Public Sector Comparator in Public-Private Partnerships

Introduction

Integration is one of the more pervasive concepts of modern society. It is pursued at numerous levels, with one of the most relevant examples being globalization. The opening of borders and the lifting of barriers allow economic activities, business operations, political views, technological developments, social norms, and other values to migrate from one region to another. In this migration, values and lifestyles interact and become integrated.

Economic integration is also highly relevant and is evident in the unions and alliances that have been formed, such as the European Union or the North American Free Trade Agreement. Within these unions and agreements, the parties become integrated beyond the purely economic sphere.

Integration is not limited to the international community, however — it often becomes a goal of domestic agencies as well. A significant example of this is represented by situations in which players from the public and private sectors come together to collaborate and achieve mutual goals.

Partnerships between the public and private sectors are extremely complex, combining diverse features and sometimes even different objectives. Nevertheless, they are often the most viable solution for completing a given project. Managing such projects is compound and requires specific tools. One of these tools is the public sector comparator (PSC), a mechanism by which partnerships between the state and private players are assessed. The purpose of this paper is to assess the PSC, but in order to do so it is first necessary to examine public-private partnerships more broadly.

At a basic level, a public-private partnership is a collaboration between a state agency and one or more players in the private sector. The collaboration revolves around the attainment of a common goal and the combined use of resources from both sources. For instance, the government could provide expertise and a labor force, while the private party could provide financial resources and technology.

Understanding Public-Private Partnerships

Virtually any type of collaboration is possible between public and private partners, and the details of each partnership are subject to individual agreements and contracts. Public-private partnerships are not novel innovations within economic and political contexts — they have existed for at least two centuries. Still, they have become increasingly popular in recent years. Within emerging economies, for instance, a market for PPPs is currently developing. In Korea, the public sector has become more decentralized and partnerships with the private sector are increasingly common. The country continues to face political, social, and economic challenges, yet PPPs constitute one important source of development (Organization for Economic Co-operation and Development, 2005).

Public-private partnerships differ from other types of collaboration between state and private institutions primarily because the scope of the collaboration is to provide a public service, and because the two parties share risk at higher levels. From this standpoint, H. K. Yong defines the public-private partnership as follows:

"A PPP is a long-term commercial arrangement for the delivery of public services, where there is a significant degree of risk-sharing between the public and private sectors" (Yong, 2010, p. 7).

Public-private partnerships are characterized by numerous features that make them applicable within the modern setting. Some of these notable characteristics include the following:

Public-private partnerships differ from one contract to the next, but trends are observed across various global regions. In countries with strong public-sector traditions, the public sector tends to dominate in PPPs, whereas in states with a weaker public sector, the private party is more dominant in the partnership. In the United States, autonomy falls primarily with the private sector, whereas dominance lies with the public sector in European countries. In the U.S., the relationship between the public and private sectors is described as strong and stable, whereas in European countries it is characterized as weaker and more dependent (Bult-Spiering and Dewulf, 2006).

Due to the benefits they offer, public-private partnerships are often appealing to all parties. Yet the actual implementation of a project is often complex and difficult. Public and private agents must decide upon a multitude of strategic issues, including the selection and delivery of the project, the transparency of the project, and the terms of the PPP agreements. Each of these decision categories is subdivided into more specific issues. For instance, decisions to be made in terms of project selection and delivery include the following:

Regarding the terms of PPP agreements, some of the more notable decisions revolve around the following:

Finally, in terms of transparency, the issues upon which decisions must be made include the levels of public participation, the adequacy of legislative oversight, and the "perceptions of foreign control of domestic assets and the role of local contractors" (Buxbaum and Ortiz, 2009, p. 11).

Overall, public-private partnerships are complex agreements signed between public agencies and private players, with the ultimate goal of providing a public service. While the theory of PPPs may appear accessible, the actual implementation of projects is highly intricate and requires numerous tools. One such tool is the public sector comparator, which is addressed in the following section.

The public sector comparator was created to support the decision-making process for public-private partnerships. The tool is used before the actual agreement is signed and launched, and its purpose is to assess the project's ultimate worth. Specifically, once the decision has been made regarding the need for a project (i.e., a public service), a further decision must be made as to whether it is worthwhile to complete that project through a public-private partnership.

The underlying question at this stage is whether the PPP offers good value for money compared to the value that would be offered if the project were completed by the public institution alone. In other words, the public sector comparator takes a comparative look at the costs and values of the project under a PPP arrangement versus the same variables in the case of a purely public project. Yescombe defines it as follows:

The Public Sector Comparator: Definition and Components

"A PSC is an assumption of what the NPV cost (sometimes known as the net present cost (NPC)) of the project would have been had it been acquired through a conventional public-sector procurement, which is then compared with the NPV cost of the PPP. The latter may also be estimated, or it may be known if bids have been received for it" (Yescombe, 2007, p. 62).

The public sector comparator is therefore the estimated value of the project when completed without the PPP — it represents the alternative. From a financial standpoint, the net present values of the two options are compared and decisions are made accordingly:

NPV of PSC > NPV of PPP → proceed with PPP
NPV of PSC < NPV of PPP → proceed with PSC (public procurement)

If the net present value of the public sector comparator is higher than the net present value of the public-private partnership, then the PPP is justified and represents the appropriate course of action. If, on the other hand, the net present value of the public sector comparator is lower than that of the PPP, then the PPP is too expensive and ineffective and does not represent the adequate solution for providing the public service (Grimsey and Lewis, 2007).

The public sector comparator identifies the value for money of the project in the case where it would be completed by the state alone. To attain this objective, it implements four specific components:

a) The Raw PSC
The raw public sector comparator represents the base cost of delivering the services as specified in the project brief under the public procurement method. Under these conditions, the asset or the services are fully owned by the public institution.

b) The Competitive Neutrality Adjustment
The competitive neutrality adjustment is a mechanism by which the net advantages and disadvantages of the public sector are eliminated, so that the comparison between the two options is more objective.

c) The Transferable Risk
The transferable risk refers to the assessment of all risks that would otherwise be assumed by the state but that could be transferred to the private partners through the use of a public-private partnership.

d) The Retained Risk
The retained risk refers to a situation in which the risks likely to be assumed by the government are added to the bidders' costs in order to make a true comparison of the risks, the bidder capabilities, and the benefits for the state (Duncan, 2005).