- Briefing Room
Jordan Wainer: Below the audio information is a list of attendees. Below the list of attendees is a box titled Materials for Download, where you can access a PDF copy of today's presentation as well as the exercise for later on. Please select the file you want to download, click Download File, and follow the prompts on your screen. In the lower left corner is a chat box where you can submit questions to our presenters throughout the webinar. Our webinar is scheduled to run until three thirty today. We're recording today's webinar so if anyone was unable to join us, they can review the material at a later time. All lines are muted, but we will provide instructions for how to ask questions over the phone at a later time. So with that, I will hand it over to Patrick DeCorla-Souza.
Patrick DeCorla-Souza: Thanks, Jordan, and welcome everyone to this third of a series of webinars on the P3-VALUE tool. This one is focused on project delivery benefit-cost analysis and we will be going into the details of how the module on benefit-cost analysis works. With me today to help present this webinar is Marcel Ham from IMG Rebel, and he will be joined by Wim Verdouw, who is the modeler who developed the P3-VALUE tool. These are the webinars we've had so far. We had an introductory webinar on January 25. We had a Value for Money webinar on February 8 and an exercise on Value for Money February 16. All of these are currently available in recorded form on our website for you to review at your leisure. Today we'll be presenting the Benefit-Cost Analysis module, and two weeks from now we will introduce Risk Valuation, and two weeks after that Financial Viability Assessment.
This is what we hope to cover today in Parts 1 and 2, which I will cover. We will introduce benefit-cost analysis and the process that is used in P3-VALUE to undertake a P3 delivery benefit-cost analysis. Part 3, which will focus on P3 delivery economic differences will be presented by Marcel Ham, and Part 4 on using the P3-VALUE tool will be presented by Wim Verdouw, and then I will come back with a summary at the end of this webinar.
So to go through just an overview of what benefit-cost analysis is and how it differs from value-for-money analysis that we covered at the last webinar on P3-VALUE, this slide here shows you the key differences. Value-for-money analysis is a financial evaluation, which means that all we look at are financial cash flows-- that is, costs and revenues. Project delivery benefit-cost analysis, which we are covering today, looks at societal benefits and costs, and these are not necessarily all cash flows. Now, on the left-hand side you'll also see something called Financial Viability Assessment, which is also a financial evaluation, and that is another module within P3-VALUE that we will cover, as I said earlier, four weeks from today.
So the key differences between financial and economic evaluation are shown in this slide. Financial evaluation, as I said, involves cash flows, and we, in value-for-money analysis, take the perspective of the procuring agency. In economic efficiency evaluation, on the other hand, we focus on all benefits and costs, not just those that are simply cash flows. For example, travel time savings, which is not a cash flow but a benefit to society no less. So we cover societal benefits as well as take a societal perspective, whereas, as I indicated, in financial evaluation, especially affordability and value-for-money analysis, the perspective taken is that of the procuring agency.
So in financial evaluation, the key questions that are being answered are: Is the project affordable to the public agency? And this could be either through conventional delivery or through P3 delivery. You're trying to find out if the agency has the funds available in its budget or funds that it can borrow to undertake the project. And the second question is, once you've determined that the project is affordable, to find out whether P3 delivery would be preferable to conventional delivery, particularly looking at the financial position of the public sponsor or the agency that is doing the evaluation.
In economic efficiency evaluation, on the other hand, the questions that are being asked are: Is the project as a whole beneficial to society? And under a subcategory of that, you might be asking the question: Is the scope optimal from a societal net benefit perspective? So is the design the most optimal solution to maximize societal benefits? A second question is: Is the project more beneficial to be undertaken today as against delaying the project to some point in the future? So would accelerating be beneficial? Then under the P3 delivery issue, we would ask a question: Is P3 delivery going to provide more net benefits to society than conventional procurement?
So this diagram shows you how P3-VALUE is structured. First, you have project assumptions that you feed into the various modules, and starting with Risk Assessment, which shows up at the bottom there. There's Risk Assessment, and you evaluate or value risks, which feed into your financial viability assessment, which looks at base cost and your risks and tries to evaluate whether you have sufficient funds to build the project. If that is then affordable, you can go to value-for-money analysis, which is another module in the P3-VALUE tool. Now, as indicated here, risk assessment also feeds into project delivery benefit-cost analysis, which is the societal perspective in P3 valuation.
So this table indicates how a benefit-cost analysis is different from value-for-money analysis, and as you can see here, all of the costs that are considered, whether we are talking about value-for-money analysis or benefit-cost analysis, are pretty much the same. The only difference is down at the bottom here, you see private transaction costs for losing bids are not a concern in value-for-money analysis because you're taking the perspective of the procuring agency. However, in benefit-cost analysis, you're taking a societal perspective, and therefore you do need to consider cost to concessionaires or potential concessionaires in preparing the bids, which then aren't selected.
On the benefit side of the picture, important to see here is that benefit-cost analysis looks at user benefits as well as externalities, and so all of these are taken care of in benefit-cost analysis. In value-for-money analysis, these are not cash flows, and so they are not taken into consideration, and besides, of course, these benefits do not necessarily occur all to the public agency. They are incurred, or they are received, by other members of society, users of the travel facility, for example, or, in the case of emissions, the entire population might be impacted. What we see here is the financing costs-- and financing costs tend to be debt and equity contributions and the interest and dividend payments paid to debt and equity, and these are transfers. These are not economic resource costs. Similarly, revenues are transfers from the user to the authority collecting the tolls. And so since they are economic transfers, they're costs to one party and they are benefits to the other parties, and if you try to include them, of course they would cancel out, and so there's no point in including them in benefit-cost analysis, and therefore they are ignored.
