Using Value for Money Analysis to Evaluate Highway Public-Private

Partnership Projects

Patrick DeCorla-Souza, P3 Program Manager, FHWA

Presentation Outline

– Overview of Value for Money Analysis– Developing the Conventional Delivery option, i.e.,

Public Sector Comparator (PSC)– Developing the P3 option, i.e., Shadow Bid – Comparing the P3 option to the PSC

What is Value for Money?

• The optimum combination of life-cycle costs and quality (or fitness for purpose) of a good or service to meet the user’s requirement

• The VfM concept is used to compare P3 and conventional delivery methods for the same investment project

Questions Answered by VfM Analysis

Project Development Phase: How will the proposed P3 impact the financial position of the

public sponsor relative to conventional delivery?– SHADOW BID VS. PUBLIC SECTOR COMPARATOR

Procurement Phase:• Does the preferred P3 bid provide the most financial value to

the public agency?• Does the actual P3 agreement add financial value for the

public agency compared to conventional delivery?– ACTUAL BID OR P3 AGREEMENT VS. PUBLIC SECTOR

COMPARATOR

Defining the Conventional Delivery Option

• Baseline public delivery option -- the most likely procurement option if P3 not selected, e.g.:– Design-Bid-Build (DBB),

– Design-Build (DB) or

– Another contracting model

What is a PSC

– The PSC estimates the overall cash flows of the conventional approach, both for costs and revenues, including adjustments for the value of risks.

Key Assumptions

• Project has the same scope and can be completed to the same standards anticipated by P3 delivery

• Project can be completed over the same timeframe (e.g., funding or financing issues will not delay conventional procurement)

• Discount rate – used to express future costs and revenue streams in present value terms

Risk Adjustments

Category Description

Pure risksPotential project-related events with a likelihood of occurrence

Regular uncertainties

Inherent uncertainties in cost and risk estimates.

Systematic risks & uncertainties

Long-term performance risks, coordination risks and systematic uncertainties.

Competitive Neutrality Adjustment

• Advantages or disadvantages of the conventional approach over P3 approaches

Developing the Shadow Bid

Start with the PSC and adjust for P3 differences:1. Private sector efficiencies2. Risk adjustments3. Higher transaction costs4. Different tax structures and financing structure5. Possibly higher toll revenues

Estimating P3 Differences

Change in level of use

Timing Impacts

Longer project preparation and procurement

Earlier Completion

Cost ImpactsΔ Public transaction costs

Δ Private transaction costs

Δ Lifecycle costs

Quality of service and/or acceleration of service

Project Characteristics

Project size

Project complexity

Design development

Project type

Context Characteristics

Market appetite for P3

Agency maturity and capacity in P3

Agency capacity under conventional delivery

Delivery CharacteristicsIntegration of phases

Output-Based Specifications

Risk allocation

Payment mechanism

Evaluation criteria

Estimate Differences

Comparing PSC to Shadow Bid

PSC P3

Base cost Base cost

Financing Financing

Other project costs

Other project costs

Retained risks Retained risks

Value of P3 Bid(Shadow or actual)

VfMCompetitive Neutrality

Perform Sensitivity Analysis

• Focus on (often very uncertain) expected differences between P3 and conventional approach

Variable Min MaxInflation -0.5% +0.5%Discount rate -0.5% +0.5%Additional procurement costs P3 -$ 2.5 M +$ 2.5 MAdditional monitoring costs P3 -$ 0.5 M +$ 0.5 MConstruction costs -10% +10%Construction cost efficiencies with P3 -5% +5%Maintenance costs -25% +25%Maintenance cost efficiencies with P3 -10% +10%Pure risks -20% +20%Pure risk efficiencies with P3 -5% +5%Revenues -10% +10%

FHWA Research to Enhance VfM Analysis

Perspective Financial Analysis Economic Analysis VfM Enhanced VfM

Public Agency

Consider only costs to the agency’s balance sheet

Also account for user benefits and externalities

State Also consider taxes received by the State from concessionaire

Also account for user benefits and externalities

Federal Also consider Federal subsidy costs and taxes received by Federal govt. from concessionaire

Also account for user benefits and externalities

FHWA Resources

• Fact sheets: One page summaries of various P3 concepts

• Primers – Introduction to P3 concepts• Guidance documents – Includes Risk

Assessment and Value for Money Guides• Analytical tools – P3-SCREEN and P3-VALUE

FHWA’s P3 Website: http://www.fhwa.dot.gov/ipd/p3/

Contact Information

Patrick DeCorla-Souza

P3 Program Manager

Office of Innovative Program DeliveryFederal Highway Administration

(202) 366-4076

Patrick.DeCorla-Souza@dot.gov