Using Value for Money Analysis to Evaluate Highway Public-Private Partnership Projects ARTBA P3 Conference Washington, DC, July 15-17, 2015 Patrick DeCorla-Souza, P3 Program Manager, FHWA

2 What is Value for Money (VfM)?  VfM analysis is used to compare P3 and conventional delivery methods for the project Project Development Phase:  How will the proposed P3 impact the financial position of the public sponsor relative to conventional delivery? 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?

3 Defining the Conventional Delivery Option  Public Sector Comparator (PSC)  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

4  Overall cash flows of the conventional approach, including adjustments for the value of risks. Developing the PSC

5 Key PSC Assumptions  Project: Has same scope as P3 Can be completed to the same standards anticipated by P3 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  Competitive neutrality: Advantages or disadvantages of the conventional approach over P3 approaches

6 Risk Adjustments Category Description Pure risks Potential 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.

7 Developing the Shadow Bid  Start with the PSC and adjust for P3 differences: 1.Higher transaction costs 2.Private sector efficiencies (schedule, lifecycle costs) 3.Risk adjustments 4.Different tax and financing structures 5.Potentially higher toll revenues

8 Comparing PSC to Shadow Bid Competitive Neutrality

9 Perform Sensitivity Analysis Focus on (often very uncertain) expected differences between P3 and conventional approach VariableMinMax Inflation-0.5%+0.5% Discount rate-0.5%+0.5% Additional procurement costs P3-$ 2.5 M+$ 2.5 M Additional monitoring costs P3-$ 0.5 M+$ 0.5 M Construction 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%

10 FHWA Research to Enhance VfM Analysis PerspectiveFinancial AnalysisEconomic Analysis VfMEnhanced VfM Public Agency Consider only costs to the agency’s balance sheet Account for user benefits and externalities, e.g., from accelerated delivery or quality differences State Consider taxes received from P3 by the State Account for user benefits and externalities NationalConsider Federal subsidy cost and taxes from P3 Account for user benefits and externalities

11 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:

12 Patrick DeCorla-Souza P3 Program Manager Office of Innovative Program Delivery Federal Highway Administration (202) Contact Information