This paper examines the Public Sector Comparator (PSC) as an assessment tool within public-private partnership (PPP) procurement. It outlines the four core elements of a PSC — raw PSC, competitive neutrality, transferable risk, and retained risk — and describes the characteristics that define a valid comparator. The paper also discusses the shadow bid model used to monitor affordability and value for money throughout procurement. Drawing on international experience from Australia, the United Kingdom, and developing countries, the paper evaluates the strengths and limitations of PSC as a benchmarking instrument, including concerns about manipulation, discount rate selection, optimism bias, and budgetary constraints.
A proposed public-private partnership (PPP) is assessed to hypothetically determine its monetary value as a basic component of the procurement process. This assessment consists of comparing the proposed PPP with the cost of the project on a like-for-like basis using the Public Sector Comparator (PSC). The PSC represents the net cost to government if it undertakes the project through a more traditional method, such as design and construct.
The PSC consists of forecast lifetime cash flows developed according to the specifications given to bidders. It also allows for project risks, such as increases in construction costs. Once private sector bids are received, the value of the project to the taxpayer can be assessed. The PSC is based on generally accepted economic theory and financial evaluation techniques (Partnerships Victoria 2001).
The four core elements of the PSC are transferable risk, competitive neutrality, raw PSC, and retained risk (Partnerships Victoria 2001). Together, these elements clarify the construction process and represent the full and true cost to the government in achieving the output specified in the public procurement delivery method.
The raw PSC includes the expected capital and operating costs to government over the entire duration of the project, before considering risks. These costs encompass direct capital costs, capital receipts, maintenance and life-cycle costs, direct operating costs, indirect costs, and third-party project revenues. The raw PSC excludes any valuation of risks to which the government is exposed (PPP 2011).
Adjustments under this core element eliminate possible net competitive advantages that a government business may have because of public ownership (Partnerships Victoria 2001). Competitive neutrality puts government business on the same equitable level as a PSC and private bidders. This is achieved when the procurement team reviews all details of the project and the market, and identifies significant advantages or disadvantages to government under a public sector delivery method.
Transferable risk is risk that is likely to be transferred to bidders under a Partnerships Victoria arrangement (Partnerships Victoria 2001). The transfer occurs when the bidder is the party most capable of managing the risk at the least cost. Transferable risks must be assessed on a project-by-project basis, as partners develop more effective risk management and mitigation expertise over time.
Retained risk is the risk that government is willing to accept — any risk not transferred to a bidder under a Partnerships Victoria model (Partnerships Victoria 2001). The cost of retained risk provides a comprehensive measure of the full cost to government. When included in the PSC, the value of a retained risk should be added to every private bid for comparison purposes.
The PSC is the net present cost (NPC) of the projected cash flow, calculated according to a specified government discount rate over the required contract life (Partnerships Victoria 2001). It is based on the most recent or most efficient public-sector delivery method used for similar services. It includes competitive neutrality adjustments, which deter financial advantage by either sector over the other.
The PSC contains a realistic assessment of all reasonable, expected, material, and quantifiable risks to bidders. It also contains an assessment of material risks reasonably expected to be retained by government. Importantly, the PSC presents only a hypothetical rather than an actual projected cost to government. This concept should guide the entire funding allocation process and the duration of revising the contract after it is awarded (Partnerships Victoria 2001).
On the other hand, a PSC is not an estimate of the cost of private sector delivery or probable savings from the partnership (PPP 2011). It does not adjust for any consequent innovation on the part of the private sector, and it is not solely based on the current delivery costs of a similar service by government.
"Shadow model monitors affordability and value"
"International critiques and PSC weaknesses"
"Tensions between PSC benchmarking and PPP delivery"
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