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P3 VALUE 2.0 Webinars
Session 2: Value for Money Analysis

February 08, 2016
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Instructors

Patrick DeCorla-Souza
P3 Program Manager
Center for Innovative Finance Support

Photo of Patrick DeCorla-Souza

Marcel Ham
Vice President
IMG/Rebel

Photo of Marcel Ham

P3-VALUE 2.0 Webinars

  • P3: Public Private Partnership
  • P3-VALUE 2.0: Analytical tool to help practitioners understand processes used to quantitatively evaluate P3 options
  • This is the second of five webinars on P3-VALUE
    • P3 Evaluation Overview
    • Value for Money Analysis (today)
    • Project Delivery Benefit-Cost Analysis
    • Risk Valuation
    • Financial Viability Assessment

Webinar Outline

Part 1 Introduction

Part 2 Develop Public Sector Comparator

Part 3 Develop P3 Option and Compare to Public Sector Comparator

Part 4 Value for Money Analysis in P3-VALUE 2.0

Recap Summary of Webinar

Webinar Objectives

After this webinar you should be able to:

  • List the various components of the Public Sector Comparator (PSC) and P3 Option (P3)
  • Describe the methodologies used to estimate the PSC and P3 Option
  • Use the P3-VALUE 2.0 tool to perform a "high-level" Value for Money analysis

Part 1: Introduction

Definitions

  • Value for Money (VfM)
    The optimum combination of life cycle costs and quality of a good or service to meet the user's requirements
  • VfM Analysis
    Quantitative analysis, expressed as dollar or % difference
  • Public Sector Comparator (or PSC)
    Conventional procurement's baseline cost against which P3 option will be compared
  • P3 Option (or P3)
    Net cost of P3 option to Agency, including estimated payments to private partner as well as other costs incurred by public sponsor

Timing of VfM Analysis

Chart: Timing of VfM Analysis

View full-size timing chart

P3 Evaluation in Project Development

Chart: P3 Evaluation in Project Development

View full-size P3 Evaluation in Project Development chart

1. Identify Procurement Options

Chart: Identify Procurement Options

View full-size Procurement Options chart

2. Risk Assessment and Allocation

Chart: Identify Procurement Options

View full-size Risk Assessment and Allocation chart

3. Develop Public Sector Comparator

  • Estimate present value of hypothetical, risk-adjusted costs and revenues of conventionally procured project
  • Assume project is completed to same scope and quality standards as under P3 delivery
  • Assume same timeframe as under P3 delivery

4. Develop P3 Option

Definition: Present value of net costs to Public Agency for delivering same project as a P3

Components

  • P3 contract payment
  • Revenue to Agency (if any)
  • Retained cost & risk

5. Compare PSC with P3

Chart: Compare PSC with P3

View full-size comparison chart

6. Qualitative Assessment

  • Considerations related to project goals:
    • Additional (earlier) user benefits from acceleration
    • Quality of service
  • P3 contract-related considerations:
    • Viability
    • Performance
    • Achievability
    • Flexibility

Test Your Knowledge

True or False

  • Value for Money analysis requires that the PSC have the same scope as the P3, and be implemented in the same time frame as the P3.

Questions

Submit a question using the chat box

Part 2: Develop Public Sector Comparator

Key Assumptions for PSC

  • Same project scope as anticipated for P3 delivery
  • Same quality standards as anticipated for P3 delivery
  • Same time frame as anticipated for P3 delivery

Components of PSC Estimate

  • Base costs
    • Design-Build phase
    • Operations phase
  • Risk values
    • Base variability
    • Pure risk
    • Lifecycle performance risk
  • Financing fees
  • Other project costs
  • Competitive neutrality

Chart: Components of PSC Estimate

A. Base Costs

  • Pre-construction and construction (capital) costs
  • Operations cost
  • Maintenance costs
  • Reconstruction & rehabilitation costs

Chart: Comparison of Base Costs

View full-size Base Costs chart

B. Cost Impacts of Risk

  • Base Variability
    Example: Uncertainty in volume of asphalt
  • Pure Risks
    Example: Accident at construction site, causing cost overrun and/or delays
  • Lifecycle Performance Risks
    Example: Conflicts between DB and O&M contractors, supervening events exceeding liability caps, inflation

C. Financing Fees on Public Debt

  • Arrangement fees
  • Commitment fees
  • Swap fees

Note: Interest and principal payments are not included in financing costs in the P3-VALUE model

D. Other Project Costs

  • Procurement costs
  • Monitoring & oversight costs

E. Competitive Neutrality Adjustment

  • Adjustments made to PSC costs for tax liabilities and other P3 costs to ensure apples-to-apples comparison
  • Adjustments can include:
    • Federal corporate tax to be received under P3
    • State corporate tax to be received under P3
    • Self-insurance cost (tort liability limits under public operation favor public sector)

Perspective on Competitive Neutrality

Perspective Competitive Neutrality Adjustment
Agency Ignore taxes from P3 that it does not receive?
State Ignore taxes paid to Federal government?
National Include subsidy cost for Federal loans and taxes paid to Federal government?