On the other hand, in value-for-money analysis, all of these are extremely important to figure out what the financial situation of the public agency will be, and so you do need to consider revenues, taxes, tax exemptions, and all of the financing costs. Another difference relates to the kinds of dollars used in these evaluations. You see here benefit-cost analysis uses real dollars, which means that they are dollars that are not indexed for inflation. They simply reflect, for example, O&M costs that you might calculate in today's dollars, and those would be applied to future O&M costs no matter which year they occur in. And value-for-money analysis is a financial analysis, so you need to use nominal values indexed to inflation for all your cash flows.
In the case of the discount rate, another difference here is since you used real dollars in the benefit-cost stream of benefits and costs, you have to use a real discount rate, which is a social discount rate that does not include inflation, and also does not include any risk. It's simply reflecting societal preferences with regard to delayed consumption of certain resources. And nominal discount rates are used in value-for-money analysis. Again, in some cases, if it's a concessionaire, the discount rate that is used in its cash flow analysis is a risk-adjusted rate or the weighted average cost of capital. In the case of a public agency, the discount rate that would be used would be the public agency's borrowing rate. So Jordan, we can now turn to the poll question.
Jordan Wainer: So our first question is true or false: Financial evaluation considers the full range of costs and benefits to society. It looks like a bunch of people have answered.
Jordan Wainer: I'll give everyone one more second to answer the question, and I will broadcast the results now. So 87.5 percent of people said false, and 11 percent of people said true.
Patrick DeCorla-Souza: All right. So those who said false are correct, because the question is "Financial evaluation" considers the full range of costs. We didn't say "benefit-cost analysis." Now, benefit-cost analysis does consider the full range of costs and benefits to society, not just cash flows, but also benefits that are not necessarily denominated as cash-- for example, as I said, travel time savings. So most of you got it correct, which is good. So let's move on to see if there are any questions. And to ask a question, simply hit star six on your phone and unmute yourself. Or you can enter a question in the chat box.
Patrick DeCorla-Souza: Okay, hearing no questions, let's move on, and we'll now go to Part 2, which will show you how P3-VALUE does benefit-cost analysis of project delivery. P3-VALUE has a three-step process, and in the first step it does a garden-variety project benefit-cost analysis, so it's simply trying to determine if the project itself is justified, no matter what delivery is used, whether it's a conventional delivery project or a P3 project. In step two, assuming that the conventional delivery would not occur immediately but might be delayed because of funding constraints, step two tries to find out if accelerating the project and doing it today instead of delaying it would provide benefits in excess of cost to advance the project-- so is accelerating the project justified from an economic perspective. And in step three, we now then focus on the impacts of P3 delivery itself, and we look at effects such as the timing that might be either advanced or delayed with P3. We look at cost impacts, any cost changes with P3, either higher or lower than conventional delivery. Quality impacts-- are there more benefits to users for any reason because of better quality of service? And finally, scope optimization, which looks at, after P3 bid is received, if there are changes to scope-- for example, adding a ramp, an extra ramp to the project, which might actually cost more than the base cost estimate but might bring in extra benefits-- and so you evaluate whether the extra benefits from that scope optimization are greater than the costs for implementing that scope change. Now, the reason we divided the process into three steps is to distinguish the effect of accelerating the project from the effects of P3 delivery itself, and a lot of times in the United States, projects are undertaken as P3s because they tend to help advance or accelerate delivery of the project, but it is true that even under conventional delivery, the project could be accelerated in other ways. For example, if debt capacity is a constraint, then it's possible to maybe raise the debt constraints or increase debt capacity and debt limits so that the project can be undertaken today. In order to do that, of course there might be a need to raise taxes, and the public agency or the state government could raise taxes in order to make that possible. So P3 delivery is not necessarily the only way to accelerate a project.
In this graphic, we are showing you how the various evaluations are done at each step. So I'll go from step three, because that is a comparison of the PSC to the P3. That is the equivalent of value-for-money analysis that we showed in the last webinar, where the PSC has to be delivered at the same time as the P3 in order for the evaluation to be valid. However, in some cases, that may not be true. So value-for-money analysis cannot handle that, and you need to do benefit-cost analysis because, as you can see here in step two, we have something called delayed PSC, which cannot be done under value-for-money analysis. Delayed PSC simply takes all of the costs that are already estimated for the PSC and simply pushes them back in time. So they are delayed to some future year when funding might be available to implement the conventional delivery approach, and we call that the Delayed PSC. So a comparison of the Delayed PSC and the PSC is what gives you the net benefits from accelerating the PSC and doing it today.
Now, to do a benefit-cost analysis of the project itself, you need to compare it to the no-build case or the do-nothing case, and that's what, in step one, is simply the normal benefit-cost analysis for a project. Step one in more detail here. What you see is the normal benefit-cost analysis on the cost side. All of these costs are very similar to the costs we already calculated in value-for-money analysis. What we didn't calculate in value-for-money analysis is benefits-- user benefits and externalities. So what benefit-cost analysis brings to this analysis is this extra component of benefits on the right-hand side. So, in the second step, we simply still had the same benefits and costs on the left-hand side that we calculated previously for delayed conventional delivery, and in the PSC, or the accelerated conventional delivery, you still had the same benefits and costs. I mean, everything's the same. The only difference is that we advance all the costs, and because we are advancing the costs, we also bring benefits in sooner than under the delayed conventional delivery. So the net effect of bringing forward the cost and increasing the benefits gives us the net value of conventional delivery.
