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P3-VALUE: Shadow Bid Tool User Manual

December 31, 2013

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Chapter 4. Key Assumptions

The Shadow Bid Tool's pre-loaded example scenario represents a hypothetical highway project to demonstrate the types of inputs that users need to develop a P3 Estimate as well as to demonstrate how the P3 Estimate outputs inform the VfM analysis.

Step 3. P3 Estimate

Developing the key assumptions for the PSC and P3 Estimate is a complex process that brings together the outcomes of several other tasks conducted in a project's development. Depending on the project, assumptions may include:

  • Project schedule;
  • Cost estimates for design, construction, operation, and maintenance;
  • Cost estimates for other projects costs such as land/ROW;
  • Tolling, traffic and revenue analysis;
  • Public policy decisions regarding the project objectives and tolling;
  • Funding analysis (estimates of grants or subsidies available for the project);
  • Financial analysis (estimates of the capital structure - debt and equity - and associated costs and terms of private finance, such as the coupon or interest rates, fees, maturity, and grace period for the P3 Estimate) and a detailed financial plan;
  • Inflation analysis; and
  • Outcomes of the risk assessment

In evaluating a "real-world" project, public agencies would have to conduct extensive analyses and investigations to obtain these inputs. Agencies would likely refer to previous project examples to assess how the project assumptions were developed and then assess how the actual project was procured and delivered. Agencies would also engage market specialists and project leaders regarding lessons learned from previous projects and determine ways to improve assumptions based on how those projects were delivered.

The "Assumptions" sheet provides the data inputs for the P3 Estimate. To calculate the cost of P3 delivery to the public agency, the Shadow Bid Tool estimates how much it will cost the private sector to deliver the project over the entire life cycle. Therefore, the Shadow Bid Tool assumptions consider a range of project costs and/or revenues that the private sector incurs or receives in delivering the project. The Shadow Bid Tool assumptions also consider costs incurred by the agency, such as the cost of rights-of-way (ROW) and risks that the agency will manage under the P3 delivery structure.

It is important to note that the assumptions relating to the private sector's costs and revenues reflect the private sector's view of the project. For each assumption category, the assumptions may be the same as the PSC or they may be different if the agency has determined that the private sector may deliver the project differently. For example, the assumption for maintenance cost may be different in the P3 Estimate if the agency anticipates that the private sector can achieve long-term maintenance cost efficiencies. When common assumptions vary between the PSC and the P3 Estimate, it is important for the agency to recognize that the VfM analysis outcome is based on the premise that the private sector can bid the project and deliver it as estimated to realize the anticipated VfM.

Using the Shadow Bid Tool

Users input key project data into the "Assumptions" sheet. Note that all inputs are entered into the cells shaded light blue either manually or from the available drop-down menus. The assumptions fields represent the types of inputs users would need to develop a P3 Estimate, though actual assumption categories and values for a "real world project" would be project-specific. The general categories of assumptions included in the Shadow Bid Tool are:

  • Traffic Scenarios
  • Project Delivery Structure
  • Timing
  • Design & Construction Costs
  • Operating & Maintenance Costs
  • Other Project Costs
  • Toll & Other Revenue
  • Funding and Financing
  • Inflation and Discount Rates
  • VfM Assumptions
  • Depreciation
  • Outcomes of the risk assessment
Traffic Scenarios

The "Example Scenario" demonstrates a range of assumptions that may be considered when preparing a P3 Estimate.

If tolling is part of the P3 delivery structure, then a traffic scenario may be developed to reflect the private sector's view on traffic. The Shadow Bid Tool provides tolling examples that can be loaded into the Shadow Bid Tool to demonstrate analysis for a tolled highway project, which 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 project and traffic data provided in the example scenario in the Shadow Bid Tool is for general information purposes only. When an agency is conducting a VfM analysis for a specific project, the assumptions used in constructing the P3 Estimate, such as the traffic and revenue assumptions, will reflect the specific project being analyzed.

