P3-VALUE Webinar - September 5, 2013
P3 Program Manager
Center for Innovative Finance Support
1. How do you identify and assess market interests?
Well again, I'm not a person with a lot of practical experience but I can tell you the way this is done is you issue something called a request for information. And a lot of times a request for information, you issue that to potential concessionaries and they basically let you know if they're interested or not or whether they would come in under certain conditions, et cetera. So that's one conventional way it is done but it seems to me that even earlier on in the process you would know if concessionaries are interested if like I indicated in your project screening or planning stage you issue a list of projects. And Virginia DOT has actually begun to do that and they've gone through their long range plan and figured out which of the projects they were proposing to build might be good candidates for P3s and they simply put that out on their Web site. And when these projects are out there, concessionaires express interest and so that's how you know whether the market is interested in your projects or not. So there are several ways to do it and I'm sure we can have some practitioners perhaps speak to it some more at the end of this webinar when we open the lines.
2. Are there any less costly models under development for quote unquote, "investment grade analysis" as an alternative to proprietary traffic and revenue models?
Yeah, you are absolutely right; the proprietary traffic and revenue models are expensive but to do at the project development stage if you want to assure potential concessionaires that there is revenue in the project you really have to do a pretty good thorough analysis. Now if you are simply doing at the planning stage, perhaps there are less detailed sketch planning models that you could use. And one of them is the TRUCE model, the tool for rush hour user evaluation which FHWA has on its Web site that simply provides very crude estimates of revenue from projects. But that's not something that you can-- it might be fine at the planning stage to simply find out is there sufficient revenue to make this project a good candidate for a P3 but it would definitely not satisfy the markets that this project has enough revenue in it.
3. What are retained risks and how do you calculate them?
Okay, so retained are the risks that the public sector retains in a conventional procurement it's the risk of cost overruns, the risk of delays which also lead to cost overruns. If it's a toll project it can be also revenue risk. Now of course there's several factors that play into these cost increases and delays that are factors that affect these three primary risks and the way you calculate them is by going through a risk assessment and I think that is going to be part of, at least we will introduce risk assessment in the next lesson so perhaps we can wait until then to talk about it.
4. Is VfM specific to the infrastructure projects or are there any synonyms?
Well VfM or value for money is a term that has been used in practice and I think it started in the UK, in Australia and Canada and all other countries have adopted that term. So I don't know of any other synonyms for VfM. Benefit cost analysis is the closest but as I mentioned, benefit cost analysis includes much more than financial evaluation which is what value for money is. The term money really is cash, so it's saying value for cash. And so that's the term that has been used conventionally all over the world.
5. As the answer to the P3 VfM analysis can be subject to assumptions, is it vetted and if so, who by and what stages?
That's the reason, of course, we are doing these Webinars because you need to be aware of the assumptions, the key assumptions that your consultant will be using to do the Value for Money analysis. It's a very complicated analysis involving very detailed financial models. So, it requires a lot of financial expertise. So, even if the financial model itself is pretty good and vetted, the assumptions that go into it may be used just based on whatever the consultant thinks is a good assumption. So, the reason we're doing these Webinars is so that the public agencies understand what these key assumptions are and they need to evaluate whether these assumptions that are used in the Value for Money analysis are good assumptions. And, of course, if you have an open process, and that's where the transparency issue comes in; if you have this open process, you will ensure that the assumptions you are making have gone through public and stakeholder review and everybody is comfortable with those assumptions. So, it's important to have a transparent process.
6. Isn't the VDOT NoVA outer beltway project a DBFOM with shadow tools?
Well, I don't know whether you are talking about the existing-- the outer beltway, as far as I know, is still on the drawing boards. It has gone through several cycles of up and down, and I don't know where it's at now, but my understanding is it has been resuscitated. But now, it's nowhere near being completed, absolutely. I mean I think it's back on the plan, but I have no idea where it's at in terms of even project development.
