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 risks
Potential project-related events
with a likelihood of occurrence
Regular
uncertainties
Inherent uncertainties in cost and
risk estimates.
Systematic risks & Long-term performance risks,
coordination risks and systematic
uncertainties
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.
2.
3.
4.
5.
Private sector efficiencies
Risk adjustments
Higher transaction costs
Different tax structures and financing structure
Possibly higher toll revenues
Estimating P3 Differences
Project Characteristics
Context Characteristics
Delivery Characteristics
Project size
Market appetite for P3
Integration of phases
Project complexity
Agency maturity and
capacity in P3
Design development
Project type
Output-Based Specifications
Risk allocation
Agency capacity under
conventional delivery
Payment mechanism
Estimate Differences
Quality of service and/or
acceleration of service
Timing Impacts
Cost Impacts
Longer project preparation
and procurement
Δ Public transaction costs
Δ Private transaction costs
Earlier Completion
Δ Lifecycle costs
Evaluation criteria
Change in level of use
Comparing PSC to
Shadow Bid
Competitive
Neutrality
VfM
Retained risks
Retained risks
Other project
costs
Other project
costs
Financing
Base cost
PSC
Financing
Value of
P3 Bid
(Shadow
or actual)
Base cost
P3
Perform Sensitivity Analysis
• Focus on (often very uncertain) expected differences
between P3 and conventional approach
Variable
Inflation
Discount rate
Additional procurement costs P3
Additional monitoring costs P3
Construction costs
Construction cost efficiencies with P3
Maintenance costs
Maintenance cost efficiencies with P3
Pure risks
Pure risk efficiencies with P3
Revenues
Min
-0.5%
-0.5%
-$ 2.5 M
-$ 0.5 M
-10%
-5%
-25%
-10%
-20%
-5%
-10%
Max
+0.5%
+0.5%
+$ 2.5 M
+$ 0.5 M
+10%
+5%
+25%
+10%
+20%
+5%
+10%
FHWA Research to
Enhance VfM Analysis
Perspective
Public
Agency
State
Federal
Financial Analysis
Economic Analysis
VfM
Enhanced VfM
Consider only costs to the Also account for user
agency’s balance sheet
benefits and externalities
Also consider taxes
received by the State
from concessionaire
Also consider Federal
subsidy costs and taxes
received by Federal govt.
from concessionaire
Also account for user
benefits and externalities
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 Delivery
Federal Highway Administration
(202) 366-4076
Patrick.DeCorla-Souza@dot.gov