Project Delivery Structure

The example projects stored in the Shadow Bid Tool demonstrate different project delivery structures. Users can alter the delivery structure of an example project through the "Project Delivery Structure" check boxes. The components of the project delivery structure options in the Shadow Bid Tool are:

  • Design Build: The design aspect refers to completing plans for the project, which includes producing engineering drawings and selecting construction materials and the construction site. Build refers to constructing the facility, which includes reviewing conditions at the building site, providing construction staff and materials, selecting equipment, and, when necessary, amending the design to address problems discovered during the construction phase. Design Build is generally carried out by the private sector in P3 delivery structures.
  • Finance: Financing includes providing capital for the project, which may include issuing debt such as project revenue bond, and raising equity. This option is also generally checked for a P3 delivery structure. Other assumptions, such as those relating to tax and depreciation, may also be needed in the Shadow Bid Tool if private finance is included in the P3 delivery method.
  • Operations: Operations includes facilitating the performance and availability of the highway, which includes removing debris and snow. It may also include the cost of collecting traffic data. This option can be checked in the Shadow Bid Tool if the P3 contract includes operations in its delivery structure.
  • Maintenance: Maintenance includes keeping the project in a state of good repair, which includes filling potholes, repaving or rebuilding roadways, and ensuring the integrity of bridges and highways. This option can be checked in the Shadow Bid Tool if the private sector will undertake highway maintenance as part of the P3 delivery structure.
  • Toll Collection: Toll collection includes the installation and operation of toll collection facilities if the agency is seeking to include toll revenues under the P3 delivery structure, such as a Real Toll P3 delivery structure. This option can be checked in the Shadow Bid Tool if the P3 delivery structure involves tolling.

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. 


The "Timing" assumptions develop the project cash flows and define when specific costs and inflation factors apply to the project. The project delivery structure selected in the Shadow Bid Tool (which may include Finance, Operation, Maintenance, etc. listed above) will determine which "Timing" assumptions will apply for the project. For example, if toll collection is not included in the project delivery structure, then the "Timing" assumptions for tolling, including length of tolling period and start and end dates, are not visible. Users will input data manually for the following "Timing" assumptions:

  • Base Date (date - format YYYY)
  • Construction Period (number of years from 1 to 10)
  • Construction Start (date - format YYYY)
  • Operations Period (number of years from 1 to 75)
  • Operations Start (date - format YYYY)

Based on the inputs to the above "Timing" assumptions, the following fields will be calculated:

  • Concession Period (no. years) - Sum of the construction period and the operations period
  • Construction End (date) - Adds the construction period to the construction start
  • Operations End (date) - Adds the operations period to the operations start
  • Tolling Period (no. years) - Equals the operations period
  • Tolling Start (date) - Equals the operations start date
  • Tolling End (date) - Adds the tolling period to the tolling start

The "Timing" assumptions are used to support the project delivery structure selected in the Shadow Bid 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 assumptions fields that relate to the selected structure, such as Concession Period, Operations Start and Financing, can then be completed.

Entering Cost Assumptions

Users should estimate 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.

Construction Costs

The "Construction Costs" assumptions reflect the costs associated with the project's design and construction phases. This may be the cost of a Design Build contract. These costs are provided in the "Asset Type" column. The design and construction costs are typically estimated as part of the project cost estimation process, and the outputs from this process are used as inputs in developing the P3 Estimate. The assumptions for the P3 Estimate may be the same as for the PSC or they may be different if the agency is developing separate assumptions for private sector delivery. The design and construction cost assumptions can be profiled over the construction period (a timing assumption) by allocating the cost percentage per year. This profile includes an "S-curve" for the project that indicates the value of work completed over time and is generated during the cost estimation process. The Shadow Bid Tool provides an example where the costs are designated by asset type. Users may also use the space provided to enter the costs of design and construction activities.

Operating and Maintenance Costs

VfM analysis considers the whole life cycle costs of a project and P3 delivery structures typically include the private sector accepting some responsibilities during the highway operations phase. Depending on the P3 delivery structure, operating costs, routine maintenance costs and/or periodic maintenance cost assumptions may be entered in the "Operating Costs" and "Maintenance Costs" sections of the "Assumptions" sheet to reflect the costs incurred by the private sector in delivering these services to the project. [1] The assumptions for the P3 Estimate may be the same as for the PSC or they may be different if the agency is developing separate assumptions for private sector delivery. Typically, maintenance costs include:

  • Routine maintenance that is planned and performed on a routine basis to maintain and preserve the condition of the highway system; and
  • Periodic (or preventive) maintenance that includes resealing, re-gravelling, or new line markings at regular intervals during operations.

