December 27, 2013
As shown below, developing the PSC estimate is the second step in conducting a VfM analysis (the first step is to develop a risk assessment). The following section details what inputs users should enter in the "Assumptions" sheet of the PSC Tool.
To develop a PSC, an agency should first compile the necessary data to utilize as assumptions in populating the model. As described earlier, agencies typically derive these assumptions from estimates, analyses, and decisions earlier in the project development process, such as:
The pre-populated Example Scenario within the PSC Tool demonstrates the range of assumptions when preparing a PSC. Users can select a variety of tolling examples to include in the scenario. The "Variable Tolling Example," the "Simple Tolling Example," or the "Toll Scenario Template" can be selected from the "Traffic Scenarios" drop-down menu. If the "Toll Scenario Template" is selected, users can navigate to the "Toll Scenario Template" sheet and enter data in this sheet. The template accommodates variations in toll rates and vehicle classifications similar to the "Variable Tolling Example" and the "Simple Tolling Example" scenarios.
The traffic scenarios provided in the PSC Tool are for demonstration purposes only. If an agency conducts a VfM analysis for a specific project, the actual components and assumptions used in constructing the PSC, such as the project cost estimate and traffic and revenue assumptions, must reflect the specific project being analyzed.
Users can alter the delivery structure of the Example Scenario through the "Project Delivery Structure" check boxes. The project delivery structure options in the PSC Tool are:
The project delivery structure assumptions are essential for facilitating a like-for-like comparison between the PSC and P3 option. Users should create a PSC that reflects the same structure that the private sector would use to deliver the project as a P3. Thus, if users wish to compare a design-build PSC to a design-build-finance P3, then they must check the "Design Build" and "Finance" boxes in the delivery structure. Users should note that because the tool uses a simple financial model that does not account for the full complexities of typical project finance debt structures, such as interest earnings on bond proceeds or a subordinate debt tranche, project financing costs may be higher than might be expected for an actual project. In particular, it should be noted that the model is designed for use with toll projects, and financing costs estimated by the model for non-toll projects are somewhat exaggerated. This is because the model assumes that any shortfall in toll revenue relative to the costs to be paid for in a particular year must be borrowed at the beginning of the year - and in the case of a non-toll project, this is essentially all of the costs (including debt service) for that year. Users should refer to the table below in determining the appropriate selections:
Table 1: Selecting Project Delivery Structure
|Project Delivery Structure Options|
|DB/DBB||DBFOM (availability payment)||X||X||X||X|
|DB/DBB||DBFOM (real toll)||X||X||X||X||X|
The "Timing" assumptions define when specific costs, revenues, and inflation factors apply to a project. The project delivery structure selected in the PSC Tool determines which timing assumptions are necessary. For example, if the project delivery structure does not include tolling, then users do not have to input values for the "Tolling Period, "Tolling Start," and "Tolling End Dates." Users can input data for the following "Timing" assumptions:
Based on the inputs to these "Timing" assumptions, the following fields will be calculated:
The "Timing" assumptions are used to support the project delivery structure selected in the PSC Tool. For example, a Design-Build-Finance delivery structure can be shown by selecting the Design Build and Finance check boxes. The "Timing" assumptions and other assumption fields that relate to this structure, such as Concession Period, Construction Start, and Financing, are then visible and can be completed.
Users should input their cost assumptions in base year dollars ( not current or year of expenditure dollars) consistent with the base date defined in the "Timing" assumptions table. All costs are inflated based on the user's assumptions entered in the "Inflation" table.
"Other Project Costs" assumptions represent the project costs that the agency incurs in its capacity as the project owner. The types of costs incurred may include right-of-way (ROW) costs, procurement costs, or transaction costs. Based on cost estimates, users input the total dollar value for the identified project costs, and select the timing assumptions that apply to each cost.
Users can input the "Total Cost" for each of the "Other Project Cost" assumptions. Additionally, users can select the "Start Date" and "End Date" from corresponding drop-down menus that contain the following selections: Base Date, Construction Start, Construction End, Operations Start, and Operations End. The "Start Date (Year)" and "End Date (Year)" fields are automatically calculated based on the selection.
The "Construction Costs" reflect the costs associated with the project's design and construction phase. Specific costs may include the cost of the design-build contract or the sum of the separate costs of the design contract and construction contract (under a design-bid-build structure, with the bid costs reflected under "Other Project Costs"). These costs are provided in the "Asset Type" column. Based on estimated costs, users may input the total dollar value of each cost in the "Cost ($)" field and then determine the allocation of each cost across the design and construction phase as percentages of the total cost. The cost profile for each "Asset Type" spreads the cost of the asset over the construction period.