In step three, we are looking at the delivery effects of doing the project as a P3. Again, all of these on the left-hand side-- the timing impacts, we did include in our value-for-money analysis, as well as the cost impacts. What we did not include were quality impacts, and these, as I indicated, are quality of service improvements either due to pavement ride quality, lane unavailability-- that is, due to construction and O&M activities, incident response; and ramp-up during the early phase right after project construction is completed might be higher under a P3 because of outreach.
So all of these are considered in estimating quality impacts of P3 delivery, and, of course, also the scope optimizations that I talked about earlier. Now, there's one factor on the timing side that actually does effect benefits, and that is if your construction is completed earlier than it would under conventional delivery, then you have an extra period of time when benefits are flowing, which get added onto the benefits side of the picture. So this slide just shows you how a P3 timing impact might occur due to P3 delivery. So we might start later because of the longer P3 contracting process, but on the other hand, because of speedier completion of construction, overall the project might actually be completed sooner than it would under conventional delivery or the PSC. Now, that might have a couple of impacts. If the construction costs are even, let's say, a few months earlier, the net present value of those costs would be higher than under conventional delivery, so that might raise the costs a little bit, but on the other hand we have more benefits because of course the project is open to traffic sooner. And so we might have a lot more benefits which might exceed the extra costs simply due to the discounting to present value.
With regard to P3 quality impacts, there are several ways that P3-VALUE addresses these effects. Pavement quality is measured through an International Roughness Index that you provide to P3-VALUE. Delays due to construction and O&M activities that cause unavailability of lanes is measured or input into P3-VALUE based on the hours that lanes are closed. And if you have faster incident response under a P3, there is an adjustment factor that can be provided in P3-VALUE that adjusts the speed to account for that faster incident response. And then also if there is faster ramp-up-- that is, more users coming to a facility early on after the facility is completed-- under a P3 because of better advertising, for example, then the extra traffic volume would be accounted for in P3-VALUE.
So taking all of this then, we put it all together. In this graphic, the table, you see on the top the three types or three options. So you have a P3 option, a PSC option and a Delayed PSC option, and each of those, in P3-VALUE we calculate the costs and we calculate the benefits. So this graphic shows you the costs, and the first four here listed are in the design-build phase, and each of them is calculated in P3-VALUE. Then in the operations phase, you have O&M costs and major maintenance costs, and then you have the risks, the pure risks for which you have contingencies, base variability, for which you set aside allowances, and something called systematic risks and uncertainties. We talked about this a little bit in the Value for Money webinar. We will go into this in a little more detail when we get to the Risk Assessment webinar in two weeks. Now, important to understand that we are comparing all of these three options to the no-build case, so what we need to evaluate is the costs that are above the cost that would be incurred in the no-build case. Now, we know that in the no-build, if we didn't do any project, the no-build would still need to be maintained, and so there would be some costs that the no-build option would have to incur. So if we build a project and we've already accounted for O&M and major maintenance costs for the build case, we also need to account for the no-build costs, and since they will no longer be incurred, we need to subtract them from the total for the build alternative, and that's what shows up in the last row here, and this is how P3-VALUE accounts for the difference between build and no-build.
On the benefits side, again we have the three options, and all of the different benefit streams which are benefits to users mostly, but we also have environmental benefits, which might be not just to users but to society at large, and all of these benefits are calculated by the tool for each of these options in comparison with the no-build case. So they are all benefits or differences relative to the no-build case. We calculate those benefits and those are all then applied to existing users, meaning those that would have continued to use the facility if we didn't build the project. So the existing project would still have some users, and those are the users that we are calculating benefits for right up to this point. Now, there might be new users on a facility; especially if you make a lot of improvements you're going to attract new users, and so the benefits to those users need to be accounted for. Now, in economic benefit-cost analysis, there is a methodology called Consumer Surplus Methodology that can be applied to calculate those benefits. It's simply called the Rule of Half, which means taking all of the benefits that we calculated for existing users and simply saying that they will be half for new users, and there's a theory behind that. I encourage you to read the P3-VALUE Concept Guide to understand that in more detail. Now, we also have something called a Producer Surplus, because the new facility or the new project may impose tolls and these tolls are considered by users in their decision to use the facility, and so we have something called Producer Surplus that accounts for the fact that these tolls are considered by the new users, and so we need to actually add that to our total benefits to do a fair accounting. And again, I encourage you to read the Concept Guide for more explanation.
So once we have all of these costs and benefits for each of the options-- so you see for Delayed Conventional Delivery we've got costs and we've got benefit. The difference here is the net present value of building the project. Now, under Conventional Delivery, which is, of course, accelerated to be at the same time as the P3, we have costs and benefits and we have a net present value. So if this difference exceeds this difference here, then we can say that it's advantageous to accelerate the project and build it today instead of delaying it. Under Public-Private Partnership, we again have costs, which appear at least in this graphic to be lower, and we have benefits, which in this graphic appear to be higher, and the difference therefore is much bigger-- and remember, these are all differences relative to no-build-- so since this difference is larger than this difference under the PSC or conventional delivery, it appears that the P3 delivery may be beneficial under this scenario.
So just by way of conclusion and summary, just wanted to emphasize again that the way benefit-cost analysis is different from value-for-money analysis, as in value-for-money analysis you are only interested in costs, either costs to the agency, if you're looking from the agency's perspective; if you're taking the perspective of the state, you look at cost to the state, so maybe some taxes that might accrue to the state would be considered. In national analysis, you would look at all costs, including, as we indicated earlier, cost to losing bidders. You're taking a national perspective on that. On the project delivery benefit-cost analysis side, we might have the same costs but then simply include all of the benefits that we just showed you how they might be calculated using P3-VALUE, and the issue here is that when you combine agency costs with societal benefits, you're not necessarily being consistent because the cost side of the picture is not the societal perspective. The only true benefit-cost analysis, therefore, is the last one, which is where societal costs and societal benefits are compared. So we are now ready to go to the poll question.