In the Shadow Bid Tool, the operations and routine maintenance costs are provided as annual costs, 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 value 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 a user chooses to input costs as dollar values, the adjacent cells in Column E black out so that the inputs are only either dollar values or percentages. The Shadow Bid Tool will prompt users to first "zero out" the percentage if switching to dollar values, or vice versa.

Other Project Costs (Concessionaire Costs)

"Other Project Costs" reflect costs that the private sector may incur in delivering the project, such as development fees. The Shadow Bid Tool allows users to enter the "Total Cost" (in dollars) for the "Other Project Cost" assumptions. The total cost can be entered and the "Start Date (Year)" and "End Date (Year)" for each assumption can be populated via the drop-down menu. These costs are funded from the private entity's cash flows, similar to operations and maintenance costs. Therefore they reduce the amount of funds available to be paid out as dividends, requiring a higher payment for the private entity to deliver the project and meet its financing commitments.

Toll & Other Revenue

When considering a toll-based project, public agencies should conduct traffic and revenue (T&R) studies to investigate options for tolling and other revenue that may be generated by the project, prior to conducting a VfM analysis. An agency's decision to proceed with a toll-based concession typically reflects public policy considerations related to the project objectives and is informed by the T&R studies prior to the VfM analysis being conducted. The outcomes from the T&R studies provide the basis for the tolling and revenue assumptions included in the P3 Estimate.

As part of the T&R studies, an agency may develop a set of tolling assumptions (e.g., traffic, toll rates, revenue leakage) for a privately operated facility that are different from the tolling assumptions for a publicly operated facility. This can result in an agency applying different toll assumptions in the P3 Estimate from those used for the PSC. The Shadow Bid Tool demonstrates the following assumptions for a tolled project:

  • A "Simple Toll Example" and "Variable Toll Example" that can be loaded into the Shadow Bid Tool using the "Traffic Scenario" drop-down menu. A blank "Toll Scenario Template" is also provided for users interested in entering their own tolling assumptions. The "Toll Scenario Template" requires the same level of detail regarding toll rates and volumes as the other tolling examples. To ensure that any revisions to the traffic scenario are incorporated into calculations of the outputs, users should click the "Update" button on the traffic scenario worksheet they are working on once they have made revisions to the assumptions.
  • The "Toll Revenue Leakage" assumption reflects a set percentage of revenue that is not collected each year (i.e., due to unpaid toll violations). "Toll Revenue Leakage" is expressed as a percentage deducted from annual gross revenues and is entered as a negative value in the Shadow Bid Tool.
  • The "Toll Revenue Ramp-Up" period reflects the period after the road opens when initial traffic volumes increase to a steady state. The ramp-up period may be up to six years long in the Shadow Bid Tool. Users can enter a negative percentage value for each year to be subtracted from the period's gross toll revenue. It is important to review the traffic assumptions to be used in the P3 Estimate to assess if the ramp-up period has already been factored into the traffic volumes. If so, leaving the ramp-up period assumptions out will avoid double counting the impact of the ramp-up period. Similarly, if toll revenue values are inputs to the P3 Estimate, it is important to consider whether toll leakage has already been accounted for in these values prior to including this assumption in the P3 Estimate.
  • "Annual Non-Road Pricing Revenue" covers a wide landscape of strategies that may be employed to generate value from the project, which may also be relevant in constructing the P3 Estimate. Depending on the project, non-road pricing strategies may involve the sharing of costs, revenues or financial risk between public and private partners, or may impose fees or taxes on defined groups expected to benefit from the project. [2] For example, value capture strategies can be applied to roads to take advantage of the increased property values and other economic benefits produced by such improvements as in the case of the San Joaquin Toll Road in California and E-470 in Colorado. Non-road pricing strategies can be accounted for as project revenues under the P3 Estimate.

The "Funding" assumptions reflect the amount of any grant or subsidy that the agency may receive for a project. In the Shadow Bid Tool, the funding amount reduces the overall construction cost that the private sector will incur in delivering the project. The assumption can be provided as an amount of total funding or it can be set as a percentage of the construction costs.

Project Financing

"Project Financing" assumptions reflect the project's financing plan for the private sector, after the project funding has been taken into consideration. If "Finance" has been checked as part of the P3 delivery structure, then this section of the Shadow Bid Tool needs to be completed. The financing structure provided for the hypothetical project example presents a simple debt and equity structure, with the debt and equity assumptions reflecting averages from recent P3 highway transactions completed in the United States. [3]

The first assumption is the project's leverage, representing the amount that the project costs are financed through debt. For example, if this assumption is 88 percent then 88 percent of the project costs (net of Funding) are financed through debt, with the remaining 12 percent financed through equity for the hypothetical project example. Once the leverage is established, assumptions regarding the project's debt and equity sources are required.

