To provide a service or build an asset, a public entity can either use a traditional mode of public procurement or enter into a PPP. A distinctive feature of projects is that their requirements are defined in terms of outputs rather than inputs. This allows the public sector to focus on specifying the level and standards of the services required, giving the private entity the task of meeting the requirements. This enables the public sector to transfer certain project risks relating to designing, building, operating, and financing the project to the private sector.
The pros of PPPs include better value for money (VfM), project sustainability, and additionality. As for cons, questions regarding the accountability and flexibility of PPPs have raised some concern among academics and policymakers.
PPPs can improve the VfM of some projects. The VfM criterion of PPPs is defined as the expected reduction of life cycle cost and the estimated value of the risk transferred. This is evident in a higher positive net present value (NPV) in cost– benefit analysis (CBA). To establish whether a PPP represents better VfM, it is usually compared with a hypothetical public sector alternative, also known as a public sector comparator (PSC), which delivers the same service. The theory behind improved VfMs via PPPs is based on the assumption that the private sector is more effective at managing construction processes and risk.
PPPs can improve the sustainability of public services by reducing the overall costs and the variability of the cost of that service to government. Again this arises from sharing the risks of service provision with the private sector. The reverse side of the coin is that flexibility is limited in PPPs. This can be a problem if government wishes to introduce regulatory changes or alter the nature of the asset after the signing of a PPP deal. Renegotiation and cancellations of PPP contracts are costly.
In addition, commercial confidentiality and the work of SPVs as closed companies may diminish the accountability of PPPs. On the other hand, the reverse has also been argued; by transferring service delivery risk to the private sector, account-ability may be improved.
Finally, PPPs provide an alternative source of finance to traditional government borrowing, thus offering the benefit of additionality. This is especially import-ant for developing countries, where domestic resources are limited and the cost of doing nothing is high due to lost economic growth (and development) incurred when infrastructure is absent and/ or inadequate.