Public Sector Comparator Term Paper

Pages: 5 (1523 words)  ·  Bibliography Sources: 5  ·  File: .docx  ·  Level: Doctorate  ·  Topic: Business

Public Sector Comparator

Concept

A proposed public-private partnership or PPP is assessed to hypothetically determine its money value as a basic component of the procurement progress (PPP 2010). Assessment consists of comparing the proposed PPP with the cost of the project on a like-for-like basis, the public sector comparator or PSC. The PSC represents the net cost to government if it undertakes the project through a more traditional method, such as design and construct. PSC consists of forecast lifetime cash flows according to the specifications given to bidders. It also allows for project risks, such as increases in construction price costs. The value of the project to the taxpayer can be assessed when the private sector bids are received (PPP). It is based on generally accepted economic theory and financial evaluation techniques (Partnerships Victoria 2001).

Core Elements

These are transferable risk, competitive neutrality, raw PSC, and retained risk (Partnerships Victoria 2001). These 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 (Partnerships Victoria).

Raw PSC

This includes the expected capital and operating costs to government in the entire duration of the project before considering the risks (PPP 2011). These are direct capital costs, capital receipts, maintenance and life-cycle costs, direct operating costs, indirect costs, and third-party project revenues. Raw PSC excludes any valuation of risks to which the government is exposed (PPP).

Competitive Neutrality

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Adjustments under this core element eliminate possible net competitive advantages of a government business because of public ownership (Partnerships Victoria 2001). It puts government business in the same and equitable level with a PSC and bidders. This is done when the procurement team reviews all the details of the project and the market and identifies significant advantages or disadvantages to government under a public sector delivery method (Partnerships Victoria).

Transferable Risk

TOPIC: Term Paper on Public Sector Comparator Assignment

This risk is one that is likely to be transferred to bidders under a Partnerships Victoria arrangement (Partnerships Victoria 2001). The transfer is made when the bidder is the one most capable of managing the risk at the least cost. Transferable risks must be assessed on project basis as partners learn more effective risk management and mitigation know-how (Partnerships Victoria).

Retained Risk

This is the risk that government is willing to accept (Partnerships Victoria 2001). It is any risk, which is not transferred to a bidder under a Partnerships Victoria model. 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 (Partnerships Victoria).

Characteristics

PSC is the net present cost or NPC of the projected cash flow made according to 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 used for similar services. It includes Competitive Neutrality adjustments, which deter financial advantage by either sector over the other. It contains a realistic assessment of the value of all reasonable and expected material and quantifiable risks to the bidders. It also contains an assessment of the value of the material risks reasonably expected to be retained by government. The PSC presents only a hypothetical rather than actually projects 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). 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 not solely based on the current delivery costs of similar service by government (PPP).

The Shadow Bid Model

Financial advisers usually develop this model based on their knowledge and experience of what the private sector is likely to deliver (DFPNI 2010). It is believed to be good practice to develop this model for use at the outline business case and full business case stages. It generally helps in monitoring affordability and value for money throughout the procurement process. It also adds reassurance to a possible limited experience in PPP for the project or when bidders are few and competition cannot assure value for money. At the outline business case stage, an initial financial model provides alternative PPP procurement options and helps assess the affordability consequences of a PPP procurement at this stage. The initial financial model should be turned into a detailed shadow bid model throughout the procurement process to monitor affordability and value for money. The model should bring out the approximate cost of coming out with the same output specifications as those distributed to bidders during procurement (DFPNI).

Effects of PSC

International experience has shown the powerful motivation to achieve value for money in partnership projects between the public and private sectors (Pangeran & Wirahadikusumah 2008). PSC is used to bring out that value of money for proposed PPP projects. It allows for the comparison between costs or gains and risks. It can be used as an evaluation method to facilitate proper risk negotiation. However, PSC also leads to issues, such as manipulation, risk transfer and the public sector's ability to perform risk management methodology (Pageran & Wirahadikusumah).

PSC has been hailed in developed countries for its usefulness in assessing PPP projects before contracts are drawn (Leigland 2008). These countries include Australia, Canada, the Netherlands and the United Kingdom. However, criticisms have evolved in the past years from Australia and the United Kingdom. These major criticisms are inaccuracy, omitted risks, the lack of consensus on discount rates, manipulation, high costs, second-guessing, the lateness of postbid results, and the lack of public sector alternatives (Leigland).

PSC does not seem suitable for developing countries, either (Leigland 2008). Many African countries do not have the public funding for infrastructure projects required by the development and use of PSCs. Even with available public funding, the use of database to estimate costs and fend off optimism bias and to shift more analytical work to the in-house staff are not as easily done in developing as they are in developed countries. The weaknesses of the UK approach may be remedied by setting up rules for the use of conventional costing methods and expert judgment and to counteract optimism bias. Some experts argue that doing PSC comparisons for one or many different types of projects may be a better move. It may also be a better option to use PSC to gather the consensus of stakeholders about their desired features for projects (Leigland).

PPP and PSC

The PSC is the preferred assessment tool in many countries (OECD 2008). It is less subjective and complicated than a cost-benefit analysis. It is, thus, easier to compile while serving as a tool to compare private bids. The absence of a PSC may raise doubts on whether the public sector has saved on cost and achieved value for money. But PSC is merely hypothetical as the government cannot secure real quotes or bids if it will not conduct traditional procurement (OECD 2008). It is also time-consuming to compile a PSC and make each bidder go through the process of creating a projected PPP model. Another issue is the use of the proper discount rate. Other issues confronted in adopting PSC are affordability and its impact on budgetary limits. PSC may not be a reliable benchmark for deciding on a PPP when the asset or service being considered is possible only with the participation of the private sector and private funding mechanisms. Many PPPs are conceived for lack of public financial resources. Its benchmarking efficiency against an unlikely policy option is a problem. In the case of budgetary limit, the government may extend less attention… [END OF PREVIEW] . . . READ MORE

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