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P3 Toolkit

Analytical Tools

P3-VALUE Analytical Tools

December 2012

 

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Chapter 7 - Comparing Costs of the Shadow Bid and the Public Sector Comparator

VfM is expressed as the percentage difference between the costs of delivering the project through the PSC and the costs of the Shadow Bid. To determine VfM, the costs of financing and delivering the PSC, including adjustments for risks and competitive neutrality, are compared to the net present costs of payments to the private sector and adjustments for retained risks and any additional procurement and oversight costs (see Figure 7-1). A P3 offers better VfM if the total costs calculated by the Shadow Bid or preferred actual bid are less than the costs calculated by the PSC.

Figure 7-1. Example Value for Money Comparison

Figure 7-1. Example Value for Money Comparison.

An agency may use the results of the VfM analysis in different ways. An agency can develop and compare a PSC and Shadow Bid during the initial project financial assessment and feasibility study, prior to determining the procurement method and issuing the solicitation. After agencies receive bids in response to a Request for Proposals (RFP), they may compare the PSC to the actual bids received to assess if VfM is still achieved prior to awarding the contract as a P3. In negotiating with the bidders, agencies may use the models to calculate the costs of transferring different risks to the private sector, sharing them, or retaining them, to understand tradeoffs. Finally, once an agency reaches its decision, it may use the results of the VfM analysis to demonstrate its rationale for choosing a particular procurement method. For more information on VfM analysis, refer to FHWA's primer on the subject (see Appendix A).

The example depicted in Figure 4 portrays a comparison between a public procurement with a baseline present cost of $60 million and a P3 Shadow Bid for which the baseline present cost (net of financing costs) is $65 million. While the baseline P3 cost is $5 million more and imposes an additional $6 million in ancillary and financing costs, the $13 million reduction in the costs of risk due to transfer of some risks to the private sector and $8 million in competitive neutrality adjustments overcome these cost differences and result in a net savings to the government of $9 million overall, offering 7 percent in VfM. This example illustrates the central trade-offs that often characterize P3 procurement: the government trades away significant risks in exchange for higher baseline costs and financing costs in the P3 scenario.

 

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