The debt assumptions are crucial in understanding the financing costs of a privately financed project. The Shadow Bid Tool provides a simplified project financing example and contains the following example assumptions that may be useful when developing a P3 Estimate:

  • Facility Start Date - Calculated as the construction start date in the Shadow Bid Tool (the debt is issued at the start of construction).
  • Maturity (years) - Indicates the debt period.
  • Issuance Fee - The issuance fee and interest rate determine the financing costs in the Shadow Bid Tool. The issuance fee is a one-time fee incurred when debt is initially drawn and is applied to the total borrowed amount.
  • Interest Rate - The interest rate is applied per period to the current loan balance.
  • Annual Debt Service Cover Ratio (DSCR) - The minimum required DSCR (see Primers) for each cash flow period. The DSCR is calculated after construction completion to ensure that it meets the minimum required DSCR.
  • Payment Schedule - Either semi-annual or annual debt payments can be selected from a drop-down menu.
  • Debt Facility - The P3-VALUE tools provide for bond- and draw-type facilities. The bond facility is based on the borrower raising debt in the year construction commences, with interest payments throughout the construction phase followed by principal and interest payments during operations until the debt matures. The draw facility is based on the borrower drawing down the debt throughout the construction phase with principal and interest payments occurring during operations until maturity.
  • Grace Period (no. of cash flow periods) - Applies to the debt principal payments that commence after construction completion. Debt interest payments will continue to be made during the grace period.

The Shadow Bid Tool also includes an "Equity Return" assumption, which is entered as a percentage, which reflects the cost of equity to the project and is the internal rate of return (IRR) to the equity investor. The level of equity is determined by the leverage assumption. The equity return is an important assumption in the Shadow Bid Tool, as the payment required by the private sector is estimated to achieve this level of return.

The Shadow Bid Tool provides for two reserves as part of the notional financing structure:

  • Debt Reserve: The debt service requirement for each period is based the debt payments calculated for the two future cash flow periods and the DSCR assumption. For example, if the DSCR assumption is 1.5, the requirement equals 1.5 times the sum of the debt payments in two future cash flow periods. The Shadow Bid 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 Shadow Bid 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.
  • Periodic Maintenance Reserve: Periodic maintenance can be a high cost item during operations, occurring at regular intervals. To smooth out the cost of periodic maintenance during the operations phase and to provide available funds when periodic maintenance occurs, the Shadow Bid Tool calculates a value per period for periodic maintenance and provides a reserve for these funds, which is notionally presented as part of the "Financial Statement" sheet.

It should be noted that P3 projects typically rely on multiple sources and types of financing over the life of a project. The simple financing assumptions in the Shadow Bid Tool provide a demonstration of the basic considerations that go into calculating a privately financed project's financing costs and are not intended to represent a "real-world" P3 project's financial structure. For example, the tool does not account for interest earnings on bond proceeds or a subordinate debt tranche. As a result, 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. 


Cost assumptions are entered into the Shadow Bid Tool in base year dollars and inflated based on user assumptions. There are four inflation factors provided as assumptions in the Shadow Bid Tool and users may input inflation assumptions as percentages for the following indices:

  • Consumer Price Index (CPI) - Applies to all costs during the operations period as well as any non-road pricing revenue).
  • An index for construction phase costs - Applies to construction costs if the field has a value greater than zero.
  • An index for operations phase costs - Applies to operations period costs if the field is greater than zero. (If the value is zero, the CPI will be used).
  • An index for toll rates (if the project delivery structure includes toll collection) - Applies to Toll Rates Revenue.
Discount Rate

The "Discount Rate" in the Shadow Bid Tool is the factor applied to the cash flows to generate the project's Net Present Value (NPV) or Net Present Cost (NPC). With a DCF 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.

