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Fact Sheets

Benefit-Cost Analysis for Public-Private Partnership Project Delivery

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Introduction

Downtown Tunnel and Berkley Bridge east photo The Downtown Tunnel and the Berkley Bridge east of the Southern Branch of the Elizabeth River, South Hampton Roads, VA.

Value for Money (VfM) analysis is frequently used to evaluate Public-Private Partnership (P3) highway concession proposals. VfM considers the financial impacts of choosing a P3 delivery model over a more conventional approach. The analysis is undertaken from the perspective of the procuring agency, and does not quantitatively estimate non-financial public benefits. For example, the public benefit from accelerated project delivery is one of the key reasons that State and local governments in the U.S. pursue P3s. Yet the current VfM approach is not able to account quantitatively for benefits to travelers and others from delivering a project earlier than would have been possible under conventional procurement. Few attempts have been made to quantify and monetize benefits from accelerated project delivery or other improvements in service quality under a P3. Benefit-Cost Analysis (BCA) could complement VfM analysis to address these issues and contribute to transparency and accountability in the P3 procurement process.

Differences Between VfM AND BCA

A basic assumption in VfM analysis is that conventional procurement is possible with public financing in the same time frame as the P3. However, this may not be true if the procuring agency is faced with budgetary or debt capacity constraints that limit its ability to tap into future revenue streams to pay for investment today. Thus, benefits to users that may accrue from earlier delivery of the project under a P3 are not considered in quantitative VfM analysis, although they may be considered in a qualitative fashion.

Another assumption in VfM analysis is that the project scope under the P3 will be exactly the same as under conventional delivery. Thus, any modifications to scope proposed in a P3 bid would need to be included in the conventional delivery option to make the VfM evaluation valid. BCA, on the other hand, can compare projects with differing scope, and is able to capture benefits or disbenefits from changes in scope proposed in a P3 bid.

Finally, VfM analysis does not quantitatively capture benefits to users from changes in service quality provided to users under a P3. For example, a P3 may provide higher pavement ride quality, improved incident response, or reduced traffic disruption during construction and maintenance activities. BCA can account for these benefits to users quantitatively, while VfM either ignores them or relegates them to qualitative assessment.

The perspective taken with BCA is much broader than that taken with quantitative VfM analysis. Societal costs and benefits broader than those that accrue mainly to the public sponsor are quantified and monetized to the extent practicable. Thus BCA is a more appropriate framework to use than VfM in answering the question: "From society's perspective, will P3 delivery constitute an improvement compared to the conventional approach?"

Benefit-Cost Evaluation Process

In the context of P3 project delivery, BCA 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.
Benefit-Costs Analysis framework diagram
Benefit-Cost Analysis Framework

Text of Benefit-Cost Analysis Framework flow chart

  • No Build
    • Step 1: Project Benefits/Costs
      • Delayed PSC
      • Step 2: Impacts of Funding Constraints
        • PSC
          • Step 3: P3 Delivery Effects
            • P3

The first two steps assume conventional delivery of the project. In the final step, the efficiency impacts that relate 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 proposal (RFP). The economic efficiency analysis in the final step parallels VfM analysis, which (necessarily) assumes that conventional procurement is possible in the same timeframe as the P3.

Program Areas of the Center for Innovative Finance Support

The Center for Innovative Finance Support is a one-stop clearinghouse for expertise, guidance, research, decision tools, and publications on program delivery innovations. Our website, workshops, and myriad resources support transportation professionals in the delivery of innovative approaches.

Public Private Partnerships (P3s)

The Center for Innovative Finance Support's P3 program focuses on the potential of design-build-operate-finance maintain (DBFOM) concessions funded through tolls or availability payments to reduce project cost, improve quality outcomes, and provide additional financing options.

Alternative Project Delivery

The Center for Innovative Finance Support's Alternative Project Delivery program provides information on contractual arrangements that allow for greater private participation in infrastructure development by transferring risk and responsibility from public project sponsors to private sector engineers, contractors and investors.

Project Finance

Center for Innovative Finance Support's Project Finance program focuses on alternative financing, including State Infrastructure Banks (SIBs), Grant Anticipation Revenue Vehicles (GARVEEs), and Build America Bonds (BABs).

Tolling And Pricing

The Center for Innovative Finance Support's Federal Tolling and Pricing program focuses on the use of tolling and other road user charges as a revenue source to fund highway improvements, and the use of variably-priced tolls as a tool to manage congestion.

Value Capture

The Center for Innovative Finance Support's Value Capture program explores strategies for tapping into the added value that transportation improvements bring to nearby properties as a means to provide new funding for surface transportation improvements.

Quick Facts

Value for Money analysis has the following limitations:

  • It does not quantify all benefits to society, such as mobility benefits.
  • It necessarily assumes that conventional delivery is possible in the same timeframe as P3s.
  • It cannot quantify societal impacts of project scope changes proposed by a P3 bid.

Benefit-cost analysis can overcome these limitations and provide a more comprehensive evaluation of societal costs and benefits of P3 delivery in comparison to conventional delivery.

Contact:

Patrick DeCorla-Souza
(202) 366-4076
Patrick.DeCorla-Souza@dot.gov

www.fhwa.dot.gov/ipd/p3/toolkit/

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