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Public Private Comparator
Public Sector Comparator (PSC) in the Public-private partnership (PPP) Process
Increased global financial pressures have caused many government entities to cut costs in any way possible. One way is to outsource services or projects to private companies. However, when comparing costs, the public sector frequently bases its cost calculations for a project by omitting certain types of factors. These can include employee benefits, utilities, or total administrative costs. As result, public sector services may erroneously appear to be less expensive than private services. The public cost comparator (PSC) provides a better comparison of the costs of public and private services. If the private sector can provide services cheaper than the public sector, then the public sector may choose to engage in a public -- private partnership (PPP). This allows them to share the costs, benefits, and risks of the project.
More than one method exists for comparing public and private job costs. Several factors that must be considered in the comparison are the discount rate, risk factors, and total costs of the project. In many cases, the discount rate will be lower for the public sector because they already have the infrastructure in place. This research will discuss various methods for calculating the public cost comparator and the effect of public-private partnership framework on the ability to lower costs through outsourcing public services.
Defining Concept: PPP
What is PPP?
The public-private partnership is a funding method whereby private companies and government entities form a partnership to carry out infrastructure improvement projects. The PPP offers several advantages over traditional funding methods. The PPP avoids the need to raise taxes. PPP projects do not raise government debt. They transfer some of the risk away from the government and the use of public funds (Nisar 2007). PPPs offer many options that are not available under traditional infrastructure improvement models. It has been found that private companies are often not interested in low-dollar projects. They are interested in larger projects. For instance, they will often be interested in building a new building, but they will not be interested in the upgrade of an existing building (Nisar 2007). The PPP arrangement can deliver better services through combining the best that the public and private sectors have to offer (Nisar 2007).
It is important to understand that PPPs differ from privatization. The distinguishing difference between these two terms is that the PPP focuses on partnership. However, some disagree with the use of the term "partnership" as they argue that partnerships usually share the same objectives. In the PPP both the private and public sector do not share the same objective. The objective of the private sector is to turn a profit, while the objective of the public entity is to provide a service (OECD 2008). Utilizing the PPP, the realization of the objectives of one party leads to the accomplishment of the objectives of the other party, but the two are not the same. This contrasts with traditional procurement means, where the objectives of both the supplier and other government entities are the same. In this case, the objectives of both parties are to provide a public service.
The PPP is an agreement between a government agency and one or more private partners. In order to be of benefit to both partners the planned project must meet both objectives of profit for the private partner and service delivery for the government entity. The government has the responsibility of stewardship of public funds and must accomplish service delivery in the most effective and efficient manner possible, regardless of the procurement process chosen (OECD 2008). The public-private partnership can only occur if the criteria for each entity are met in the project plan and design.
The most typical form of PPP is where the private partners designed, build, finance, operate, and manage the capital asset. They may deliver the final service either to the government or to the end users (OECD 2008). The private partner may receive a stream of payments from the government, or charges levied directly to end users. The government sets the standard for the quality and quantity of the end product. Payments may depend on the ability of the private partner to deliver the quality and quantity of services requested. Private partners assume a considerable amount of risk, in that they must ensure that the project operates smoothly and efficiently according to government standards. The public-private partnership can develop in many different forms. These include the build-own-maintain, build-own-operate, build-develop-operate, design-construct-manage-finance, design-build-operate, buy-build-operate, build-rent-own-transfer, build-transfer-operate, and many others (OECD 2008).
The significance of these different forms of the PPP are important in an understanding of the Public Sector Comparator. If each of these different forms of the PPP will have an affect on the accuracy of the public sector comparator and its ability to provide a realistic comparison between public and private funding of a project. The most important aspect to understand about the Public Sector Comparator is that many variables will have an affect on its accuracy and reliability. There is no single answer as to which of the factors should be included in the public sector comparator and how much weight they should be given. The public sector comparator has both quantitative and qualitative aspects, each of which must be considered for the proposed partnership. There is no "magic formula" that represents the best answer for the public sector comparator to utilize. Each project is different and has different parameters. Choosing the proper form of the public sector comparator can be a daunting task, but it is one of the most important factors if government entities wish to maintain efficient and effective use of public funds.
Global Perspective: UK, Australia, USA, Germany, Korea
Australia and the United Kingdom were among the first to adopt PPP strategies. However, France, Germany, Ireland, Italy, Japan, Korea, Portugal, Spain, Turkey, Argentina, Brazil, South Africa and others soon began to see PPP as a viable strategy for funding public projects (OECD 2008). The introduction of PPP into the government infrastructure raised several questions, one of which was whether the introduction of private entities into the public sector would create political problems. Those countries who wished to engage in the PPP process saw a need to develop clear legal framework and policies to ensure that sufficient capacity existed to manage the projects and that private entities did not gain control of some portion of the government (OECD 2008).
Many government agencies set up dedicated public-private partnership units to help with organization, set up or to help the government ensure that all provisions necessary are provided to the private entity to complete their task (OECD 2010). Seventeen OECD countries have dedicated public-private partnership units at a national level. The 17 countries are Australia, Belgium, Canada, Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Netherlands, Poland, Portugal, and the United Kingdom. However, not all countries choose to have this type of unit at a national level. Tthe 12 countries that do not have a public-private partnership unit on a national level are Austria, Finland, Iceland, Luxembourg, Mexico, New Zealand, Norway, Slovak Republic, Spain, Sweden, Switzerland, and the United States (OECD 2010).
In addition to different methods of managing public-private partnerships, countries also have different definitions of public-private partnerships. For instance, Korea defines a public-private partnership project as a project to build and operate infrastructure which has been traditionally constructed and run by government funding (OECD 2010). The United Kingdom defines a public-private partnership as "typified by joint working between the public and private sectors" (OECD 2010: 22). They further define the PPP by the types of projects that they can cover. The most common definition is that it must be one involving an investment of assets in a public project on a long-term basis between 15 and 30 years (OECD 2010). In this State of Victoria, Australia, a public-private partnership relates to the provision of any ancillary service that involves private investment or financing of more than a minimal monetary amount.
Throughout the world, PPPs account for varying percentages of infrastructure investment. Mexico and Chile utilize the greatest percentage of PPP infrastructure projects at >20%. Korea and New South Wales utilize between 10-15%. The UK, Czech Republic, Slovak Republic, Greece, Italy, South Africa, and Ireland utilize between 5-10%. The lowest usage of PPP infrastructure projects are undertaken by Austria, Germany, Canada, Denmark, France, Netherlands, Hungary, Norway and Spain at less than 5% (Burger & Hawkesworth 2010). Traditional procurement (TIP) is still the most widely utilized method for funding public projects and it is also the default mode of procurement. Many countries lack criteria to identify how projects are chosen as PPP or TIP candidates (Burger & Hawkesworth 2010).
In the State of Victoria, Australia the public-private partnership relates to the provision of infrastructure and related services which involve private investment or financing with a present value of payments for service to be made of more than AUD 10 million (OECD 2010). South Africa defines the…[continue]
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The assessment becomes biased, especially when a PSC is compared to the PPP bid of a willing company. Moreover, if un-affordability and budgetary limits exclude traditional procurement, the project will not progress. This is the case when the submitted bids do not reflect value for money and there is no delivery. This situation and the strong desire to deliver may indicate an inclination to bias the PSC to make
If, on the other hand, the net present value of the public sector comparator is lower than the net present value of the public-private partnership, then the PPP is too expensive and ineffective and it does not represent the adequate solution for the provision of the public service (Grimsey and Lewis, 2007). The public sector comparator identifies the value of money for the project in the case in which it