Jordan Wainer: Great. The next question is true or false: Benefits from project acceleration may not necessarily be attributable to P3 delivery.
Jordan Wainer: I'll give everyone just one more second to answer. And we have 100 percent of people saying True.
Patrick DeCorla-Souza: And that's correct. So congratulations to the class for a successful result. So let's move on to the next part. And the next part is going to be P3 delivery economic differences, and I'll pass it on to Marcel to do that section.
Marcel Ham: Thank you, Patrick. So in this section, we're going to talk about the differences that come from P3 delivery in our economic assessment. We talked about a similar exercise two weeks ago when we did value-for-money assessment. We tried to better understand what drives the underlying differences resulting from P3 delivery when compared against conventional delivery, and we talked about the qualitative analysis, qualitative value-for-money analysis. The same analysis is still applicable in the PDBCA, especially on the cost and risk side. So what we did in the value-for-money assessment is focus on cost and risk and try to understand how P3 delivery could lead to efficiencies in cost and in risks, and also in higher cost and risks potentially-- for example, higher transaction cost. All those results from that part of the analysis are still as applicable. Today we're going to focus on the benefit side mostly, and of course we also need to make a few corrections on the cost side.
But before we get to that, we want to talk briefly about the factors that are driving P3 differences, or the differences that we should be expecting from P3 delivery. As we discussed two weeks ago, one of the main explanatory factors for potential efficiencies in P3 delivery are the incentive mechanisms in combination with the lifecycle integration in the P3 contract, which is very different from conventional delivery. Those incentives could also lead to the differences in benefits that we're going to discuss later, but of course one of the challenges is going to be how much of a difference will we be expecting for a specific project that we'll be looking into. And so the Concept Guide is providing some further guidance on the drivers of those potential efficiencies or potential effects of incentives.
The three factors, the key driving factors that are listed on this sheet, have been identified as the main categories. The first one is Project Characteristics. So there are certain project characteristics that determine the extent to which we should expect any higher benefits or lower costs from P3 delivery-- for example, size or complexity. Those are the key ones, but there are more. As an example, for a more complicated project, it is more likely that incentives to come up with smarter solutions in the design, for example, or in the execution of the work are going to lead to higher benefits or lower cost. So a more complex project is likely to allow for more efficiencies resulting from P3 delivery than a fairly straightforward project. So that's one of the driving factors. That's the first category, the Project Characteristics.
The next one is Context Characteristics, which is about the institutional capacity of the contracting authority, and it's also about the market. Is the market ready for the project? Is there a functioning market? Is there expected to be market appetite for this project? If there's expected to be low market appetite for a project, or if the level of capacity of the implementing agency is low, then it's likely that the P3 will result in lower efficiencies or lower increases in benefits than if we're talking about a very mature implementing agency or a very high market appetite. So this is examples of how context characteristics drive the potential for increases in benefits and reductions in cost and risk.
The third element is Procurement Characteristics, and this is not so much about the project itself or about the environment, but it's about how the P3 is being implemented. So of course not all P3s are created equal, and also the implementation may be better or worse. That is, this is of course related to the capacity of the implementing agency, but in general one can say that, okay, if the agreement is based on international best practice and also national lessons learned from previous projects, then it's more likely to be a very effective project, and then it is more likely that incentives will be effective and lead to lower cost and higher benefits. If, however, the agreement is more first of a kind or is not based on best practices, then we are expecting to see lower effects. So those are the three categories of driving factors for differences resulting from P3 delivery.
Now we're going to apply that to costs and benefits, and Patrick laid out in detail what the costs and benefits are that we're looking for. So on the cost side, we have the base cost, as we also discussed in the value-for-money assessment, and risks, including all the different categories of risk that we discussed two weeks ago and that we will discuss in more detail in two weeks from now. On the benefits side, there is quality of service, leading to potential higher benefits, and there can be more users, as Patrick just explained, because of an increase in capacity. So in a way, we are using a lot of the same information from value-for-money analysis, especially on the cost and risk side.
A few things we need to bear in mind if we use that information, and the first one is that the costs that we are including-- there's a few exceptions or, yeah, adjustments in comparison with the value-for-money assessment. One is on the financing side. On the financing side, we are just considering financing fees because financing fees are net cost to society, whereas financing itself-- equity, debt and also repayments-- is not included in our PDBCA because financing is not relevant in a benefit-cost assessment.
The second point is the lifecycle performance risk. We briefly talked about lifecycle performance risk in value-for-money assessments. We will discuss in more detail how we determine the lifecycle performance risk under a P3, and also for the PSC, in the webinar that is scheduled in two weeks from now. But the lifecycle performance risk is a real risk. It's an additional category of risk that we need to consider for the implementation of projects regardless of the delivery model, and that also means that those risks result in a-- or effect a cost to society, which means that we need to consider these risks in the PDBCA.
The third component that we want to highlight is that in the value-for-money assessment, again, that takes the financial perspective for the implementing agency. Now, the implementing agency will not be facing the cost of unsuccessful bidders. So the agency implementing a P3 procurement will receive, for example, three or four bids, and only the bid that is eventually accepted will be-- and if there's government stipend involved-- then only these costs are being incurred by the implementing agencies. Now, there's of course the other two, three bidders who were not successful, and that put in some sometimes significant transaction cost or bid cost to get to the point of bid submission. Sometimes these costs can run into several millions. Those costs are not relevant in value-for-money assessment but are relevant in the project delivery BCA because they are a cost to society. They are a cost related to the implementation of our project.