Because agencies consider the life cycle costs of a project in the PSC, it is important to include "Operating Costs" and "Maintenance Costs" in the "Assumptions" sheet unless the P3 option being considered is Design-Build-Finance (i.e., it does not include operations and maintenance). Typically, maintenance costs include:
In the PSC Tool, the operations and routine maintenance costs are provided as annual values and can be entered as either a percentage of construction (Column E), or as a dollar value (Column F).
The assumptions required for "Periodic Maintenance Costs" are the same; however, users can enter a number in the "Years Per Period" field to indicate how often the periodic maintenance is completed. For example, if the value of the "Years Per Period" field is "8", then the "Periodic Maintenance Costs" will occur every eight years during the operations phase. Note that if users choose to input O&M costs as dollar values, the adjacent cells in column E black out so that the inputs are only either dollar values or percentages. The PSC Tool will prompt users to first "zero out" the percentage if switching to dollar values, or vice versa.
If a project delivery structure includes toll collection, then a project's traffic and revenue study would provide a basis for the "Toll & Other Revenue" assumptions in a PSC. Other revenues from non-road pricing strategies, such as utility right-of-way lease payments, may generate value relevant for the PSC. The PSC Tool accounts for tolling assumptions such as:
The "Funding" assumptions reflect the amount of any grant or subsidy that the agency may receive for a project, or that it may finance from non-project revenue streams such as taxes. The assumption can be provided as an amount of total funding or it can be set as a percentage of the construction costs.
If "Finance" has been checked as part of the project delivery structure, it indicates that project-based financing is included in the PSC. (Any financing based on the public sector's full faith and credit would be included in the "Funding" line item above)
If a project involves financing, users can specify the level of project-based finance taking into consideration what can be supported by project revenues and what is needed based on the funding gap. Users can input a percentage in the "% Of Project Financed" field, indicating the amount of the funding gap or net costs after funding amounts included in the "Funding" line item above. If financing based on project revenues is proposed to be used to address the entire gap, then users can enter "100%" as the assumption for this field. If some of the gap in funding will be provided by some other project source and not financed, users may input an amount less than 100%-but this will not normally be the case for a new highway project, so the user should input 100%. Users can then input the following assumptions that typically come from a project's finance plan:
The PSC Tool includes a debt reserve as part of its notional financing structure. The debt service requirement for each period is based on the debt payments calculated for the two future cash flow periods and the DSCR assumption. For example, if the minimum required DSCR assumption is 1.5, the requirement equals 1.5 times the sum of the debt payments in two future cash flow periods. The PSC Tool calculates whether the cash flow available for debt service is sufficient to meet this requirement. If it is insufficient, additional funds are borrowed in the debt reserve account notionally presented on the "Financing" sheet of the PSC Tool to increase the funds available for debt service. Any borrowed funds are held in the reserve until they are no longer required to meet the DSCR requirement.
Users should note that because the tool uses a simple financial model that does not account for the full complexities of typical project finance debt structures, such as interest earnings on bond proceeds or a subordinate debt tranche, project financing costs may be higher than might be expected for an actual project. This is particularly true for non-toll projects, because the tool has been designed for use with toll projects in which a revenue stream from the project is available to support costs over the life of the project.
There are four Inflation Factors that may be provided as Assumptions in the PSC Tool. Users may input inflation assumptions as percentages for the following indices:
Conducting a risk assessment is a prerequisite for developing a PSC. For general guidance on the risk assessment process, see FHWA's Primer on Risk Assessment for Public-Private Partnerships and for step-by-step instructions for conducting a risk assessment, see the Risk Assessment Tool User Manual in conjunction with FHWA's Risk Assessment Tool.
The "Risk Allocation" and "Risk Values" inputs are outcomes of the risk assessment process and may include:
Table 2 below specifies the Risk Assessment Tool outputs that users should carry over into the PSC Tool after completing the risk register from the public sector perspective.
Users may manually enter the discount rate in the PSC Tool as a percentage value in the "Rate" field. The discount rate is the factor applied to the cash flows to generate the project's Net Present Value (NPV) or Net Present Cost (NPC). With a discounted cash flow analysis, all cash flows are discounted to their present value using the discount rate established by the public agency. The discount rate is the rate at which the cash flows occurring at different times in the future are brought to a base period. Discounting allows project cash flows that have different timing assumptions to be discounted back to a base date, enabling a like-for-like comparison of the cost of each delivery structure. 
A discounted cash flow analysis may utilize either a real or a nominal discount rate. The selection of a nominal or real discount rate should be consistent with the use of nominal or real project cash flows. The pre-populated "Example Scenario" in the PSC Tool includes inflation assumptions that are applied to the project cash flows. The Example Scenario's nominal discount rate accounts for the effect of inflation and is therefore consistent with the cash flows being discounted. If users wish to apply a real discount rate, then they should assume no inflation factors.
