Value for Money and Risk in Public-Private Partnerships

Author:

Matti Siemiatycki and Naeem Farooqi

Citation:

Siemiatycki, Matti and Naeem Farooqi. “Value for Money and Risk in Public-Private Partnerships”. Journal of the American Planning Association 79.3 (2012): 286-299.

Publisher:   

Journal of the American Planning Association

Date:

2012

Summary

The aim of this article is to examine the VfM methodology and the extent to which cost savings are achieved when delivering public infrastructure through P3s relative to traditional government procurement. In most jurisdictions, VfM studies are not publicly released. This means that the central basis on whether or not to proceed with a P3 is not well understood. Using Ontario as an example, the authors attempt to determine how planners structure and choose the preferred P3 model in order to realize VfM. They conclude that a greater understanding of how VfM is conceptualized is required to ensure that project risks are properly allocated to better protect the public’s interest when governments pursue P3s.

Key Findings

  • A key challenge for government agencies has been to find a rigorous and feasible method of evaluating whether P3s provide a superior approach to delivering infrastructure than traditional methods.
  • This is especially pertinent in a context where P3s have been criticized as being politically motivated by an ideological belief in the efficiency of the private sector and a desire to obscure the true costs of large public investments by drawing on up-front private financing.
  • VfM was developed to address this by assessing the comparative merits of using a P3 to deliver a project relative to other procurement options.
  • In Ontario, the base cost of delivering the 28 projects studied is lower (on average 16% less) when delivered through a traditional procurement rather than a P3.
  • A retained risk premium averaging 49% of the base cost of delivering the project was added to the traditional government procurement option, and in each case this additional risk premium swung the VfM calculation in favour of the P3.
  • IO’s publicly available matrix for allocating risk in the VfM calculation shows that governments using the traditional procurement model retain substantially larger financial liabilities for nearly every type of risk identified as possibly occurring than under the P3 approach.
  • No empirical data is provided to substantiate these risk allocations, making it difficult to assess their accuracy and validity.
  • It is critical that key project information which underpins VfM studies be released. This includes data on private rates of financing, expected returns and data used to determine risk premiums in the assessment.
  • There are not strong commercial reasons to classify this information once the bidding process is complete.
  • Greater understanding of how VfM is conceptualized may also alleviate common concerns that planners have including the potential to involve community consultation, integrating the P3 project into the wider infrastructure network and maintaining government flexibility when priorities change.

To access full article: http://www.tandfonline.com/doi/abs/10.1080/01944363.2012.715525