Users are advised to consult FHWA's Guidebook on Value for Money Analysis to gain an understanding of the appropriate use of discount rates. If all risk costs are accounted for in cash flows, a risk-free discount rate may be used to estimate the NPV. In a Shadow Bid, risks that are borne by subcontractors of the concessionaire are accounted for in the operational cash flows, while risks borne by the concessionaire (such as systematic risks, project coordination and interface risks, and long-term performance risks) are accounted for in project financing costs. Thus, a risk-free discount rate (i.e., a rate that excludes project-related risk premiums) may be used to obtain the NPV.  The discount rate used with the Shadow Bid Tool can either be a manual input or reflect the project internal rate of return (IRR).  However, a manual input of the risk-free discount rate is recommended, since all risks are accounted for in cash flows.  For comparison with the PSC estimate, it is important to ensure that all risks are also accounted for in the PSC, including those risks borne by the concessionaire, i.e., systematic risks, project coordination and interface risks, and long-term performance risks. Some agencies, in lieu of estimating and accounting for concessionaire risks in the PSC, use the P3 Estimate of project IRR as the discount rate to reflect the risk-adjusted time value of money in calculating the NPVs of both the PSC and the Shadow Bid. This approach is used to account for risks that are borne by the concessionaire but not accounted for in the PSC.[4]  However, in net cost projects (i.e., where project costs exceed project revenues), the PSC estimate may produce counterintuitive results if this approach is used - the discount rate will reduce the NPC instead of increasing it.  The project IRR is generated by a button on the "Output" Sheet, which must be run (after all other project assumptions have been included in the Shadow Bid Tool) for the project IRR to be calculated and used in deriving the NPC results. The project IRR notionally illustrated in the Shadow Bid Tool reflects the risk-adjusted project cash flows at the 70th percentile.

The same discount rate should be used to calculate the NPV in the PSC and P3 Estimate to provide consistency across the present value calculations. To use the project IRR as the discount rate for the PSC, the user must first calculate the project IRR in the Shadow Bid Tool and then enter the project IRR as the discount rate in the PSC Tool. It should be noted that the project IRR is used to reflect concessionaire risks, which are different from the risks normally calculated by the Risk Assessment tool and included in the cash flows. Those risks are generally risks pushed down to the subcontractors, and a P70 level is generally used to reflect the market price of those risks.

A discounted cash flow analysis may utilize either a real or 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 Shadow Bid 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.

Selecting the Discount Rate

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. A higher rate will typically favor the P3 Estimate over the PSC and a lower rate will favor the PSC over the P3 Estimate. [5] 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.

Jurisdictions in the United States have adopted various approaches to calculate the discount rate for the P3 Estimate. Following examples set forth by recent United States projects and other jurisdictions, users can select the preferred method for their project. Options for selecting the discount rate are discussed below and users may also reference 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. Methodologies for selecting the discount rate include:

  • Social Time Preference Rate: This rate reflects the value society places on consumption of goods and services now, compared with consumption in the future. Refer to HM Treasury in the UK [6] for further discussion.
  • Weighted Average Cost of Capital: This approach applies standard investment portfolio theory by setting the discount rate at the project's pre-tax, time-weighted average cost of capital (WACC) of the P3 delivery structure. This approach incorporates the financing principle that the cost of obtaining finance is separate from the cost of using finance, risk is inherent in a particular asset, and investors in the marketplace are the best estimators of risk value. To accurately model the project over the concession life, the time weighted cost of capital is used and will be equivalent to the project's internal rate of return (IRR). [7] Refer to Partnerships British Columbia for further guidance.
  • Capital Asset Pricing Model (CAPM): The approach applies different discount rates to the PSC and P3 delivery structure, utilizing the CAPM for P3 delivery to account for systematic or market risks within the project cash flows. Refer to Infrastructure Australia for further guidance. [8]
  • Risk-Free Rate: The approach uses the public sector's long-term cost of financing as a proxy for a risk-free rate and may be used if the agency believes the costs of project risks are fully reflected in the project cash flows, including systematic risks, project coordination and interface risks, and long-term performance risks that are normally borne by the concessionaire. Examples include FDOT's I-595 Value for Money Analysis.[9]

Consideration of various discount rate methods may be useful in understanding how the selection of the discount rate impacts the VfM analysis results and to highlight the break-even point between the delivery options. [10] This can be completed through a scenario analysis, based on the discount rates calculated under the various methodologies.

Several discount rate methodologies incorporate an adjustment to the discount rate for project risks. In selecting the discount rate, it is important to review the project's risk register and consider whether any double-counting of risks may occur if the discount rate includes a risk adjustment.