Timing and Escalation of Costs

  • When discounting, timing of construction and operational expenses is important due to the time value of money
  • Cost must also be adjusted for inflation

Chart: Timing and Escalation of Costs

View full-size Timing and Escalation of Costs chart

Add Toll Revenues

  • If the road is tolled, toll revenues must be added to the PSC cash flows
  • Toll revenues should be adjusted for uncertainty (to be discussed in webinar on risk)

Chart: Add Toll Revenues

View full-size Toll Revenues chart

Discounting of Cash Flows

  • Discounting converts future cost and revenue cash flows to "present value" terms
  • Discount rate reflects the time value of money

    Chart: Discounting of Cash Flows

    Where PV = Present Value
    CFn = Cash Flow in year n
    r = discount rate
    n = year

Effects of Discounting

  • Cash flows later in a concession period will have a relatively lower impact than earlier cash flows

Chart: Effects of Discounting

View full-size Effects of Discounting chart

Effect of Discount Rate

  • Net present value is sum of all discounted cash flows
  • A higher discount rate leads to a lower present value

Chart: Compare PSC with P3

View full-size Effect of Discount Rate chart

Test Your Knowledge

Multiple answer

Which of the following are components of a PSC cost estimate in P3-VALUE 2.0:

  • Construction costs
  • O&M costs
  • Financing fees
  • Interest and principal payments

Questions?

Submit a question using the chat box

Part 3: Develop P3 Option and Compare to Public Sector Comparator

Process to Develop a P3 Option

Chart: Process to Develop a P3 Option

View full-size Process to Develop a P3 Option chart

1. Private Sector Efficiencies

  • Timing: Delayed start and/or accelerated construction
    • Complex P3 contracting may delay project start
    • P3 concessionaire may be financially incentivized to shorten construction period
  • Costs: Lifecycle costing may reduce overall construction, operation and maintenance costs

Chart: Private Sector Efficiencies

View full-size Private Sector Efficiencies chart

2. Costs of Transferred Risks

  • Transferred risks include risks pushed down to subcontractors
  • Efficient P3 risk management may reduce overall risk valuation and contingencies

Chart: Costs of Transferred Risks

3. Possible Higher Toll Revenues

  • P3 may lead to innovations such as improved access which could have an impact on toll revenues
  • P3s may carry out a more aggressive marketing campaign, resulting in a faster ramp-up of traffic

Chart: Possible Higher Toll Revenues

View full-size Higher Toll Revenues chart

4. Higher Transaction Costs

Public transaction costs:

  • Develop a complex tailored P3 contract
  • Oversight and monitoring of P3 concessionaire

Private transaction costs:

  • Prepare bid and obtain financing
  • Lengthy preparation process
  • Oversight and monitoring

5. Different Tax Structure

  • Concessionaire takes on additional (federal and state) tax liabilities that would not exist under conventional delivery
  • Subcontractors are subject to taxation as well, but this may be the same as under conventional delivery

Chart: Different Tax Structure

6. Different Financing Structure

P3 typically uses a combination of equity, debt and public subsidy

Chart: Different Financing Structure

Estimating P3 Contract Payments

A P3 bidder will determine its desired P3 contract payments (the "Bid") based on:

  • Base lifecycle costs
  • Valuation of transferred risks
  • Available subsidies and financing costs

P3-VALUE 2.0 iteratively determines the required up-front subsidy or concession fee (for toll concessions) or availability payment (for AP concessions) to satisfy the debt terms and required equity return

  • To be covered in Financial Viability Assessment webinar

Public Agency Costs under P3

Under P3, the public Agency will incur the following costs:

  • Payments to P3 concessionaire
  • Retained costs
  • Value of retained risks
  • Other costs

Compare PSC with P3

Chart: Compare PSC with P3

View full-size comparison chart

Test Your Knowledge

Multiple answer

In an Availability Payment concession, which of the following are included in the calculation of the public agency's payments to the P3 concessionaire:

  • Estimated base lifecycle costs of the concessionaire
  • Costs of risks transferred to the concessionaire
  • Toll revenues

Questions

Submit a question using the chat box

Part 4: Value for Money Analysis in P3-VALUE 2.0

FHWA's P3-VALUE 2.0

Chart: FHWA's P3-Value 2.0

View full-size P3-VALUE 2.0 chart

Training Modules

Chart: Training Modules

Training Navigator User Interface

Graphic: Training Navigator User Interface

View full-size User Interface graphic

Demonstration of VfM Module

Please stand by as we open the Excel file

Tool and References

Webinar Summary

Webinar Recap

Part 1 Introduction

Part 2 Develop Public Sector Comparator

Part 3 Develop P3 Option and Compare to Public Sector Comparator

Part 4 Value for Money Analysis in P3-VALUE 2.0

Upcoming P3-VALUE Training

  • Homework review - Tuesday, February 16, at 2:00pm
  • February 22 Project Delivery Benefit Cost Analysis
  • March 7 Risk Valuation
  • March 21 Financial Viability Assessment

To access the Homework Review webinar, please use the following link and telephone number:

Resources

FHWA's Center for Innovative Finance Support Website:
https://www.fhwa.dot.gov/ipd/

P3 Website:
https://www.fhwa.dot.gov/ipd/p3/

Questions?

Submit a question using the chat box

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