Measuring value for money in public private partnerships: a review of the public sector comparator in Australia, Canada, New Zealand and United Kingdom
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Do Public-Private Partnerships Create Value for Money for the Public Sector? The Portuguese Experience
Over the last few decades, public-private partnerships have been increasingly used by governments around the world to finance and manage complex operations. Doubts about their efficiency have been raised, however. Criticism of public-private partnerships reflects the fact that governments tend to use them as “off-budget” operations, to avoid fiscal constraints. Do they generate “value for money” to the public sector? The literature is less than unanimous. How one assesses value for money in these types of arrangements has become extremely important for public managers.
The risk premium for evaluating public projects
Governments face a lower apparent cost of capital than private firms. However, the low cost of borrowing by governments does not reflect superior capabilities to choose or manage projects. Instead, it reflects the fact that governments have recourse to taxpayers, who de facto provide a fairly open-ended credit insurance to the government. If taxpayers were remunerated for the risk they assume in the case of tax-financed projects, then ex ante there would be no capital cost advantage to government finance. The risk premium on government finance would, in principle, be no different from that of private investors. There is thus no justification on the basis of capital cost advantages for government funding or guaranteeing the provision of private goods or services. Privatization is, therefore, valuable, if it improves business efficiency when evaluated at the risk-adjusted private cost of capital. No more need be demonstrated in a value-for-money test. Copyright 1997 by Oxford University Press.