Agencies that choose to use the risk-free rate as the discount rate should understand that the risk-free rate of public sector borrowing reflects the credit worthiness of the public agency rather than the project's specific risk and that to fully account for project risks all potential project risk costs must be quantified through the risk assessment process and applied to project cash flows.

Many project risks are difficult to assess and to quantify through a risk assessment process. To account for uncertainty about project costs and risk values, a project-specific discount rate, such as the project's WACC, may be utilized. Theoretically, a project's WACC reflects the project's cost of capital which is, in turn, a reflection of project investors' time value of money and perception of a project's risk. This is because investors in a project will demand a higher rate or return for a project that is perceived as riskier. In this way, the WACC discount rate methodology may be more indicative of a specific project's risk profile than other approaches.

VfM Assumptions

As stated earlier, there are several different approaches that an agency may take in preparing a P3 Estimate. One approach may result in the agency assessing the potential efficiencies that the private sector may generate under the P3 delivery structure. The efficiencies can be reflected in the P3 Estimate by updating the "VfM Efficiencies Options" project assumptions and preparing tolling assumptions for a P3 delivery structure and running the P3 Estimate with these assumptions. Another option may be to apply a general level of efficiency to the project costs and/or revenues. The Shadow Bid Tool provides examples of the types of general efficiencies that may be applied in a P3 Estimate, including:

  • A construction cost efficiency that reduces the overall project construction cost.
  • A schedule efficiency which reduces the length of the construction and extends the operating period so that the total concession period remains the same. As a result, additional operations and routine maintenance costs can occur when this efficiency is applied.
  • An operating efficiency that reduces the operating costs.
  • A maintenance efficiency that reduces the routine and periodic maintenance costs.

Agencies may also consider an efficiency that reduces the risk values incorporated in the project cash flows, or a revenue efficiency that may increase toll revenues and/or decrease leakage rates or the ramp-up period. In determining which efficiency factors, if any, may be included in a P3 Estimate, it is important for the agency to understand the assumptions that underpin the P3 Estimate's project costs and revenues and how any assumptions regarding private sector efficiencies are reflected in the project cash flows. For example, the risk values provided in the "Example Scenario" are based on an assumption that risks can generally be managed better under a P3 delivery structure. Including an efficiency factor in the Shadow Bid Tool that reduces the baseline costs in the P3 Estimate may result in this assumption being double counted.

The "VfM Tax Options" reflect assumptions on the corporate income tax payable at the Federal and State level. Users may input these assumptions as a percentage, which are used to calculate the notional net income provided on the "Financial Statements." Taxes such as sales tax are generally reflected in the project cost assumptions. However, if an agency considers it appropriate, an estimated PSC adjustment can be applied to the PSC to account for any benefit attributable to the tax-exempt status of the public agency. The corporate income tax rates may also be reduced or set to zero as demonstrated in the "Example Scenario" in the Shadow Bid Tool. If it is unclear whether or how much corporate tax will be paid by a P3 concessionaire, the corporate income tax rate may be set to zero when using a post-tax equity rate of return as an input on the Assumptions sheet. The resulting P3 estimate will be an estimate that excludes consideration of corporate taxes, and may therefore be lower than actual P3 bids that may be received.

The "VfM Other Options" reflect assumptions that may be required in developing the project cash flows for the P3 Estimate. The Shadow Bid Tool includes an assumption regarding "Working Capital" as an example of the other types of assumptions that may be required for a P3 Estimate. Users are able to select the "Period (No. of Months)" as 6 or 12 months for the "Working Capital" assumption. The "Working Capital" assumption in the Shadow Bid Tool helps to ensure that sufficient cash is retained for the project before dividends are paid.

Additionally, users are able to select "Yes" or "No" from a drop-down menu for the "Tax Carryforward Allowed" assumption. Loss Carryforward is an accounting technique that applies the current year's net operating losses to future years' profits to reduce tax liability. If "Yes" is selected as the assumption, the Shadow Bid Tool applies operating losses to years with positive net operating incomes.


There are a number of factors that influence the tax obligations for the private sector, including the P3 project delivery structure and the concession length. These factors can drive the private sector to structure a project in a specific way that will impact its tax obligations. These include the depreciation rate applied to the project's assets and the treatment of interest and fees on its debt facilities, as in the Shadow Bid Tool.