The final point that we want to make here is that-- and Patrick already mentioned this-- is that toll revenues are not relevant in a PDBCA, whereas they were very relevant in the value-for-money analysis. Again, from the perspective of the implementing agency, toll revenues are relevant financial cash flows, but toll revenues are, from an economic perspective, transfers from members of society to other members of society, which means that it's irrelevant. Now, underlying, of course, there's travel time savings that determine willingness to pay and that determine toll levels. Those are relevant. We're going to talk about those in a bit. But toll revenues themselves are not relevant in our PDBCA analysis.
Now, on the benefits side. So we talked about the costs and risks, and now we move onto the benefits. The relevant benefits that we consider in the PDBCA are user benefits and externalities. The user benefits that we are considering are travel time, and also more specifically travel time savings; travel cost, which is more than just travel time; travel cost also includes vehicle operating cost; and then also accident cost differences between different delivery models. So those are the three components together constituting the user benefits, and to add to that, those are relevant for both existing users and new users.
So since we will be, in most cases, increasing capacity of the roads, we will potentially attract new users, and those new users will also experience user benefits. Or actually, it's the other way around. They will experience user benefits which will encourage them to start using the roads. So that's on the user benefits, and then of course there's externalities. Externalities-- or the most important externality that we are considering is emissions cost differences, which is also included in our analysis.
Now, these are the benefits or differences in benefits that we are considering. Now the question is, what are the sources of those benefits? Why are we expecting differences in benefits? And there are four components that we are considering, and those four components are all the result from potentially incentive mechanisms in the P3 contract. The first one is early construction completion. So there can be incentives in a P3 contract that lead to earlier construction completion, and therefore-- and we will talk about how that works in more detail later-- but that leads to higher benefit or earlier benefits, which we need to consider in the PDBCA. That's the first source.
The second source is pavement ride quality. Again, as a result of incentive mechanisms in the P3 contract, typically referred to as the payment mechanism, a system that includes penalties and deductions and potentially bonuses to incentivize the concessionaire to optimize the pavement quality, is more likely to lead to a higher quality in pavement than a system without those incentives. So this is why we're expecting potentially a higher and more stable pavement quality under P3 delivery, which then yields additional user benefits.
The third source of benefit is the work zoning practices. Again, if there is an incentive in the contract that encourages the concessionaire to do efficient work zoning and to minimize the unavailability of the road, to minimize potential loss of not only revenues, but also-- therefore also user benefits, and that leads to additional user benefits too. So that's the third source of potential benefits resulting from P3 delivery.
The fourth one is incident response. P3 contracts typically include some penalty and performance mechanisms related to incident response times. So there's typically key performance indicators specifying within what time period the concessionaire needs to respond to incidents. And so, again, in a system with that incentive mechanism, it is more likely that incident responses are going to be shorter than a system without those incentives. So, again, that could be another source for user benefits.
Now we're going to discuss all these four sources one by one. The first source was, as we just discussed, the earlier construction completion, and Patrick already mentioned this. This graph should be building up, I think. So we're missing some information here. Let me explain verbally. The point is if there are incentives in the contract to complete the project early, they will also not only lead to earlier costs, which is unattractive, but also leads to earlier benefits, which is, in net present value terms, of course very attractive. So the NPV effect of benefits and costs combined is going to be positive for an acceleration of the project, assuming that we're talking about an economically feasible project. If the project, of course, is not economically feasible, then delay is very attractive, but let's assume for the moment that we're talking about an economically feasible project. Now, within early construction completion, there's actually two relevant effects. The one is acceleration. Acceleration, as we also discussed in the previous webinar and as Patrick just explained, maybe the financing that is included in P3 delivery allows for expediting the project several years, when compared against a delayed PSC. So maybe under the PSC, the Public Sector Comparator, under conventional delivery there are no funding and financing resources available, which could, for example, mean that the project can only be implemented five years later. Then, of course, if we have access to a financing solution that leads to acceleration of the project, which then also leads to higher benefits. That's the first impact, the acceleration.
The second impact is early completion resulting from potential incentives in the contract. No, for example, if we take a PSC delivery or a conventional delivery and a P3 delivery starting at the exact same moment in time, but now the P3 delivery has some additional incentives to complete the project early, then it is more likely that will happen than in a system without such incentive. So the contract itself can also have incentives that lead to early completion, which then has additional differences in benefit, or results in additional differences in benefits. So again, it's the two components-- the first one, acceleration, which is typically the larger component, and then there can be an additional effect of early completion due to incentives in the contract.
The second source was the pavement ride quality. And again, what we discussed is incentives in the P3 contract linked to key performance indicators defining pavement quality can lead to an effective higher pavement quality and therefore result in additional user benefits. What we're showing here is a table that links the pavement quality indicator-- in this case, it's the International Roughness Index, IRI-- with fuel cost adjustments and non-fuel cost adjustments. So what we're seeing here is that a high score on IRI, the roughness index, is actually low, so high quality of pavement is a lower score, also results in low fuel cost adjustments and also low non-fuel cost adjustments. So in this case, the higher the score the lower the quality of the surface, of the pavement, which then also leads to higher fuel cost and higher non-fuel cost, as you can see in the table. And so this is a very objective indicator, the IRI. It can be measured, and so what we should be doing here is to see what the expected average IRI would be under conventional delivery-- for example, on the basis of existing roads-- and then compare that against the average IRI that we should be expecting under P3 delivery. And then of course we should also look at what the contract is specifying in terms of the key performance indicator. Now, if we are expecting that there's going to be a difference-- for example, the IRI under conventional delivery is expected to be 150 and the IRI under P3 delivery is expected to be roughly 50, then on the basis of this table we can calculate what the difference in fuel cost and the difference in non-fuel cost is going to be. And this is also included in the P3-VALUE model. This is the second source.