Selection of the discount rate is a critical decision in conducting a VfM analysis because the discount rate affects all cash flows and has a significant influence on the relative NPV. The same discount rate may be used to calculate the NPV in the PSC and P3 Estimate to provide consistency across the present value calculations. A higher rate will typically favor the P3 Estimate over the PSC and a lower rate will favor the PSC over the P3 Estimate.  This may occur if a larger portion of PSC payments are made in earlier years relative to the P3 Estimate. If payment profiles are similar between the PSC and the P3 option, the discount rate should not affect the relative comparison (i.e., the per cent difference), although the actual values of the PSC and P3 Estimate will change.
There is no universal approach for selecting the discount rates for VfM analyses, though users are encouraged to refer to the "Discount Rate" section of Chapter 4 of the Shadow Bid Tool User Manual. Users may also refer to Chapter 3 of the Primer and the Guidebook for Value for Money Analysis for Public-Private Partnerships (under development) for additional information on selecting an appropriate discount rate.
To facilitate a like-for-like comparison between public and P3 delivery options, users may input "PSC Adjustments" (as dollar amounts incurred during construction or operations) to remove any differences between the delivery options. Such adjustments are discussed below.
Table 2: Integrating Risk Assessment Outputs with the PSC Tool
|Risk Assessment Tool||Public Sector Comparator Tool|
|Table 5 - Cost Impact Outputs||Public % of Cost Risk (DB)||G16||Assumption||DB Phase % Public Cost Allocation||E80|
|Table 5 - Cost Impact Outputs||Private % of Cost Risk (DB)||H16||Assumption||DB Phase % Private Cost Allocation||E81|
|Table 5 - Cost Impact Outputs||Public % of Cost Risk (Oper.)||G17||Assumption||Oper. Phase % Public Cost Allocation||E82|
|Table 5 - Cost Impact Outputs||Private % of Cost Risk (Oper.)||H17||Assumption||Oper. Phase % Private Cost Allocation||E83|
|Table 5 - Cost Impact Outputs||P10 DB Subtotal||F26||Assumption||P10 DB Cost Impact||E86|
|Table 5 - Cost Impact Outputs||P70 DB Subtotal||G26||Assumption||P70 DB Cost Impact||F86|
|Table 5 - Cost Impact Outputs||P90 DB Subtotal||H26||Assumption||P90 DB Cost Impact||G86|
|Table 5 - Cost Impact Outputs||P10 Oper. Subtotal||F27||Assumption||P10 Oper. Cost Impact||E87|
|Table 5 - Cost Impact Outputs||P70 Oper. Subtotal||G27||Assumption||P70 Oper. Cost Impact||F87|
|Table 5 - Cost Impact Outputs||P90 Oper. Subtotal||H27||Assumption||P90 Oper. Cost Impact||G87|
|Table 7 - Schedule Impact Output||Public % of Schedule Risk (DB)||G18||Assumption||DB Phase % Public Schedule Allocation||F80|
|Table 7 - Schedule Impact Output||Private % of Schedule Risk (DB)||H18||Assumption||DB Phase % Private Schedule Allocation||F81|
|Table 7 - Schedule Impact Output||Public % of Schedule Risk (Oper.)||G19||Assumption||Oper. Phase % Public Schedule Allocation||F82|
|Table 7 - Schedule Impact Output||Private % of Schedule Risk (Oper.)||H19||Assumption||Oper. Phase % Private Schedule Allocation||F83|
|Table 7 - Schedule Impact Output||P10 DB Subtotal||F38||Assumption||P10 DB Schedule Impact||E88|
|Table 7 - Schedule Impact Output||P70 DB Subtotal||G38||Assumption||P70 DB Schedule Impact||F88|
|Table 7 - Schedule Impact Output||P90 DB Subtotal||H38||Assumption||P90 DB Schedule Impact||G88|
|Table 7 - Schedule Impact Output||P10 Oper. Subtotal||F39||Assumption||P10 Oper. Schedule Impact||E89|
|Table 7 - Schedule Impact Output||P70 Oper. Subtotal||G39||Assumption||P70 Oper. Schedule Impact||F89|
|Table 7 - Schedule Impact Output||P90 Oper. Subtotal||H39||Assumption||P90 Oper. Schedule Impact||G89|
 FHWA, Innovative Program Delivery, http://www.fhwa.dot.gov/ipd/revenue/non_pricing/defined/
 Partnerships British Columbia, Methodology for Quantitative Procurement Options Analysis Discussion Paper
 Treasury Board of Canada Secretariat, Guideline to Implementing Budget 2011 Direction on Public-Private Partnerships