How should public officials decide when a project is a good candidate for a long-term concession approach? As this form of public-private partnership becomes better-known, some enthusiasts portray it as the obviously superior approach for any large infrastructure project. Others call this an “ideological” approach that may not serve the public interest. And in some places with large, experienced public-sector toll agencies (e.g., Pennsylvania, Dallas) some have viewed PPP concessions as a dire threat. Last year, as a member of the Legislative Study Committee on Private Participation in Toll Projects, in Texas, I spent a good deal of time looking into this question of how the public-private partnership decision should be arrived at.
In response to concerns raised at the federal level, by members of Congress and by the Policy & Revenue Commission, last year the Government Accountability Office issued a report on PPP toll roads. It cited the experience of the United Kingdom, Canada, and Australia in using quantitative tests to assess value for money (VfM), in particular the Public Sector Comparator (PSC) methodology. As a member of the Texas committee, I looked into this methodology and concluded that it has much to offer.
As the GAO’s report (GAO-08-44) describes it, “[A] PSC test examines life-cycle project costs, including initial construction costs, maintenance and operation costs, and additional capital improvement costs that will be incurred over the course of the concession term.” A PSC also seeks to quantify the value of various types of risk transfer to the private sector, whereby the more risk transferred to the private sector, the more value to the public sector. GAO’s report goes on to explain that the use of a PSC test is required for all PPP projects in the United Kingdom; that is also true for all long-term PPP projects in British Columbia. GAO’s report also noted that PSC tools continue to evolve to incorporate lessons learned from experience, citing recent revisions in Australia (where PSC is used extensively in both New South Wales and Victoria).
What follows comes from a detailed guidebook from Partnerships Victoria called “Public Sector Comparator: a Technical Note.”(www.partnerships.vic.gov.au). Their PSC consists of four parts, each quantified. Its aim is to reflect the “full and true cost to government” of taking on the project, so that this cost can be compared to private-sector bids. It is based on using the net present value of all cash flows, based on the specified government discount rate over the life of the concession period. The four components of the PSC are as follows:
- Raw PSC-the base cost under the public procurement/public ownership method, including all capital and operating costs.
- Competitive Neutrality-cost adjustments aimed at accounting for differences between public and private sector, such as the latter’s requirement to pay taxes, so as to eliminate-resource allocation distortions arising from such factors.
- Transferable Risk-the value of those risks transferable to the private sector, but which are retained by the public agency if the traditional approach is pursued.
- Retained Risk-the value of those risks which would remain with the public agency in any case.
The guidance document provides a whole chapter on each of these components, as well as discussions of how to use the PSC in the procurement process. Helpful quantitative examples are included. Similar materials are available from Partnerships UK and Partnerships BC.
There is real value in a rigorous, quantitative procedure like the PSC. Compared to either the arbitrary “first dibs” for public-sector toll agencies favored by pending legislation in Texas or the endless wrangling there last year over trying to establish a “market valuation” for the planned SH 161 toll road, the PSC offers a way to de-politicize such questions, discovering where the best value lies on a project-by-project basis.
But can politics actually be removed from the process? After all, any accountant or any consultant knows the old line: “Tell me what result you want, and I’ll show you how to get it.” If the party doing the PSC analysis is biased toward a particular outcome, it is certainly possible for it to make assumptions likely to tilt the result in one direction or the other.
I’ve recently heard several criticisms of how the value for money assessments are being carried out under the U.K.’s Private Finance Initiative, with one major PPP concession company telling me they will not bid on such projects in the U.K. Another source relates that a major Canadian public-employee union is trying to influence PSC assessments there. Nevertheless, another well-informed source tells me that Canada is perhaps the most respected PPP user, with the PSC process leading to expeditious PPP decision-making.
So the critically important questions are (1) who does the PSC analyses, and (2) how can they be kept objective? Our Texas committee recommended the creation of a new entity modeled on Partnerships BC and Partnerships Victoria. Because some view Texas DOT as biased in favor of PPPs, a “Texas Partnerships” would be more credible as an independent agency, and legislation to create such an entity has been introduced in the current session. That legislation should explicitly call for the new agency to use the PSC methodology akin to what is used in BC and Victoria. It should also permit the agency to hire and/or contract for expert legal and financial talent outside of civil service compensation limits.
Ultimately, however, there will never be absolute guarantees against bias and politicization in doing such analyses. The best defense against that is transparency. Analyses by such agencies need to be published in full, with all assumptions clearly spelled out, so that outside parties can look for and point out biases. That will not be a perfect process, but it’s likely to be better than an arbitrary preference for government provision of large-scale infrastructure.
Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.