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P3 Toolkit

Analytical Tools

P3-VALUE Analytical Tools

December 2012


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Chapter 3 - Overview of P3 Evaluation Methodologies

P3 Evaluation Methodologies

In determining whether to deliver a project as a P3 and how to optimally structure a P3, agencies may compare the financial impacts on their budgets as a result of different procurement options for a project. P3 financial evaluation methodologies include:

  • Value for Money analysis - This methodology compares the time-discounted, risk-adjusted, financial costs and benefits of delivering the same project over the same period under different procurement approaches. Qualitative analysis may be helpful in advance of, or as a supplement to, VfM analysis to account for considerations that are not quantifiable in VfM analysis such as political or legal issues or differences in scope or timing between different procurement options.
  • Cash Flow Analysis/Financial Assessment - This methodology compares nominal cash flows to assist in determining the affordability of different procurement options.

The evaluation method appropriate for a particular project, or at a particular phase in project development, depends on the question the public agency is trying to answer and the quality of the data available to answer the question. An agency may apply both methodologies to the same project. Also, they may both be applied at different points in the project development process.

Overview of Value for Money Analysis

VfM analysis allows decision-makers to compare the risk-adjusted net present costs to the public sector sponsor of different project delivery options. A VfM analysis compares the estimated risk-adjusted financial costs and benefits of a P3 project over an anticipated concession period to the financial costs and benefits of delivering a project over the same period using a traditional procurement approach.

VfM analysis provides a tool for policymakers to better understand the value of transferring or retaining project risks and to assess the overall value of a potential concession to a public agency. As such, public policymakers may use VfM analyses to assist in:

  • Selecting a preferred procurement option for a project;
  • Selecting a preferred bidder;
  • Negotiating with a selected bidder prior to finalizing the P3 agreement; and
  • Communicating procurement decisions to the public.

Steps in Determining Value for Money

While there are important variations in the application of VfM methodologies, the basic steps of VfM include:

  1. Create a baseline Public Sector Comparator (estimate hypothetical life cycle costs of procuring the project through a traditional approach, including capital and operating costs and costs of financing);
  2. Identify and assess the timing, probability and consequence of project risks and allocate them between the public and private sectors;
  3. Adjust the PSC for the costs of risks and competitive neutrality and subtract project revenues such as tolls;
  4. Estimate the hypothetical risk-adjusted life cycle costs of the P3 alternative (Shadow Bid), including costs directly borne by the public agency; and
  5. Compare the costs of the two approaches.

Value for Money Assumptions

The core assumptions necessary to conduct a VfM analysis are estimates of project life cycle costs, estimates of the value of retained and transferrable risks, adjustments for competitive neutrality, and discount rates. The following assumptions make up the core components of quantitative VfM Analysis:

  • Project life cycle costs: construction costs, procurement and oversight costs, operation and maintenance costs, financing costs, taxes and inflation.
  • Risk adjustments: the estimated value of retained and transferrable risks under different procurement options.
  • Competitive neutrality adjustments: adjustments to account for competitive advantages and disadvantages inherent to public agencies.
  • Discount rate: adjustment to cash flows over time to account for the time value of money.

An understanding of the project schedule is also necessary to estimate the timing of risks and life cycle costs accurately since they affect project cash flows.

There must be sufficient data to assess project risks and to estimate project life cycle costs. Sufficient preliminary design work should be completed on the project to understand the project's basic scope, alignment, potential revenue sources and procurement structures. If the project is tolled, a traffic and revenue (T&R) study can be a useful source for estimating potential revenues and operations costs. Figure 3-1 lists the assumptions required to develop a comprehensive VfM analysis. Initial sources of data and assumptions may include:

  • Preliminary engineering cost estimates;
  • T&R study; and
  • Project funding and financial plan

Figure 3-1. Assumptions in VfM Analysis

Figure 3-1. Assumptions in VfM Analysis.

Gathering the data and conducting the analysis required for a comprehensive VfM analysis can take more than six months; therefore, it is useful to consider conducting a VfM analysis sufficiently in advance of the completion of the environmental review process to prevent delays to procurement. The analysis may be revisited throughout the project development process as assumptions are refined.

Limitations of VfM Analysis

Whereas an agency may use a benefit-cost analysis (BCA) to determine whether a project's societal benefits are worth the cost to society, agencies typically conduct a VfM analysis once it has made the decision to undertake a project and wishes to evaluate how best to deliver it. Furthermore, since VfM analysis considers only financial costs and benefits, it does not consider the benefits to society from accelerating project delivery. VfM analysis primarily focuses on the financial impacts of different procurement models from the perspective of public sector project sponsors. Non-financial impacts such as benefits to users or non-users of a facility are not considered or are relegated to a qualitative evaluation.

A critical assumption in VfM analysis is that the procurement options considered are technically, legally and financially feasible and that the project can be delivered over the same time period using the different procurement options. Thus, a VfM analysis that compares a publicly financed PSC to a privately financed Shadow Bid would not be appropriate in cases where an agency decides to pursue a P3 because traditional publicly financed procurement options are not available. That said, VfM analysis may be used to compare two privately financed procurement structures such as a DBF and a DBFOM.

Another consideration is treatment of toll revenues. Toll revenues are in effect a direct payment from the public to the toll operator. If the P3 concessionaire is responsible for setting toll rates, the concessionaire may be able to increase toll revenues by charging higher rates to the public (within limits imposed by the P3 agreement). If this additional revenue is included in a Shadow Bid for the toll concession model, a lower Net Present Value (NPV) that compares favorably with the PSC may result, even if there is no difference in total costs.

Treatment of Federal financing support is another consideration. The Federal government has provided a number of direct and indirect opportunities for subsidized financing of transportation infrastructure, including tax-exempt debt (such as municipal bonds or private activity bonds); tax credit bonds (such as Build America Bonds); and subsidized direct loans such as loans under the Transportation Infrastructure Finance and Innovation Act (TIFIA). Accounting for such subsidies within the VfM financial analysis could potentially produce different results from analyses that treat these subsidies as being external from the perspective of the state, local public agency or P3 concessionaire.

Another issue that a VfM analysis may not consider is any differences in the profiles of the public agency's long-term payments. For example, the PSC involving DBB or DBF may involve much higher payments in earlier years, relative to availability payments made over a longer period of time to a DBFOM concessionaire. When the patterns of payment streams for alternatives differ significantly, the discount rate can have a significant impact on the analysis results because payments in early years have a higher present value when compared to payments made in later years.


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