Recently, new indicators on the convenience of public-private partnership (PPP) deals in general, and Design-Finance-Build-Operate-Maintenance (DFBOM) arrangements in particular, have appeared in a public scenario introduced by the World Association of PPP Units and Professionals (WAPPP). The aim of this post and others forthcoming is to present them and show how they can be used to enhance the transparency and convenience of PPP globally.
PPP becomes a critical paradigm for many countries intending to achieve the Sustainable Development Goals (SDGs). In principle, PPP deals are only justified when providing sufficient Value for money (VfM) to the concerned society, meaning what the government promoting the investment judges to be an optimal combination for the project in terms of cost savings, risk mitigation, quality and innovation. It is worthwhile noting, however, that very few academic studies have been attempted to develop a proper framework to guide and appraise such optimal combination (VfM) despite its importance. PPP schemes are usually country-specific and determined by existing legal, economic, institutional, administrative and political frameworks.
From the point of view of society, the best way to provide infrastructure is the arrangement that maximizes well-being. Accordingly, a key concern of decision makers should be to maximise economic, social and environmental benefits with the least possible consumption of resources. This implies that public managers use public resources efficiently, without ignoring who will end up footing the bill stemming from the main investment and the operation and maintenance of the project. Overall, the public sector may have recourse to multiple funding and financing options, including private financing, channeled through PPP/DFBOM arrangements, but at the end of the day it is the user and/or the taxpayer who will be compelled to endure the financial burden from infrastructure development. Financing for infrastructure delivery, while not directly affecting social welfare, may have nevertheless a clear impact on public accounts over the years and, as a consequence, on the successive generations involved. The financing mechanism smooths the financial charges to be borne by the public budget annually but, instead, alongside the “present society”, those who are currently young, even unborn, will end up bearing part of the financial burden stemming from public investment programmes. In other words, infrastructure development in general, and major infrastructure projects in particular, have strong implications for the taxpayers of different overlapping generations.
An adequate blending of funding sources under a long-term financing perspective is thus key to ensure that the effects of the financing formula finally adopted for the project will be acceptable. In this sense, researchers have proven that PPP/DFBOM arrangements, although often entailing a substantial increase of the public expenditure linked to infrastructure development compared to conventional procurement mechanisms, are typically better in terms of Value for People (VfP) and Value for the Future (VfF). In relation to PPP, VfP and VfM are the main insights on the socioeconomic value provided by infrastructure development. Determined from the interpretation of the set of indicators obtained from the Intergenerational Redistributive Effects Model (IREM), they will inform us about the impact on project socioeconomic benefits of different interest rates, loan conditions and other financial compensations given to private partners for project risk mitigation. The rationale behind these indicators is that users and/or taxpayers should contribute in a fair/balanced way to project funding as some (overlapping) generations will end up suffering negative/unfair redistribution effects if the project’s flows of net benefits and actual payments are not balanced.
Indeed, there remains some challenges to PPP/DFBOM deals because there may be good reasons to choose traditional procurement and public finance. Yet PPP can be controversial because it is really difficult to explain its social value with simple words, especially because society often perceives that PPP entails high costs of opportunity to the future. In this context, VfP and VfF, which are complementary to traditional VfM, can be used to prove the convenience of private management and financing for the society concerned as they inform us on whether the socioeconomic value provided by infrastructure financing is balanced with regards to the opportunity cost that the investment entails for present and future society. All in all, VfM-VfP-VfF offer a comprehensive picture on the convenience for the society concerned of investments channeled through PPP/DFBOM arrangements.
Article originally posted at the PPP Times, the newsletter of the World Association of PPP Units & Professionals www.wappp.org
Author: Dr. Domingo Penyalver (https://www.linkedin.com/in/domingo-p-4a165014/)
About the author:
Domingo Penyalver is an internationally recognized researcher in the field of Transport Economics and Infrastructure Financing and counts on more than 21 years’ work experience in industry and academics. Industry experience of around 14 years has been in the fields of transport, investment analysis, territorial planning, urban development and transport infrastructure construction as in-site engineer, project director and strategic consultant for the public sector, in sales, marketing, product management, SBU Head & CEO positions. Academic and research positions have been with the Polytechnic University of Catalonia (UPC) in Barcelona (Spain), the European Investment Bank (EIB) in Luxembourg, the Center of Innovation for Transport (CENIT), and the International Center of Numerical Methods for Engineering (CIMNE) in Barcelona, Spain.
Penyalver has developed a new appraisal model (IREM) that allows processing comprehensively social, economic and financial inputs and provides objective-metrics on the Value for Money (VfM), the Value for People (VfP) and the Value for the Future (VfF) of PPP deals. He studied International DPhil in Transport Economics (Polytechnic University of Catalonia, 2019), MSc. in Transport (University Alfonso X El Sabio, 2013), MEng. in Civil and Environment Engineering (University Alfonso X El Sabio, 2004), BSc. in Public Construction Works (Polytechnic University of Alicante, 1999). Penyalver has published multiple studies and academic papers in top peer-reviewed journals of international scope.