When developing a P3 Estimate for a real-world project, agencies would seek professional advice on the likely tax and depreciation treatment for their project. Toll concession P3 contracts are usually treated differently than availability payment P3 contracts for tax purposes. They may benefit from depreciation deductions, unlike availability payment concessions.  In the Shadow Bid Tool, there are three options to notionally demonstrate the impact of depreciation, which can be selected from the drop-down menu under the "Depreciation" section of the "Assumptions" sheet:

  • "Straight-line" depreciation where an equal amount of depreciation expense is taken annually over the life of the asset. This is the simplest method and is found by taking the original cost of the asset minus the residual value and dividing it by the estimated useful life of the asset.
  • "Accelerated" depreciation where a depreciation expense is taken that is higher than the annual straight-line amount in the early years and lower in later years. It should be noted that there may be statutory restrictions that limit the ability of the private entity to benefit from utilizing this method of depreciation.
  • No Depreciation" removes the impact of depreciation from the project cash flows. This option should always be used with availability payment concessions, since such concessions are not eligible for depreciation deductions in calculating taxes owed.

After the depreciation method is selected, users are required to enter values for the "Asset Life" and "Residual Value." These assumptions are required to calculate the depreciation amounts notionally illustrated in the Shadow Bid Tool. The discussion above indicates that the asset life and residual value are used in calculating both straight-line and accelerated depreciation in the Shadow Bid Tool.

The Shadow Bid Tool also notionally illustrates the impact of how interest paid on project debt can be accounted for by the private entity. Two choices are offered in the tool, which can be selected using the "Interest Expense Treatment" drop-down menu:

  • "Capitalized" interest is an account created on the income statement that holds a suitable amount of funds to pay off upcoming interest payments. Furthermore, this type of interest is seen as an asset and unlike most conventional types of interest, it also is expensed over time.
  • "Expensed" interest is the expense paid for borrowed money. The difference between the two choices impacts the net income or loss for the private entity, which is provided on the "Financial Statements." If applied, capitalized interest may increase net income losses early in a project when compared to interest expensed, reducing the private entity's taxation obligations.
Risk Allocation & Risk Values

Conducting a risk assessment is a prerequisite for developing a P3 Estimate. 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" tables reflect the outcomes of the risk assessment process. The assumptions for the P3 Estimate may be the same as the PSC or they may be different if the agency is developing separate assumptions for private sector delivery. The assumptions provided in the Shadow Bid Tool include:

  • An allocation of project risks between the public and private sectors based on the preferred P3 delivery structure.
  • The cost and schedule delays calculated as part of the quantitative risk assessment for the project's construction phase and operations phase, including the 10th percentile, 70th percentile, and 90th percentile values for cost and schedule delays in real dollars.

Table 1 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.

The allocation of transferable risks is used in the Shadow Bid Tool to calculate the private sector's cost of delivering the project. Another approach to adjusting the private sector's project cash flows to account for the risks they accept would be to include a risk premium in the P3 Estimate rather than the transferable risk values. The Shadow Bid Tool does not accommodate this approach, but users may refer to the VDOT PPTA Value for Money guidance for additional information on how this approach would apply in a "real-world" project analysis. There is a strong link between the level of risks included in the project cash flows and the discount rate selected for the P3 Estimate, as the discount rate can also be used to reflect the risks associated with project delivery.

The retained risk values in the Shadow Bid Tool represent the risks that the public sector will manage under the P3 delivery structure, which are also included in the P3 Estimate as agency costs. The "Example Scenario" in the Shadow Bid Tool includes risk values that are 15 percent lower than the PSC Tool, which reflects an assumption that the project risks can be better managed under the P3 delivery structure and is based on recent VfM analysis reports for highways. [11]

