An Analysis of PPP Procurement Arrangements in Project Finance

This report provides a comprehensive analysis of Project Finance and Procurement, focusing on Public-Private Partnership (PPP) procurement arrangements. It begins by defining PPP procurement and highlighting its advantages, such as cost efficiency and access to private sector expertise, using the Irish schools case study to illustrate real-world applications. The report then delves into the disadvantages of PPPs, including increased complexity and higher monitoring costs, and discusses strategies for mitigating risks, such as flexible contract terms and risk allocation practices. Furthermore, the report contrasts PPP project contract procurement with traditional procurement methods, outlining key differences in process, responsibility, and risk involvement. The Irish schools case study is used again to demonstrate the benefits of PPP in terms of cost-effectiveness, innovation, and off-balance sheet financing. The report concludes by emphasizing the role of PPPs in reducing government costs and promoting efficient project delivery while underscoring the need for robust risk mitigation to ensure the success of these complex arrangements.

PROJECT FINANCE AND
PROCUREMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. PPP Procurement Arrangements........................................................................................1
2. PPP Project Contract Procurement vs. Traditional Procurement.......................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Project Procurement is a comprehensive process which is followed with a sole purpose to
acquire goods and services from the external environment (Atmo and et.al., 2017). Since a
project is usually undertaken for a longer period of time, it is important to note that higher the
complexity of a specific project, the more procurement it would need from third-party vendors as
well as partners. This report aims to provide a critical examination of benefits and demerits of
PPP procurement arrangements has been taken into account. Additionally, those mechanisms
have also been highlighted that must be implemented in order to mitigate such disadvantages.
Apart from this, a difference between PPP project contract procurement and traditional
procurement has been undertaken. For this purpose, a case-based study has been analysed which
talks about the sovereign risk associated with social infrastructure PPP, specifically in relation to
Irish Schools.
MAIN BODY
1. PPP Procurement Arrangements
A Public-Private Partnership is one which includes acquisition of goods and services with
an intention to deliver high quality projects or services that were traditionally executed by the
public sector only. This type of partnership may have different forms and notions associated with
it, however, it helped in the communication of value addition through the exploitation of private
sector competencies.
The main rationale behind the adoption of this arrangement by the Department of
Education and Skills (DoES) was to overcome the shortcomings of traditional procurement
methods which resulted in delay in delivery time, inefficiencies and budget overruns.
 Advantages:
One of the main advantages of PPP Procurement arrangement is that one is able to
achieve cost efficiency (Blanc-Brude and Makovsek, 2013). As the government does not need to
look for more than one outside vendor here, the number of vendors associated and their fees
thereof are waived into one single entity. Through this private enterprise's competencies in
Financial Planning, Designing, Construction and Cost Controlling, the state is able to relish the
advantages of service bundling. Thus, enhancing their overall returns to the respective
shareholders. In the context of the given case scenario, economic progress was greatly
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decelerated for the country between 2007-13 when the government was unable to qualify for
funding from European Union (EU). Thus, the country underwent a phase of expansion deficit.
In order to rectify this situation, the state resorted to the introduction of this arrangement.
 Disadvantages:
A disadvantage of PP, in general, is that private profit is earned at public expense. This
means that private sector investors make profits for themselves by providing public services that
are usually cost-effective if undertaken by a public sector enterprise solely. The chief demerit of
this arrangement is that due to its complexity, there may be a significant risk involved as these
demand a much more specialized resource availability in comparison to traditional PPP
Procurement Arrangements. Thus, there is much meticulous work and analysis put in by the
governments in order to ensure that the relevant project is completed in the manner in which it
was proposed (Hoppe, Kusterer and Schmitz, 2013). As a result, the monitoring costs incurred on
the part of government in relation to such arrangements are always higher than those incurred in
the ones where the state holds the complete ownership of the project itself. Hence, the
complexity of the PPP and the monitoring cost can be said to have a direct relationship with each
other.
Even though there are advantages to this arrangement, it may so happen that PPP
Contract Procurement mechanisms may be subjective to some kind of situations that lead to a
decline in the quality of the overall project (Liu and et.al., 2014). In the context of the Irish
School Case Study, due to the Global Financial Crisis, the domestic businesses had suffered all
around the world. In order to avoid such risks, the bundle 2 project had entailed a unitary
payment structure. It is important to keep in mind that this project was set up as an SPV that
included different counterparties to undertake various kinds of functions associated with the
project. Apart from this, a forward looking cash reserve account was also implemented which
was known as Maintenance Reserve Account (MRA) which was to be funded through senior
debt and equity once the construction concluded. When the tender opened for this bundle, Ireland
had been experiencing high sovereign debt levels with the European crisis becoming prominent
by November 2010. As a result, one of the domestic companies associated with this bundle,
called Pierse Contracting, was not able to repay its €212 million debt and dissolved on the
grounds of bankruptcy.
