Step 2(a) Consider PPP Models

This issue may already have been considered in the data gathering step. It involves determining whether there are any post-construction services that could be bundled with the construction contract and procured as one package. This decision requires an objective analysis of the following:

•  Efficiency - Are there efficiency gains from bundling such post-construction services together?  What are they?

•  Quality - Can the post-construction services be adequately defined (in terms of quality) and articulated in a contract?

•  Cost - What are the transaction costs involved in bundling?

Bundling means that the contractor has responsibility for all the bundled services (e.g. designing, building, maintaining, financing and operating the asset). The contractor may be permitted to subcontract elements but will retain ultimate responsibility for the delivery of all the services. The contract defines the quality of these services.

By contrast, the unbundled approach means that the government would contract for the building of the asset and make separate contractual or in-house arrangements for the post-construction services.

The main rationale for bundling is that by putting one party in charge of all the services, cost savings can be made over the whole life cycle (including innovation, risk pricing and whole-of-life trade-offs). The government can extract the benefit of these savings by running a competitive process for the contract.

Consider the potential benefits in terms of lower lifecycle costs, if the provider has appropriate incentive to build quality that reduces maintenance and operating costs. Such efficiency savings can be significant.

For further information on these models and their suitability, see the National PPP Guidelines.