Table 1: Integrating Risk Assessment Outputs with the Shadow Bid Tool

Risk Assessment Tool Shadow Bid Tool
Worksheet Field Cell Worksheet Field Cell
Table 5 - Cost Impact Outputs Public % of Cost Risk (DB) G16 Assumption DB Phase % Public Cost Allocation E103
Table 5 - Cost Impact Outputs Private % of Cost Risk (DB) H16 Assumption DB Phase % Private Cost Allocation E104
Table 5 - Cost Impact Outputs Public % of Cost Risk (Oper.) G17 Assumption Oper. Phase % Public Cost Allocation E105
Table 5 - Cost Impact Outputs Private % of Cost Risk (Oper.) H17 Assumption Oper. Phase % Private Cost Allocation E106
Table 5 - Cost Impact Outputs P10 DB Subtotal F26 Assumption P10 DB Cost Impact E109
Table 5 - Cost Impact Outputs P70 DB Subtotal G26 Assumption P70 DB Cost Impact F109
Table 5 - Cost Impact Outputs P90 DB Subtotal> H26 Assumption P90 DB Cost Impact G109
Table 5 - Cost Impact Outputs P10 Oper. Subtotal F27 Assumption P10 Oper. Cost Impact E110
Table 5 - Cost Impact Outputs P70 Oper. Subtotal G27 Assumption P70 Oper. Cost Impact F110
Table 5 - Cost Impact Outputs P90 Oper. Subtotal H27 Assumption P90 Oper. Cost Impact G110
Table 7 - Schedule Impact Output Public % of Schedule Risk (DB) G18 Assumption DB Phase % Public Schedule Allocation F103
Table 7 - Schedule Impact Output Private % of Schedule Risk (DB) H18 Assumption DB Phase % Private Schedule Allocation F104
Table 7 - Schedule Impact Output Public % of Schedule Risk (Oper.) G19 Assumption Oper. Phase % Public Schedule Allocation F105
Table 7 - Schedule Impact Output Private % of Schedule Risk (Oper.) H19 Assumption Oper. Phase % Private Schedule Allocation F106
Table 7 - Schedule Impact Output P10 DB Subtotal F38 Assumption P10 DB Schedule Impact E111
Table 7 - Schedule Impact Output P70 DB Subtotal G38 Assumption P70 DB Schedule Impact F111
Table 7 - Schedule Impact Output P90 DB Subtotal H38 Assumption P90 DB Schedule Impact G111
Table 7 - Schedule Impact Output P10 Oper. Subtotal F39 Assumption P10 Oper. Schedule Impact E112
Table 7 - Schedule Impact Output P70 Oper. Subtotal G39 Assumption P70 Oper. Schedule Impact F112
Table 7 - Schedule Impact Output P90 Oper. Subtotal H39 Assumption P90 Oper. Schedule Impact G112
Other Project Costs (For Agency)

The "Other Project Costs (For Agency)" assumptions reflect the project costs incurred by the agency in its capacity as the project owner. These costs are estimated prior to developing the P3 Estimate as part of the project cost estimation process and the outputs from this process are used as inputs in developing the P3 Estimate.

The types of costs incurred by the agency can vary and may include costs associated with the acquisition of any Land/ROW, Procurement or Transaction Costs, Quality Assurance, Related Works, Owner Costs / Construction Engineering Costs (which include the allowable costs for environmental evaluation and documentation, permits, or approvals), or other miscellaneous project costs.

The Shadow Bid Tool requires a dollar value for the other project costs identified, as well as the "Start Date (Year)" and End Date (Year)" when the costs are incurred. The start and end date columns have the option for users to select the following from drop-down menus: Base Date, Construction Start, Construction End, Operating Start, and Operating End.

Funding for Agency Costs

"Funding for Agency Costs" is an assumption that reflects how the agency may fund the costs that it incurs under the P3 delivery structure (retained risks and other project costs). An assumption may be included in the Shadow Bid Tool if the agency has a grant specifically to cover its costs, which is separate from the funding amount discussed above.



[1] Refer to Appendix B for a definition of these costs.

[2] FHWA, Innovative Program Delivery,

[3] Averages are based on publicly available information for the Midtown Tunnel, I-595 Corridor Improvements, Port of Miami Tunnel, North Tarrant Expressway, IH-635 and Presidio Parkway projects.

[4] Partnerships British Columbia, Methodology for Quantitative Procurement Options Analysis Discussion Paper

[5] Treasury Board of Canada Secretariat, Guideline to Implementing Budget 2011 Direction on Public-Private Partnerships

[6] HM Treasury, Value for Money Guidance, 2006

[7] Partnerships British Columbia, Methodology for Quantitative Procurement Options Analysis Discussion Paper

[8] See Infrastructure Australia, Discount Rate Methodology Guidance, 2009.

[9] Florida Department of Transportation, I-595 Value for Money Analysis

[10] Caltrans, Analysis of Delivery Options for the Presidio Parkway Project, 2010

[11] California Department of Transportation (Caltrans), Analysis of Delivery Options for the Presidio Parkway Project, 2010 and Florida Department of Transportation, I-595 Value for Money Analysis


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