We're going to move on to the third source of potential benefits, and that is work zone practices. Work zoning leads to speed reductions. So if there's a work zone due to maintenance during either construction or during maintenance-- major maintenance or regular maintenance-- then the result of the work zoning is a speed reduction. Now, if there are incentives in the P3 contract to minimize work zoning or to minimize work zoning during certain days or time of the days, then of course that could reduce the average speed reduction, and therefore a P3 delivery could lead to lower loss of travel time saving, or in other words, a lower travel time altogether, than a conventional delivery. So what we need here is an assumption of the speed reduction under P3 delivery and conventional delivery, but this is another-- and by the way, we will need data from existing P3 contracts to get to a realistic assumption here. This is the third source.
The source that we want to discuss today is incident response. Now, of course, incidents also lead to speed reductions just like work zones, and this table on this slide shows how, under different levels of congestion, incidents lead to average speed reductions. So what this table is telling us, that if there is a severe level of congestion then the average delays due to incident-- or sorry-- the average speed reduction due to incidents is 18 percent, and so this is based on research done by Texas Transportation Institute. And so this table really links the level of congestion to speed reduction. Now, if we apply this same methodology to our PDBCA, then we should be asking ourselves the question, "What is the speed reduction factor under P3 delivery compared against the speed reduction factor due to incident responses under conventional delivery?" And so the assumption can be that if the contract provides for performance indicators and a performance mechanism that incentivizes the concessionaire to have faster incident response and therefore to reduce the negative impacts or the delays due to incidents, then that is likely to lead to a lower speed reduction factor. And so that's the variable that we are looking at, is the speed reduction factor. So on the basis of this table, we know what, under different levels of congestion, the speed reduction factor under conventional delivery should be, and then what we should be doing in the project delivery BCA is to then determine what the speed reduction factor under P3 delivery should be. It's going to be lower provided that there's the right incentives in place. So those are the four sources of benefits to users that we wanted to discuss today.
The next slide is-- we also talked about benefits to new users. So, so far it's been mainly benefits to existing users, but there's also new users. And so Patrick already referred to the rule of half and how that's applied to calculate the user benefits for new users, but again, let me also refer to the Concept Guide for a further discussion on this graph that discusses how to determine the number of new users and then also how to determine the consumer surplus, and also producer surplus, resulting from those new users. With that, I think we can move on to the polling question. Jordan?
Jordan Wainer: Great. Our question is: Which of the following may be different under a P3? Construction completion, pavement ride quality, impacts of work zone practices on travel time, incident response time, or all of the above.
Jordan Wainer: So I'll give everyone just a couple more seconds and then we will broadcast the results. So 100 percent of you said All of the Above.
Marcel Ham: That's great. Perfect. Yeah, I don't know what to say. That's exactly what we wanted to discuss with you today. So we wanted to discuss these four key sources of potential additional benefits, and also how they are linked to the P3 delivery and the P3 contract. I think there is time for some questions, and I think there's already a question in the chat box.
Jordan Wainer: Yep, there is one question in the chat pod. What is the basis for estimation of pavement roughness impacts on vehicle operating costs?
Marcel Ham: David, thanks for your question. Okay, I don't know this from the top of my head, but I know that the source for this is included in the Concept Guide. So maybe the easy answer is please refer to the Concept Guide for the source material, and we can also-- we are also trying to look it up quickly, but the Concept Guide is providing more background on all of these calculations, frankly.
Jordan Wainer: There are no other questions in the chat pod, but if anyone has any questions, you can press star six on your phone to unmute yourself, or type one in the chat pod as well. Okay, hearing none, I think we can move on to the next part.
Marcel Ham: Okay, thank you very much. Now I think we discussed the foundation of the PDBCA methodology. We also discussed how we can get to the different assumptions of the PDBCA analysis, and what we're going to do next is to go into the P3-VALUE 2.0 tool. We also showed this graph in the previous webinar. On the left-hand side you see the value-for-money analysis that compares conventional delivery to a P3, resulting in a certain percentage or range of percentages or NPV for value-for-money. On the right-hand side we are showing the project delivery BCA analysis that compares conventional delivery, delayed conventional delivery and P3 delivery. In the middle you'll see all the different inputs, many of which are used in both, but of course the revenues are used, as we discussed in this webinar, on the left-hand side in the value-for-money assessment, whereas the benefits are being used in the right-hand side. Financing and tax is only relevant for value-for-money assessment and only the financing fees are relevant for a PDBCA. And then finally, at the bottom of this slide you will see the potential P3 efficiencies, or maybe differences would be better. We talked in detail about P3 differences in the last webinar, Value for Money Assessment, for costs and risks, and today we also talked about differences we could be expecting from P3 delivery on the benefit side. Now, we have already shown you the P3-VALUE model in the previous webinar. What we discussed then is the value-for-money analysis and today we're going to look into the PDBCA module of the P3-VALUE tool. I'm turning it over to Wim Verdouw.
Wim Verdouw: Good afternoon. So as you would have seen last week-- sorry, two weeks ago-- this is the opening screen for the P3-VALUE 2.0 tool. Just like last time, we'll go through the Training Navigator, and today we also can see Project Delivery Benefit-Cost Analysis. And just like last time, you'll see the four buttons that determine what module you're in, the different input sheets that are relevant for this particular module, and then the output sheets listed below. What I'm going to do today is going to focus on those inputs that are different from the value-for-money inputs, and of course show you the outputs that come with this analysis. So in terms of cost, we start off with the INP Timing and Cost sheet, and one input that is particularly relevant here is Row 30, the cost of non-compensated losing bids, and it even says in the tool, "Only considered in PDBCA." So these are the bids that Marcel mentioned earlier that may not have won the project but still spent economic resources, and so in this particular case we are saying that this value here right now is zero. We may want to give it a value of, for example, five million dollars, and that represents the cost to society of losing bids.
