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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