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P3 Toolkit

Analytical Tools

P3-VALUE Analytical Tools

December 2012


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Chapter 6 - Developing a Shadow Bid

The estimated risk-adjusted, whole-life, net present costs (NPC) of the PSC are compared to the estimated risk-adjusted, whole-life, net present costs of delivering the project as a P3. This estimate is called a "Shadow Bid." The process of developing a Shadow Bid is similar to the process of developing a PSC, though the hypothetical costs to the private sector to deliver the project as a P3 are considered instead. The Shadow Bid Tool allows users to model private sector cash flows to calculate the payments the private partner would require to deliver the project under different privately financed procurement structures. The costs of the Shadow Bid include the net present costs of payments to the private partner, which include compensation for life cycle costs, financing costs, and costs of transferrable risks, plus the costs to the public agency for retained risks and the costs of procuring and overseeing the project. The Shadow Bid tool allows users to model those costs to calculate the payment required by a potential private partner under different procurement and compensation models.

The Shadow Bid incorporates many of the same life cycle cost assumptions incorporated in the PSC, though some of the values may vary. For example, the Shadow Bid may reduce construction or operations and maintenance costs if it is reasonable to assume that the P3 procurement structure will allow the private sector to manage costs more efficiently than the public sector. Additional efficiencies may be assumed in the private sector's risk management, which thereby lowers the costs of risk adjustments to the Shadow Bid cash flows. Finally, differences in the private sector's financing costs and tax burden are important to consider in calculating the payments demanded by the private sector under a P3 procurement structure. Table 6-1 summarizes the differences between the PSC and the Shadow Bid. For more information, refer to FHWA's primer on Financial Structuring and Assessment for Public-Private Partnerships (see Appendix A).

Table 6-1. Differences between the PSC and Shadow Bid
Assumption Type PSC vs. Shadow Bid
Construction, Operations, and Maintenance Costs The bundling of project delivery phases under a single contract may allow the private sector to more efficiently manage project costs.
Financing Costs The Shadow Bid will likely assume higher financing costs to account for equity returns and higher interest rates demanded for non-recourse debt.
Taxes The tax burden to the private partner may be different under the P3 procurement model, so corporate tax rates (and depreciation adjustments to income) will need to be considered for the Shadow Bid.
Risk Adjustments The private sector may be more capable of managing certain transferrable risks than the public sector, so private delivery should lower the costs associated with those risks.
Competitive Neutrality The costs of the PSC may be adjusted to neutralize the public sector advantages that are not equally available to private bidders, such as tax exemptions and the ability to self-insure risks.


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