Another element in the timing and cost that's particularly relevant is the inflation, right? In effect, what I'm trying to point out here is that inflation is not being considered in the BCA. As Patrick pointed out earlier, in the value-for-money we were comparing nominal amounts and we were taking net present values of nominal cash flows. In the PDBCA we look at real values, and for that reason the inflation figures listed here will not be relevant. So we could change them, we could not change them; they should not impact the outputs of the PDBCA. So in terms of cost, really there's one big difference, which is the project procurement cost that was not compensated for the losing bid. Other than that, the costs and benefits should be the same.
Another element that was relevant between P3 and PSC was of course the timing, but that's relevant both in the PDBCA and in the value-for-money. So here we see that the PSC had a four-year construction period, whereas we had early completion, which Marcel alluded to earlier, under the P3.
The next element-- or the next input sheet that's relevant is the INP Traffic and Toll, which lists all the traffic assumptions, the tolling assumptions, as well as those assumptions that allow the model to calculate what speeds are to be expected on the new facility. So you have already seen the traffic inputs in the previous presentation. The same for the tolling inputs, which actually right now are mostly irrelevant. So that brings us to the Traffic Characteristics and Shares inputs. You'll see a Sensitivity Analysis Factor. In the exercise you'll learn what this allows you to do. Simply it gives you the possibility to test how the results of the PDBCA vary if you apply more or less traffic, and please note that the percentage is applied on all traffic above the no-build traffic. So if you were to put zero percent, it means that the no-build traffic will continue throughout the entire evaluation period.
Next we need to specify control the segment is-- in this case, a 20-mile segment-- how many days in a year, how many weekdays or weekend days, how many peak hours, how many off-peak hours, the number of lanes-- in this case, we've already discussed this last time as well-- between the managed lanes and the general purpose lanes, and then the split between peak and off-peak and weekend traffic. Again, this was covered last time in the Value for Money for the purpose of calculating tolling. Here, however, it is relevant for the purpose of calculating the speeds on the different lanes in the different time periods.
Next here we see the split between a two-axle vehicle and a four-axle vehicle for the peak, off-peak, and weekends, again with the purpose of calculating the travel speeds and therefore the travel time costs of a two-axle vehicle and four-axle vehicles. The next set of inputs are the speed inputs, which show the maximum free flow speed is for the no-build, the managed lane, or the general purpose lane. And lastly we have the Volume Delay Function Parameters, which relate the speed observed on a road segment given to a certain amount of traffic, and these factors, as you can see, are in orange, which means they don't need to be specified by the user. These are inputs provided by default. But of course if you have information that you think is more appropriate, feel free to update it, and all of these factors are described in detail in the Concept Guide.
The third input sheet listed is the input series, which actually compared to the value-for-money is completely, of course, the same as we looked at last time, and the inputs are all relevant. The one we'll look at most right now is the traffic ramp-up, which shows for the PSC and the P3 how traffic ramps up from substantial completion to, in this case, five years into operation.
As the name indicates, the sheet that's most relevant here is the INP BCA sheet. This sheet contains all the-- or most of the inputs relevant to the different benefits listed earlier and explained by Marcel, such as the ride quality, the work zone practices, and the incident response. So we start off with the delay inputs, which relate to the work zoning. So for the construction period as well as the operations period, we have to list for the no-build as well as for the build scenario how many days of construction do we expect and whether these construction days are to be carried out mainly in the peak or in the off-peak or more on the weekends. Same for the O&M. So in this case, for example, we are saying that there's 25 O&M days in a year for the no-build, and that these are carried out-- 25 of these are carried out on the off periods, and 20 of these are carried out on the weekends, and according to the inputs here we have the same pattern both for the no-build, the managed lanes, and the general purpose lane. This gives us an indication of how many days do we expect delays due to work zoning, but it doesn't say how many hours this affects us, so we need to specify how many hours we expect these delays to last. So in this case, for example, we're saying that for construction, seven and a half hours per day; under the P3 we expect delays for the construction periods.
And lastly, we need to specify whether this applies to the entire section or whether it applies only to a part of the section. As you may remember, we were talking about a 20-mile section, and here we are saying that construction happens only over a four-mile period at a time, so this means that only about one-fifth of the traffic is actively affected due to-- no, sorry. All of the traffic passing in that period is affected, but it is affected only one-fifth of the distance, not for the full distance.
And lastly, we need to determine-- if we know that the speed of traffic is going to be reduced because of construction and O&M, then by how much, and here we have a speed adjustment factor based on past research which indicates that the speed is typically 45 percent lower than usual if you are dealing with O&M delays. Incident relays, as explained by Marcel earlier are treated slightly differently. Incident delays rely on how much traffic the road has in total. The delay factor-- in this case, 18 percent for the no-builds-- is applied to all traffic, and the logic here is that if you have a very congested corridor then any incident will create delays, whereas if you have a less congested corridor, which we'll calculate under the build scenario, you will have a lower speed adjustment factor. And here, as an example of one of the differences between the PSC and the P3, here are the input estimates that the speed adjustment factor for the P3 is slightly lower than the one for PSC, presumably caused by different incentive mechanisms in the contract. So these are inputs relevant for the delays.
