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3.0 Benefit-Cost Evaluation Process

A proposed P3 project may be evaluated (a) using financial analysis to evaluate its financial impact on the budget of the procuring agency; and/or (b) using benefit-cost analysis to compare societal benefits against societal costs, i.e., economic efficiency analysis. Each type of evaluation is described further below in the context of the project delivery process. The Figure below shows the relationship between financial and economic evaluation.

Figure 1. Financial Evaluation vs. Economic Evaluation

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Financial Analysis

Project delivery financial evaluation will generally include an analysis of Financial Viability and Value for Money (VfM). Financial Viability Analysis evaluates the feasibility of the project on the basis of all the financial cash flows, including the ability to pay for the project through existing or potential new revenue streams. This may initially be done assuming conventional delivery. At a later stage, if a decision is made to consider P3 delivery, the analysis may again be undertaken assuming P3 delivery. VfM analysis can then be used to compare the P3 option to conventional procurement.

Economic Efficiency Analysis / Benefit-Cost Analysis (BCA)

The focus of this guide is on a process for comprehensive evaluation of societal benefits and costs associated with P3 design-build-finance-operate-maintain (DBFOM) project delivery. In the context of P3 project delivery, this analysis - the PDBCA - may be conducted in three steps:

1. Project evaluation (including evaluation of funding policy choices such as funding through broad-based tax sources vs. direct user charges), assuming conventional delivery of the project based on a financially feasible schedule, which may delay delivery compared to a P3 option;
2. Incremental evaluation of an accelerated delivery schedule assuming that the project can be conventionally procured in the (earlier) time frame proposed under the P3; and
3. Incremental evaluation of the P3 procurement type, focusing on the direct impacts of P3 delivery.

The first two steps assume conventional delivery of the project.¹ In the final step, the efficiency impacts relating directly to P3 procurement are estimated relative to accelerated conventional delivery of the project. This will include impacts of a P3 on costs, schedule, quality of service and travel demand relative to accelerated conventional delivery, as well as impacts of any modifications to scope proposed by a P3 bidder in response to a Request for Proposals (RFP). The economic efficiency analysis in the final step parallels VfM analysis, which (necessarily) assumes that conventional procurement is possible in the same time frame as the P3.

The rest of this guide describes how a State Department of Transportation (DOT) might apply the PDBCA framework ex ante, i.e., before bids are received. Two alternative delivery methods for a major project are compared:

• Conventional delivery using a series of design-bid-build (DBB) contracts. Construction would be delayed by several years, as the DOT faces severe budgetary constraints and limits on its debt capacity.
• P3 delivery implemented under a single 50-year DBFOM contract, with an annual availability payment to be paid by the public agency to the concessionaire during the operations phase. The project construction would begin immediately after reaching financial close.

As depicted in Figure 2, the State DOT would compare the two project delivery methods as follows using the three-step process:

1. A project BCA would first demonstrate the project's net costs and net benefits to society as a whole, comparing the Build alternative to the No Build. Any proposed tolling policy options, such as congestion pricing to maximize toll revenue vs. other objectives such as optimizing traffic flow on the facility, would be included in the project's scope. The Build alternative in this project BCA is termed the "Delayed Public Sector Comparator" or Delayed PSC, representing the most likely and realistic alternative to P3 delivery if the agency is fiscally constrained.
2. The next step would evaluate the accelerated Public Sector Comparator (PSC) based upon the same project delivery method as the Delayed PSC, but assuming that the project can start in the same time frame as the P3.
3. The final step would determine differences in costs and benefits between the P3 and the accelerated PSC attributable to P3 delivery.

Figure 2: Benefit-Cost Analysis Framework

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Footnotes

1 Step 2 accounts for situations where the public agency does not expect that conventional delivery would be possible in the same time frame as the P3, due to budgetary or debt capacity constraints. If this is not the case, then this step in the analytical framework could be skipped.

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