Public Sector Comparator in PPP Term Paper

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If, on the other hand, the net present value of the public sector comparator is lower than the net present value of the public-private partnership, then the PPP is too expensive and ineffective and it does not represent the adequate solution for the provision of the public service (Grimsey and Lewis, 2007).

The public sector comparator identifies the value of money for the project in the case in which it would be completed by the state alone. In order 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 and under the public procurement method; under these conditions, the asset or the services are fully owned by the federal institution.

b) The competitive neutrality adjustment

The competitive neutrality adjustment represents a mechanism by which the net advantages and disadvantages of the public sector are eliminated, so that the comparison is more objective.

c) The transferable risk

The transferable risk refers to the assessment of the totality of risks which would be assumed by the state, but which 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, in order to make a true comparison of the risks, the bidder capabilities and the benefits for the state (Duncan, 2005).

Similar to the theory of public-private partnerships, the theory of the public sector comparator is revealed in a simplistic manner. Yet, its real life application is more complex. On an initial level, it is noted that the net present value of the public sector comparator is generally only estimated based on assumptions or on the bids already received. Nevertheless, the real value of the PSC is virtually impossible to determine, meaning as such that the full and efficient decision making process is impeded (Hodge and Greve, 2005).

Subsequently, it is revealed that the public sector comparator is subjected to numerous assumptions and that each of these assumptions influences the final results and the final decisions. Assumptions are for instance made regarding the financials of the project, such as the cash flows of the investors. Then, assumptions are made regarding the impact of the project on core services. These two sets of assumptions are pegged to quantitative issues, which can be presented in a numeric format. This makes them easier to assess.

Still, aside from the quantitative issues, there are also other qualitative issues. These are generally not presentable in a numerical format, meaning as such that the assumptions made regarding them are even more so complex and face a higher risk of inaccuracy. Some of the more notable of these qualitative issues include the quality of the services, the actual delivery processes, the design amenity, the inability to quantify the risk or the overall sustainability of the public sector comparator. At the level of PSC sustainability, the issues of insecurity comprise the access to funds, including the concern for access to credits; the structuring of the taxes or the experience and capacity of the PSC team (Partnerships Victoria, 2003).

All in all, the final decision when assessing the public sector comparator relative to the public-private partnerships is highly sensitive to a wide array of assumptions, as well as numerous uncontrollable features. This virtually means that the public sector comparator is not a full proof measure of decision in regard to public sector endeavors -- alone or in partnership with the private sector.

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The limitations described above refer specifically to the need to make a wide array of assumptions, which increase the sensitivity of the decision making process. Nevertheless, this sensitivity can be reduced if the public sector comparator analysis is conducted before the private players place their bids, but also after the bidding from the private sector. This two-round PSC is generally a more preferred means of assessing public-private partnerships in comparison to public projects.

The limitation of the two-round public sector comparator is that it implies increased amounts of work and the processes can sometimes be tedious and redundant. Still, it is preferred to the other two alternatives of assessing the projects -- the cost benefit analysis and the reliance on competitive bidding alone.

The complete cost-benefit analysis is most commonly used in Germany and it relies on vast information and numerous assumptions regarding the costs and benefits. The assumptions however integrate a high level of subjectivity and sensitivity, and they as such lead to the formation of biased conclusions. Then, the third alternative is the least complex one, but it generates unreliable results, retrieved only from comparative bidding, which can be influenced and out of sync with the realities of the market. In such a context then, the public sector comparator remains the more adequate choice in the assessment of public and public-private projects.

"The public sector comparator (PSC) is the preferred assessment tool in many countries since it is less subjective and complex than a cost-benefit analysis and thus easier to compile, yet it still provides a tool with which to compare private sector bids" (Organization for Economic Co-operation and Development, 2008, p.72).

4. Conclusions

In the modern day community, integration is becoming more and more of a leitmotif. And this is obvious not only in terms of international trade agreements and unions, but even at domestic levels, with the most relevant example in this sense being represented by the partnerships between the public sector and the private sector.

The sectors are traditionally recognized and accepted as different, each with its own advantages and limitations. Still, the collaboration between the two allows for the projects to be completed in a manner in which the limitations are minimized and the benefits are maximized.

The private-public partnerships are complex endeavors, and however they would appear as straightforward in theory, their actual implementation is intricate. Numerous decisions have to be made regarding the selection and delivery of the project, the transparency of the partnership and the agreements of the partnerships. Still, despite the complexities, the public-private partnerships are growingly popular as they seem tailored to the features of the current economy (crisis, need for more capital or increasingly complex federal responsibilities and tasks).

One important tool in the management of the PPP is represented by the public sector comparator, which represents the alternative of the PPP project when this is completed by the state alone. The emphasis falls on the net present value of the project and the PPP is selected when its net present value is inferior to that of the PSC.

The public sector comparator is characterized by its own limitations, such as the complexity of the tasks involved or the extensive reliance on assumptions. Nevertheless, in spite of these shortages, the method remains the most popular one at a global level......

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