Another set of inputs are the accident costs, so we need to specify how likely are accidents in terms of frequency and what is the cost of an accident. Now, we know the cost of a fatal accident-- at least there is statistical information on this-- but ultimately the cost of an injury accident and a property damage only accident will need to be established by the agency that does the analysis, and the same of course goes for the frequency in terms of the number of accidents per million vehicle miles traveled.
Next we see the inputs for the vehicle occupancy and the value of time. So combined, of course, they determine how much one minute saved is worth in terms of dollars to the economy. And so the next input is the IRI, the parameter that expresses the pavement quality, and here we see a small difference between the no-build, the PSC and the P3, based again on observations of what a road under PSC may look like compared to what the contract of a P3 may specify. And then lastly, linked to this IRI we will need to specify what the non-fuel costs and the fuel costs are, and how they may be affected by the quality of the road. Again, this is based on past research, and the orange cells indicate that these are default values and they can be found in the User Guide.
I want to quickly run you through the outputs. So these outputs may look a little similar because it's structured more or less in the same way as the value-for-money output was structured. On the left side top you see the delayed conventional delivery. It lists all the benefits here. It lists cost savings here. These three. And next it lists the various risks, and then adds them up and then gives us the NPV, or the Nominal-- sorry, the real total for that project, in this case the delayed conventional delivery. Next we see the benefit-cost ratio, which simply takes the benefits and divides them by the costs. If this is larger than one-- if it's higher than one, we think this is a positive project. If it's less than one, it is a negative project. On the right side we see the graph that shows what constitutes the different benefits and the costs for each delivery model. Next we see the conventional delivery; the same table, the same components, just slightly different values. And lastly, if I scroll down, you see the same for the P3.
In the next sheet, the PDBCA Comparison Table, we compare these three delivery models in an incremental way. In other words, step one, which is the analysis-- the benefit-cost analysis of delayed conventional delivery compared to no-build gives us the net benefit to society, and then step two gives us the increase in net benefits if we were to advance the implementation. In other words, we're comparing the conventional delivery to the delayed conventional delivery. In the last step, we are determining what the additional benefits to society are from P3. So here we are comparing the P3 to conventional delivery. And then the table below here, we are simply adding it all up, and you'll see again the total benefit of a P3 delivery, which should of course be the same as the initially listed total benefit on the P3.
This same information is presented here in the following tab on Graphs. So at the top we see the absolute comparison of the three delivery models, whereas the lower graph shows the incremental analysis with the first one being the comparison of the delayed PSC, the second one, the PSC. Sorry, the delayed PSC is the first one, compared to the no-build; the second one the PSC compared to the delayed PSC; and then lastly the P3 compared to the PSC. And as we can see, every time we have a positive increase in net benefits-- in other words, we believe that every step adds value to society. And the last three graphs show the same graphs that we saw under the PDBCA Output Summary, but now blown up to allow you for a closer inspection of the different costs and benefits of each of the three delivery options, and I'm just showing you very quickly those three graphs. And with that, I would like to hand it back to Patrick.
Patrick DeCorla-Souza: Thank you, Wim. Thank you. All right, so let's move on to the webinar summary. So we've so far talked about the benefit-cost analysis process and I suggest that for more detail and to understand it better you can go to our P3 Toolkit webpage and download a guide on the framework for benefit-cost analysis. That'll give you more information on that. With regard to the P3 delivery economic differences and the concepts behind how those differences are estimated as well as how they affect benefits and costs, you can refer to the Concept Guide, which is actually Part 2 of the Guide to P3-VALUE 2.0, and that is also downloadable from our website. So it's called Guide to P3-VALUE 2.0. The first part is the User Guide, and the second part is the Concept Guide. Finally, we of course encourage you to download the tool itself and explore it, and to help you get a little practice, we have created a homework or an exercise that you can try out. It is available for download on your screen, on the left-hand side, you see Materials for Download. The first is the presentation and the second is the exercise. That'll help you understand how the tool works. Now, of course, as I said, I encourage you to read the User Guide and the primers and guidebooks that are on the website.
If you have an opportunity to do the exercise within the next week, we will be going over the exercise to explain the inputs and the outputs and interpret what they mean at a special webinar that has been scheduled on February 29 at 12:30 p.m. Eastern, early in the afternoon. Of course the next regular webinar will be on Risk Valuation, as we've said, two weeks from today on March 7 at 2 o'clock, and two weeks after that we will have the webinar on Financial Viability Assessment. Now, on this slide, you see the information on how to connect to the exercise review webinar, which will be next Monday, and also of course, to make sure you have this, please make sure you download the presentation available to you on the left-hand side.
Also, we will make all of these materials available in due course on the P3-VALUE Toolkit website, which is the second URL you see on this slide here. All of the materials are available there, and if you have questions while trying to do the exercise, feel free to contact me either by email or by telephone, and my contact information is shown here, so feel free to contact me if you have an urgent question that can't wait till the exercise review webinar on-- next Monday.
So with that, I think we've got a couple minutes left for any questions, so feel free to either type your question into the chat box or hit star six to unmute your phone. By way of encouragement, I should have mentioned-- to encourage you to do the exercise-- we will be awarding certificates for those that submit their answers by 10 a.m. on February 29, which is the day of the webinar. So I encourage you to send in your answers. Of course they don't have to be correct. I mean, we just need to see that you've done the exercise. So star six for any questions. I don't see anybody typing in the chat box, so I think with that I would like to thank Jordan Wainer for moderating this webinar, and I'd like to thank my colleagues from IMG Rebel, Wim Verdouw and Marcel Ham, for their presentations, and I look forward to seeing you back here again next Monday to review the homework exercise. Thank you all, and see you next Monday.