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P3 Toolkit

Guidance Documents

Value for Money Assessment for Public-Private Partnerships: A Primer

December 2012

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Chapter 9 - Summary and Closing Comments

Whether a project can deliver value for money through a P3 approach can be significantly affected by the project's characteristics, such as opportunity for better risk management or combined services. P3s may be a suitable procurement option if the following VfM drivers are present:

  • Sufficient scale and long-term nature to attract market interest and justify the sizable transaction costs to government of procuring the project as a P3.
  • Complex risk profile and opportunity for risk transfer to the private sector of those risks it is best able to manage.
  • Assignment of responsibilities for multiple elements to a single entity to deliver improved efficiency as design and construction become fully integrated up-front with operations and asset management.
  • Potential for innovation by focusing on output specifications to provide a wider opportunity to use competition as an incentive for private parties to develop innovative solutions in meeting the service specifications.
  • Measurable outputs that enable output specifications and a performance-based contract, with payments to the private sector linked to the quality and timeliness of the delivery of the outputs to ensure that the standards set in place through the contract will be implemented.
  • Competitive bidding process to ensure market price and encourage private entities to develop innovative means of service delivery while meeting government cost objectives.
  • Private sector skills to effectively manage the delivery and operations of the project.

VfM is a tool that can assist governments in selecting between public and private delivery options for highway projects. A systematic and transparent analysis for P3 projects such as a VfM analysis can increase overall confidence in the P3 market and add clarity for government agencies, private investors, banks, and other stakeholders seeking to invest and deliver P3 projects.

While there are several approaches to assessing VfM, they are much more alike than different – all measure the public sector costs of a conventional procurement in similar ways, all have identified similar drivers that are likely to make a P3 worthy of consideration, and all assess P3 proposals by quantifying risks and determining if the risk transfer is worth more than any price premium charged.

The experience gained with utilizing a Value for Money approach shows that the process of assessing the public-sector and private-sector costs of a project is both time-intensive and resource-intensive. Risk quantification workshops and special steering committees require time and expertise to achieve an accurate analysis. Agencies without the in-house capacity to do this work adequately may need to utilize consulting assistance. Quantification of risks is the hardest and most complex step in estimating the values of the alternate approaches to a project, but it is a crucial step in determining the appropriateness of a P3.

The reader should be cautioned that quantitative VfM analysis results are entirely dependent on the assumptions made, particularly regarding the crucial element of risk transfer to the private sector. The appropriateness of competitive neutrality calculations and selection of the discount rate can also significantly affect the outcome of the analysis. With long-term contracts, financial evaluations related to cost estimates, discount rates and risk allocation are subject to uncertainties, and thus any conclusions will not be definitive.  Thus, while quantitative VfM analysis is intended to aid in decision-making, it is just one of several factors that decision-makers may consider in determining how to proceed with procurement. 

 

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