This thesis focuses on Public Private Partnerships (PPPs) for infrastructural projects, in which PPPs entail Design Build Finance Maintain (and Operate), or DBFM(O) contracts. The main differences of such contracts with more traditional contracts is the establishment of a project-specific Special Purpose Company (SPC), the need for external financing and governmental payments based on the availability of the infrastructure; indeed, a long-term service contract (20-30 years) rather than a construction/product contract – illustrated in diagram 1 below. Diagram 1. Cash Flows DBFM-Contract versus DB+M contract The Dutch government, with infrastructural execution agency Rijkswaterstaat in particular, is ravenous for these DBFM-contracts, since it allows Rijkswaterstaat to transfer risks to the party who is best able to control them. Furthermore, these contract forms relieve Rijkswaterstaat from many responsibilities and duties while making use of market efficiency and the external discipline on the contractors by external financiers which would speed up the construction process and ensure as little maintenance will be performed as possible – since penalties are charged to the SPC for closing off roads. More importantly, Rijkswaterstaat argues that these contracts warrant a much higher Value for Money than more traditional contracts (e.g. Design & Build); either less costs for the same scope, or more scope for the same amount of money. Rijkswaterstaat bases this conclusion on two important decision instruments: ? The Public Private Comparator (PPC): This decision instrument is used for a preliminary comparison on the value of contract costs. Indeed this instrument is based on personal input, experiences and historical figures. With this instrument at least one PPP contract (e.g. DBFM) compared to at least one non-PPP contract (typically Design & Build). The instrument focuses on the design, construction and exploitation costs of the infrastructure but disregards the effects of external financing and therefore the availability based payment structure. A comparison of the Net Present Value of the costs for each contract determines the calculated “added value” of a particular contract – assuming the same project scope for each contract. In case the PPC indicates added value for the PPP contract a tender process on this contract form will be started. ? The Public Sector Comparator (PSC): The Public Sector Comparator is the determination of a benchmark versus the private PPP- bids in tender process. It estimates - to a greater detail than PPC - how much it would have cost (in net present value terms) the government to execute a project with the same scope as each of the private bids, but then using a non-PPP contract form (e.g. D&B). The private bids should always be lower than the PSC benchmark, else it will not be chosen. Rijkswaterstaat records the NPV difference between the PSC and the value agreed on in the final DBFM-contract as the “realized added value” of the DBFM contract. The issue here, is that both of these instruments are based on estimations rather than “hard facts”, making the use of the term “added value” to the PPP contracts disputable. RESEARCH GOAL Following from the latter, the main research goal of this thesis was to examine whether private financing increase the financial-economic Value for Money for infrastructural projects in the way Rijkswaterstaat expects. Since these expectations follow from the way the PSC and PPC work, and how they are used in the decision process, the following two sub-questions were tried to be answered: 1. Are the PPC and PSC based on valid assumptions and methods? 2. Is the decision process – from the PPC onwards – arranged in an appropriate way for selecting the optimal contract for infrastructural projects, from a governmental perspective? METHOD This thesis was made using the methodology of case study research. A common and robust way of doing research and conducting analyses in case study research is called triangulation, in which the researcher attempts to confirm facts by using different data sources from the same category (e.g. interviewing multiple persons, or comparing academic articles) in combination with data sources from other categories: in example confirming academic findings and governmental publications by means of conducting interviews with relevant people. Eventually, for this research sixteen expert interviews have been conducted, complemented by investigating governmental publications, confidential PPC & PSC reports and academic research in numerous papers on public finance and risk management. MAIN CONCLUSIONS After an intensive research process, the following set of main conclusions could be drawn up , indicating that private financing - as in PPP contracts - does not add value like the PPC and PSC decision instruments make Rijkswaterstaat believe: ? Misuse and (in)transparency of PPC & PSC : There is room for manipulation in both the PPC and PSC, since these instruments are based on subjective input and are undisclosed. ? Ignorance or underestimating costs of financing in PPC: The costs of financing are underestimated and more often completely ignored in the PPC. This result in a bias towards PPP-contracts, since these financing costs are substantial. ? Inappropriate discount rate in PPC & PSC: The discount rate used for calculating the net present value in both the PPC & PSC is unjustified; they include a risk spread which – due to the cost - makes riskier projects seem more attractive, leading to irrational decision making. ? The costs of scope changes, delays and uncertainties: The impact scope changes, delays and the occurrence of unforeseen risks have on the costs for Rijkswaterstaat in DBFM-contracts is much higher than for DB-contracts – due to higher transaction costs and external financing which imposes additional interest rate costs. This is however disregarded in both the PPC and PSC. ? Innovation & maintenance costs: Innovation as a result of market incentives is overstated for DBFM-contracts; engineering efficiencies would be a better term. The question to what extent the opportunity costs of network efficiencies in with regards maintenance reduce the efficiencies gained by innovation (or engineering). ? Misrepresentation of added value PSC versus PPC: The use of faulty discount rates, and the incorporation of different financial structures and other cost units, makes the comparison of calculated value between the PPC and the PSC unjust. The methodology in the instruments is completely different making “added value” comparisons irrelevant. ? De-central governments are less able to execute DBFM: Due to the fact that nationwide infra-projects are embedded in the so called MIRT program, infrastructural projects using a availability based payment structure suitable. Since smaller projects carried out by de-central governments are not embedded in the MIRT program, the financing of PPP contracts is much more problematic for budgetary reasons. ? Lack of competition and bad negotiation position: During both the contracting phase as well as the exploitation phase, there is a lack of competition (i.e. market efficiency) which negatively affects the negotiation position of Rijkswaterstaat. RECOMMENDATIONS With regards to solving the issues concluded above we propose the following recommendations (amongst others): ? Be careful with personal preferences in PPC/PSC interpretation and team selection ? Disclose PPCs and PSCs to the general public ? Attach greater importance to qualitative arguments in the PPC ? Do not overestimate the value of innovation in the PPC ? Decrease transaction costs of tender process by standardization ? Take charges on inflexibility and delays into account in valuation ? Take financial costs into account in PPC ? Try pilot project of asking double prices in tender process For the full set and explanation of conclusions and recommendations, I would like to refer to the original document.