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From this one can agree on the fact that mitigation of such risks, especially in those
contract arrangements related to Public-Private Partnerships that are of highly complex nature is
of immense importance. A mitigation of such risks is only achievable when there is a definite
level of flexibility present in the contracts which gives a breathing space to both private as well
as public sector enterprises. In order to achieve this definite risk allocation practices may be
included in the contract itself which helps in the identification as well as prioritisation of various
contractual obligations (Lloyd-Walker and Walker, 2015). As a result, any contingency can be
met with clarity and in a prepared manner.
2. PPP Project Contract Procurement vs. Traditional Procurement
Basis of Difference PPP Project Contract
Procurement
Traditional Procurement
Process Under this arrangement, a
public sector procurer signs a
termed contract with a special
purpose vehicle (SPV) whose
main role is to hold the asset
and provide necessary
procurement services. In
addition to this, the functions
of financing, designing and
cost controlling among others
are subcontracted to private
companies (Reeves, Palcic and
Flannery, 2015) .
Hereunder, a set of consultants
are appointed in order to
review contracts which best
define the interests of both the
buyer as well as supplier. Their
main role is to design and
undertake cost controlling
activities. Once this is
accomplished, a contractor is
chosen to complete the project.
Responsibility The responsibility for success
or failure of the project is
divided among both private as
well as public sector
enterprises in a predefined
manner so as to avoid
The sole responsibility for
success or failure of a
infrastructure project is that of
the central, state or local
government itself.
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ambiguity.
Risk Involvement No unlimited risk associated
with these contracts as a
private entity is involved.
Hence, they would be cautious
in undertaking any kind of
significant risk.
Risk associated with such
projects is mainly dependent
on the nature of the project
itself. For instance, low cost
risk is involved with those
contracts that include lump-
sum payments. This may be
higher for those where
instalments payments are
involved.
Ownership Initially, the ownership lies
with the private sector
companies that execute the
operations of the project
through the SPV which
provides a certain amount of
revenue streams. At the end of
the project, the ownership is
then transferred back to the
state itself.
It lies with the government
since the initiation of the
project itself and remains to be
once the work has been
completed.
Looking at the Irish School Case Study, it can be said that the government made a wise
choice by taking the route of PPP Project procurement for the construction as well as
establishment of 27 schools in the nation. This is due to the fact that both Bundle 1 and 2 require
the PPP Project Contract Procurement was much more cost effective in comparison to the
traditional procurement method. Since presence of private sector introduced a degree of
innovativeness and cautiousness along with enhanced efficiency, this route resulted in the
improvement of costs through the bundling of construction, operations and maintenance into one
(Regan, Love and Jim, 2015). Additionally, accounting benefits of off-balance sheet financing
are achieved under PPP which is not attainable in the case of Traditional Procurement Methods.
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The rationale for choosing a PPP Arrangement rather than traditional one unlike in the case of
economic infrastructure the revenue streams generated by the social infrastructure projects were
inadequate as no or very low user fees was charged for these public goods. Under PPP this would
not be the case as the government would make availability payments regardless of the demand.
CONCLUSION
From the above discussion it can be inferred that Public-Private Partnerships help in
reducing overall costs for the government which were previously incurred in a substantial
manner as each level of contracting required hiring of a different set of entities. These would be
responsible for a diverse set of functions or a small portion of the overall project. In addition to
this, cost-efficiency and benefits of off-balance sheet financing are also relished by the state
which helps in the deliverance of project in a faster, efficient and budgeted manner. It is also
important to have proper mitigation mechanisms kept in place so as to avoid any kind of internal
or external factors that may result in dissolution of the private sector enterprise associated with
such projects or hampers its efficiency.
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REFERENCES
Books and Journal
Atmo, G. U. and et.al., 2017. Comparative performance of PPPs and traditional procurement
projects in Indonesia. International Journal of Public Sector Management. 30(2).
pp.118-136.
Blanc-Brude, F. and Makovsek, D., 2013. Construction risk in infrastructure project
finance. Research, EDHEC Risk Institute, February.
Hoppe, E. I., Kusterer, D. J. and Schmitz, P. W., 2013. Public–private partnerships versus
traditional procurement: An experimental investigation. Journal of Economic Behavior
& Organization. 89. pp.145-166.
Liu, J. and et.al., 2014. Life cycle critical success factors for public-private partnership
infrastructure projects. Journal of Management in Engineering. 31(5). p.04014073.
Lloyd-Walker, B. and Walker, D., 2015, April. Collaborative project procurement arrangements.
Project Management Institute.
Reeves, E., Palcic, D. and Flannery, D., 2015. PPP procurement in Ireland: An analysis of
tendering periods. Local Government Studies. 41(3). pp.379-400.
Regan, M., Love, P.E. and Jim, J., 2015. Public infrastructure procurement: a review of
adversarial and non-adversarial contracting methods. Journal of Public
Procurement. 15(4). pp.405-438.
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