1. Patrick DeCorla-Souza, P3 Program Manager, FHWA
Using Value for Money Analysis to Evaluate Highway Public-Private Partnership Projects
Patrick DeCorla-Souza,
P3 Program Manager, FHWA

2. 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

3. 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

4. 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

5. 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
By definition, the conventional approach is usually the most reasonable fall back option in any decision. Typically, a P3 consists of integrated contracts, whereas the conventional delivery method will be a combination of several contracts and insourcing by the public entity - depending on the level of expertise within the organization. For construction or reconstruction, the conventional delivery method can be Design-Bid-Build (DBB), Design-Build (DB) or another contracting model – essentially whatever the public agency is familiar with. Selecting the conventional delivery model is not about defining the most traditional delivery method, but as the most reasonable fall back if P3 is not selected.

6. 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.
The PSC is calculated on a cash flow basis rather than an accrual basis. Therefore only cash flows are included, whereas costs that do not qualify as cash flows, such as depreciation, are not included in the PSC.
The PSC should reflect the financial consequences of a conventionally delivered project alternative as realistically as possible. This is accomplished by using cash flows reflecting the situation as if it will be carried out. Realistic efficiency savings should be included. However, unfounded wishful thinking about cost savings has no place in the cash flow analysis. In addition, it is important to note that the PSC is a reflection of the expected costs and not the available budget.
For the PSC to provide an appropriate benchmark for the shadow bid or actual bids, it must contain a realistic and fair reflection of the value of all risks attached to delivering the project, according to the same scope and requirements that are applicable to the shadow bid. Please refer to the Guidebook on Risk Assessment for further guidance on identification and valuation of risks. All risks should be categorized as to whether they are retained or transferrable after they have been identified and valued.

7. 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
A key assumption you have to be aware of before you develop a public sector comparator is that you assume that the public sector comparator will be built and be operated to the same standards as the P3 option would be, so you cannot have a lower quality of service, for example, on the PSC, because that would not be a fair comparison to the P3.
The second key assumption is that both options would be constructed according to the same schedule. So you cannot assume that because you don't have money now to build a project in the conventional manner with conventional financing, you can build it five years from now, and you take those cost estimates and compare them to a P3 cost for a project that is being built today.
You cannot do those kinds of comparisons with value for money analysis. You might be able to do those kinds of comparisons with benefit cost analysis; we are doing research to develop such a tool, and we will update the P3-VALUE tools to incorporate that type of analysis.
Another key assumption is the discount rate, and, as some of you may be aware, it can make a huge difference in the estimates of present values of costs that are incurred in the future.

8. 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.

9. Competitive Neutrality Adjustment
Advantages or disadvantages of the conventional approach over P3 approaches
Competitive neutrality is the adjustment for the 1) virtual advantages or disadvantages of the conventional approach over P3 approaches, and 2) net competitive advantages or disadvantages accruing to a government business by virtue of its public ownership.
The advantages and disadvantages in the first category are virtual, because they are economically irrelevant from a macro perspective. Examples of this are differences in taxation (land or property taxes, local government rates exemptions, payroll taxes, corporate taxes) leading to higher costs for the government, yet at the same time also leading to higher revenues.
Net competitive advantages or disadvantages accruing to a government business by virtue of its public ownership. Examples of this are increased administrative requirements, reporting requirements or material requirements/legislation/regulation (e.g. building permits). One can argue that differences in requirements leads to differences in projects and/or project scope, hampering a fair comparison.
Competitive neutrality adjustment allows the PSC and shadow bid/actual bids to be compared on an equivalent basis and to neutralizes any competitive advantages or disadvantages that the public agency maintains due to its unique status.

10. Developing the Shadow Bid
Start with the PSC and adjust for P3 differences:
Private sector efficiencies
Risk adjustments
Higher transaction costs
Different tax structures and financing structure
Possibly higher toll revenues
Because we already have the PSC inputs, this part of the analysis focuses entirely on the expected differences between a P3 and the conventional approach reflected in the PSC. These may include:
Private sector efficiencies
Risk adjustments
Higher toll revenues
Higher transaction costs
Different tax structures
Different financing structure

11. Estimating P3 Differences
Change in level of use
Timing Impacts
Longer project preparation and procurement
Earlier Completion
Cost Impacts
Δ 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 Characteristics
Integration of phases
Output-Based Specifications
Risk allocation
Payment mechanism
Evaluation criteria
Estimate Differences

12. Comparing PSC to Shadow Bid
Competitive Neutrality
This graphic shows you how we do the comparison. We already calculated for the PSC, the present value of base cost, and the financing costs of about $2.4 million. We assumed there were no other project costs for simplicity. We calculated the present value of retained risks. And we said there is no competitive neutrality adjustment for simplicity.
On the shadow bid side, we calculated the present value of base costs including risks, and we calculated the financing costs. And we then used that concessionaire cost to compute the availability payment. And then we assumed there are no other project costs, a similar assumption to the PSC for simplicity. And we still had some risks that the public agency retained in the design-build phase. So shows up in your total.

13. Perform Sensitivity Analysis
Focus on (often very uncertain) expected differences between P3 and conventional approach
Variable
Min
Max
Inflation
-0.5%
+0.5%
Discount rate
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
Pure risks
-20%
+20%
Pure risk efficiencies with P3
Revenues
The net present value calculation results in a single value. However, in real life there is uncertainty about assumptions, which is why a sensitivity analysis is recommended. The sensitivity analysis does not replace the risk assessment, because the PSC and shadow bid should still reflect a valuation of all risks and uncertainties. A sensitivity analysis demonstrates the robustness of the PSC to potential changes in the key input variables, facilitating a better understanding of the meaning of the outcomes.
By running these sensitivities a range of realistic outcomes can be determined. It is strongly recommended to present this output as a bandwidth rather than a precise outcome.

14. 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
Federal
Also consider Federal subsidy costs and taxes received by Federal govt. from concessionaire

15. 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:

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