1.2.4 Value for money analysis

A PPP project yields value for money if it results in a net positive gain to society which is greater than that which could be achieved through any alternative procurement route. It is good practice to carry out a value for money analysis (essentially a cost-benefit analysis) as part of the initial preparation of a project, regardless of whether it is procured conventionally or as a PPP.

In some countries like the UK, which have extensive PPP programmes, a PPP project is said to achieve value for money if it costs less than the best realistic public sector project alternative (often a hypothetical project) which would deliver the same (or very similar) services.  Guidance 11 This public sector alternative is often referred to as the "public sector comparator" ("PSC").

Carrying out a PSC exercise is part of building the business case for a PPP project. It is a legal requirement in many PPP programmes worldwide. Advisers need to make various cost adjustments to be able to undertake a detailed quantitative comparison between the PPP project and the PSC. These cost adjustments include differences in tax regime, for example.

It is generally assumed that the PPP option will be more efficient in investment, operating and maintenance costs than the PSC. So the key question in assessing value for money is usually whether the greater efficiency of the PPP project is likely to outweigh factors that might make the PPP more costly, the main ones being transaction and contract oversight costs (i.e. additional bidding, contracting and monitoring costs in a PPP setting) and financing costs (i.e. possible added costs due to private sector financing, especially equity financing).  Guidance 12, 13, 14 The value for money assessment should also take into account the potential non-financial benefits of PPPs such as the accelerated and enhanced delivery of projects.  Guidance 15 Experience suggests that the likelihood that a PPP scheme will provide value for money is higher when all or most of the following conditions are met:  Guidance 2

•  there is a major investment programme, requiring effective management of risks associated with construction and delivery. This may be a single major project or a series of replicable smaller projects;

•  the private sector has the expertise to design and implement the project;

•  the public sector is able to define its service needs as outputs that can be written into the PPP contract ensuring effective and accountable delivery of services in the long run;

•  risk allocation between the public and private sectors can be clearly identified and implemented;

•  it is possible to estimate on a whole-of-life basis the long-term costs of providing the assets and services involved;

•  the value of the project is sufficiently large to ensure that procurement costs are not disproportionate; and

•  the technological aspects of the project are reasonably stable and not susceptible to short-term and sudden changes.

The project identification phase therefore involves an early assessment of what payment structure is feasible, what the Authority or the users can afford to pay (and when), the impact on the project scope and the service levels, and the associated risks the private sector might be prepared to accept. This exercise should help the Authority to identify and manage any long-term fiscal obligations (implicit and explicit) that may result from the PPP project.