Value for Money Assessment for Public-Private Partnerships

What are Public-Private Partnerships?

Public-private partnerships (P3s) for transportation projects are drawing much interest in the United States for their ability to access new financing sources and transfer certain project risks. P3s differ from conventional procurements where the public sponsor controls each phase of the infrastructure development process – design, construction, finance, operations and maintenance. With a P3, a single private entity (which may be a consortium of several private companies) assumes responsibility for more than one development phase, accepting risks and seeking rewards.

Design-Build procurement – under which private contractors are responsible for both designing and building projects for a fixed price – are considered by some to be a basic form of P3. Further along the P3 spectrum, the private sector may also assume responsibility for finance, operations, and maintenance, typically via a long-term (e.g., 30 years or more) concession from the public sponsor. With a Design-Build-Finance (DBF) structure, the private sector entity is in charge of financing and building the project, but leaves the O&M of the facility to the public agency. Design-Build-Finance- Operate-Maintain (DBFOM) adds private financing to the design, construction, and O&M of the project. The public agency may have to provide a public subsidy to the project which may require use of bond proceeds or budgetary authority, but the public agency will not usually finance the entire project under this P3 structure.

This document, as well as the series of FHWA primers on P3s, is concerned primarily with forms of P3s where the private sector partner (called the “concessionaire”) enters into a long-term concession to perform most or all the responsibilities conventionally procured separately and coordinated by the government. Public agencies pursue P3s for a variety of reasons, including access to private capital, improved budget certainty, accelerated project delivery, transfer of risk to the private sector, attraction of private sector innovation, and improved or more reliable levels of service. However, P3s – like conventional projects – require revenue in order to pay back the upfront investment.  P3s are complex transactions, and determining that a P3 is likely to provide a better result than a conventional approach is not simple. There are many factors that must be considered when determining the best procurement approach for a given project, including long-term costs, myriad uncertainties, risks both now and in the future, and complicated funding and financing approaches.

Value for money is defined as the optimum combination of life-cycle costs and quality (or fitness for purpose) of a good or service to meet the user’s requirement. For example, in the case of highways, the user’s requirement might be mobility and safety on a specific roadway. Value for Money (VfM) processes have been designed and utilized in many countries to help government officials determine if, when entering into a P3 agreement, they are likely to obtain a better deal compared to conventional approaches to procure the same project. A basic assumption is that a public procurement is possible with public financing. Also, benefits to users (if it is determined that a P3 could enable delivery earlier than with the conventional approach) are generally not quantified, although they may be considered in a qualitative evaluation.

It is important to clarify that VfM assessment of P3s is distinct from the process of establishing whether a public sector project is a good use of society’s resources, which is done through a full benefit-cost analysis. Benefit-cost analysis involves a comprehensive assessment of the full range of economic costs, risks and benefits and takes into account less quantifiable impacts including external costs and benefits. In contrast, VfM analysis assumes that the decision has been made that a project is a good use of societal resources, and that the question that remains to be answered is which procurement method will deliver the greatest value.