2.2  Key features of the PPP model

The PPP approach represents a shift in thinking from traditional infrastructure procurement methods. While many features of the PPP model are familiar from existing or past practice, there are key innovations and differences:

•  service focus. The focus of PPPs is on purchasing services of an agreed quality and quantity and within an agreed timeframe. Purchasing services (rather than the asset directly) gives government greater strategic flexibility and focuses attention on the quality of the services being delivered. For this reason, the focus of PPPs is on services and performance, over the whole-of-life;

•  core services. As discussed above, government itself generally retains direct control of certain core services. This is relevant particularly in social infrastructure projects;

•  payment for services. The essence of the PPP approach is that government is buying services with an agreed quality, quantity, cost and timeframe. If a service is not provided on time or is not of agreed quality or quantity, service payments to the private sector party may be reduced.

Apart from exceptional circumstances, 'no service' should mean 'no payment'. This is consistent with a fundamental premise of PPPs being that the private party bears the risk of asset performance, while government has the certainty of paying only for those services it receives.

The government's capacity to control the quality of service delivery through the payment structure may depend on its control over demand for the services and the nature of that demand. To the extent that government makes some direct payments, there is scope for government to use the payment mechanism to directly achieve service quality outcomes.

In some cases, such as economic infrastructure, there is a user-pays arrangement, where payment to the private party similarly depends on users receiving a service (for which they then pay). Additionally, there may also be contractual obligations relating to performance which have financial consequences for the private party;

•  whole-of-life. The PPP structure includes the full integration, under the responsibility of one private party, of up-front design and construction costs, with ongoing service delivery, operational, maintenance and refurbishment elements for the life of the contract;

•  financial discipline.  The participation of private finance instils a significant level of rigor and discipline;

•  output specification. The output specification clearly sets out the outputs that government is seeking. The requirements should be expressed, as far as possible, in output terms and not in prescriptive input terms. Key to this is government detailing the required functionality of infrastructure, incorporating the overall services to be delivered;

•  value for money.  Value for money is a key principle of PPP projects and includes both a quantitative and qualitative assessment of the benefits of the private sector proposals.  The quantitative assessment is assisted by the use of the Public Sector Comparator ("PSC") which is a whole-of-life net present cost model that reflects government retaining ownership and responsibility for construction/redevelopment and ongoing management of the project.  The qualitative assessment looks at all other factors including certainty of delivery, quality, efficiency of design etc;

•  public interest. The public interest is considered by government as part of the overall investment evaluation and subsequent procurement methodology decisions. Public interest matters continue to be important throughout the procurement and delivery of the infrastructure and associated services;

•  contract term. PPP projects generally involve long-term contractual arrangements that combine the delivery of infrastructure assets.  The term of the contract will be determined by reference to the optimal period for a whole-of-life approach with the ability to appropriately incentivise the private sector as well as the practicalities of debt funding;

•  contract management. Given the long-term nature of PPPs, contracts need to be managed with a focus on the commercial relationship, long-term value for money and performance management; and

•  risk allocation and standard commercial principles. These principles represent the preferred position of governments across jurisdictions in relation to risk allocations under a PPP model. The principles form the basis of contract terms for projects.