector management skills.
3. Fiscal rules and expenditure limits. The issue of affordability – and hence the necessity for the government to operate within the boundaries of its inter-temporal budget constraint – should not be confused with fiscal rules, medium-term expenditure frameworks or budgetary limits imposed either legally or as political commitments. Getting a PPP project off the books is not a valid argument for taking the PPP route.
4. Risk sharing plays a fundamental role in whether or not a PPP will yield value for money. As risk is an important part of the incentive mechanism for the private partner to be as efficient as possible, risk sharing is a key feature for a successful PPP. In general, risk must be carried by the party best suited to carry it, i.e. the party that can carry the risk at least cost. Thus, efficiency
improves through adequate risk sharing. The way risk is shared between the government and the private partner is also the key feature when classifying a project as a PPP or as traditional procurement
5. Competition and contestability are key elements to ensure the effective transfer of risk to the private partner. Aspects include competition for the market (i.e. in the bidding process) as well as competition or contestability in the market once the contract is concluded and in operation. In the absence of competition, effective risk transfer will not occur, which in turn means that the intended value for money improvements will not be realised.
6. PPPs, budget documentation and transparency. Budget documentation must disclose all information on PPPs in a transparent way. The information should include what and when the government will pay, and full details of guarantees and contingent liabilities. The information should preferably be disclosed at the same time as the results of the long-term fiscal analysis that
shows the long-term effects of PPP contracts.
7. Regulatory and legal framework. Normal procurement legislation is often inadequate for public-private partnerships. During all stages of the PPP process, there must be a clear and transparent legal framework that both parties trust. Clarity in the regulatory framework will also help minimise the risk of corruption and prevent unethical behaviour. Where possible, contracts
can be standardised to improve clarity and to reduce transaction costs. In addition, as PPP contracts are long-term commitments and as demand for public services may change, clear rules for renegotiation must be applicable to all parties.
8. Institutional capacity: the PPP unit. To ensure efficient public-private partnerships, the government needs proper institutional capacity to create, manage and evaluate them. There is also a need for capacity to provide expertise and support to public parties engaged in public-private
partnerships. A PPP unit can fulfil these functions. It should be equipped with expertise to set up and negotiate PPP contracts and to support public bodies responsible for projects in the PPP process.
9. Public sector comparator. A public sector comparator will improve the scrutiny of PPP projects and improve the assessment of value for money.
10. Political support is necessary from the highest level and preferably also across party political lines, as PPP contracts usually last longer than the elected term of governments.
The list is taken from the OECD study ‘Public-Private Partnerships – In pursuit of risk sharing and value for money’ (2008). Check the bibliography at the end: it is exhaustive.