7. Are costs incurred by a project sponsor to do a Value for Money analysis eligible for reimbursement?
Well, again, this is something that obviously if it's in the planning stage, you can use, I'm sure. I'm not in the planning office here, but I assume it would be eligible for your normal planning funds if you're doing it at the planning stage and project development stage just like your EIS' are eligible for federal funding. Yeah, it would be. I don't see any reason why it wouldn't. But again, I'm not in the planning office. So, I can't give a definitive answer to that question.
8. How likely is it that a project qualifies in a traditional benefit cost analysis, but not in Value for Money?
Well, since we haven't really done these analyses, you know, I have no way of knowing. But, we need to-- it really depends on the project I would assume, you know. I think one possibility is when a project would not be undertaken in the same year or would not be completed in the same year as the P3 option would complete the project. Maybe it would be delayed by ten years and then for Value for Money, since you can't do the analysis unless you assume that the project is delivered conventionally in the same year as the P3 option, you make a wrong assumption. Otherwise, you can't do a Value for Money analysis. So, the only way then you can do a correct analysis is to do a benefit cost analysis because with benefit cost analysis, you can account for the fact that the benefits now are being brought forward. Instead of the benefits being received ten years from now under conventional procurement, they are achieved in year one. And so, you have all these extra benefits that you can account for and a BCA could theoretically, in a case where the conventional procurement might delay the project, a BCA, a benefit cost analysis, might actually show a positive result for a P3 because of these extra benefits relative to the Value for Money.
9. Are there any quantitative benefits from taking the project costs "off" the balance sheet for the agency?
Well, again, that's an issue for the public agencies, but if they go above a certain debt capacity, my understanding is that the rating agencies downgrade their debt and of course, that has financial-- debt for the entire state and then that has a financial consequence for the state, which I'm sure you could calculate the value of that loss, or the extra amount that the state would have to pay on their debt, on their future debt. Now, my understanding is rating agencies are becoming smarter and may be actually now considering the fact that commitments are being made for things like availability payments, and they may be accounting for these future commitments to the cash flows of the agency. These are the kinds of things that were actually done in Europe, to take the project off the balance sheet and the agencies and that's why we have situations like Greece occurring where basically they were trying to not account for it in their budget.
10. Is FHWA working on how environmental performance agreements might be incorporated into P3 contracts to enable them to deliver superior VfM compared to a PSE through incentive payments that ensure delivery of superior transportation projects and environment performance? For example, increasing vehicle occupancies, shifting to low carbon mode, improved congestion management, reduce air and water pollution, etc.
Well, you know, we are working on this benefit cost analysis module and I guess I welcome anybody, including Michael, to participate on the review panel. We are looking for folks out there who might be interested in reviewing draft documents. Of course, these are privileged documents not to be shared. So, it's only for review, and I'd be happy to include Michael on my list of reviewers of these documents so that he can assist us in ensuring that these types of considerations are included in the benefit cost approach.
11. Is there any guidance stipulating the required sophistication of a P3 analysis for major project? If so, where is it located?
Well, there is no guidance on the requirements. We are issuing some sort of guidance on financial planning and major projects and it will reference our P3 screen tool. So, the P3 screening tool is all that a person might want to use to evaluate the potential of their major project for a P3. So, we are not requiring any detailed analysis, but simply screening evaluation, which is not a quantitative detailed evaluation.
12. Is there any particular reason why shadow tolls are not practiced much, especially in the U.S.?
Well, the U.K. used it a lot and they have dispensed with it and I think that there are probably some good reasons in the sense that when you're doing a shadow toll, you're actually transferring some risk over to the concessionaire, and it's sort of like a half risk. And in situations where you are trying to get the best deal from the private sector and you want to reduce financing costs, by increasing their risk, by shifting this so-called demand risk over to them, their financing costs are going to increase and therefore, their bids are going to be higher. So, there hasn't been much need to do a shadow toll because if you want to transfer risk, you just do a complete toll concession. Why do this halfway house. There's really no benefit. I mean if you're really worried about risk, you just do a real toll concession.