The Public Sector Comparator (PSC) is a method used to compare the cost and risk of a public-private partnership (PPP) project to a traditional public sector procurement. As part of the PSC analysis, risks associated with the project are identified, and a risk allocation strategy is developed.
The risks associated with a PPP project can be broadly classified as retained risks and transferable risks.
Retained risks are those that the public sector retains and assumes responsibility for managing. These risks are typically associated with the project’s core objectives and are more likely to be retained by the public sector. Examples of retained risks include political risks related to changes in government policies, social risks related to public opinion, and strategic risks related to the project’s objectives and outcomes.
On the other hand, transferable risks are those that can be transferred to the private partner. These risks are typically associated with external factors that are outside the public sector’s control. Examples of transferable risks include construction risks related to design and construction, operational risks related to the operation and maintenance of the project, and financial risks related to funding and revenue generation.
In a PPP project, the risk allocation strategy aims to allocate risks to the party best able to manage them effectively. The PSC analysis helps to identify the risks associated with each approach and to determine which party is best placed to assume the risks.
The risk allocation strategy adopted in a PPP project will depend on various factors, including the nature of the project, the capabilities of the private partner, and the level of risk appetite of the public sector. Ultimately, effective risk management requires a careful balance of retained and transferable risks, as well as a proactive approach to identifying and mitigating potential risks throughout the project lifecycle.
To arrive at the PSC, the risks that are present over the life of the project need to be quantified. These include those risks that are retained and those which could be transferred to the private partner. The value of project-specific risks is to be added to the cash flows while calculating the PSC.
The risk may be quantified in terms of a regular cash-flow item or it may be reflected as a discount factor while arriving at the NPV value. Valuing risk in the cash flow of the PSC has the following advantages:
1. Optimal level of risk allocation is comparatively easy to achieve
2. Cash flow valuation takes better account of the timing of risk
3. The value and impact of a particular risk may vary over time;
A PPP reference bid is a hypothetical private party bid which meets the defined output specifications (the same as that used in constructing the PSC). It is also known as a shadow bid. In this case, the costing of the output specifications should be carried out from a private party‟s perspective. Comparing the net present cost of a risk-adjusted PSC model with the net present cost of a risk adjusted PPP reference model to the public entity/public finances enables an assessment of whether service delivery by the Government or by a private party yields the best value to the public entity.
Since the public entity may not be able to estimate the costs associated with the output specifications to be charged by the private parties, the transaction advisor should have the necessary expertise, market knowledge and experience to construct a market related PPP reference project in the following stages:
- Determine the nature of the PPP arrangement
- Determine the proposed project structure and sources of funding
- Identify the core components of the payment mechanism
- Estimate taxes accruing to public finances
- Allocate risks
- Assess the value of the transferred risk
- Assess retained risks
- Calculate the net cost of the PPP reference bid
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