What is the problem?
Many public authorities use value for money ("VfM") analyses to compare delivering an investment through a PPP with implementing it through a "conventional" procurement. These ex-ante VfM analyses usually focus on the financial costs (risk-adjusted) of providing what is assumed to be an equivalent output. However, where there are reasons to believe that the non-financial benefits of delivery under a PPP will be greater than under conventional procurement, traditional VfM approaches will underestimate the benefits of PPPs. In fact, the incentives which are specific to PPP projects are specifically intended to deliver greater non-financial benefits than conventional procurements. Ignoring this issue could lead to an unwarranted bias against PPPs.
What is the distinction between financial and non-financial benefits?
By non-financial benefits ("NFBs") we mean the "socio-economic" benefits to service users or wider society from an infrastructure investment. NFBs are distinct from financial benefits (or costs) which represent cash inflows/outflows (that usually fall directly on the public sector decision-maker).
Take the example of the appraisal of a public infrastructure investment which is not revenue generating (e.g. a school, a hospital, a non-toll road):
• Stating that Option A has greater financial benefits than Option B means that for a given level/quality of output, Option A has the lower net present cost;
• Stating that Option B has greater NFBs than Option A means that the net present value of the external benefits delivered under option B exceed those of Option A.
Box 1 provides examples of the distinction between "financial" and "non-financial" costs and benefits in infrastructure investments. Note that these apply equally to both PPP and non PPP projects.
The remainder of this paper focuses on NFBs of PPPs, as opposed to "non-financial costs". This is for simplicity of presentation as, conceptually, there is no difference between costs and benefits1. Besides, it is difficult to imagine cases where the non-financial costs of a PPP exceed those of conventional procurement2.
Box 1 - Examples of "financial" and "non-financial" costs and benefits
| Financial costs to the decision-maker | Financial benefits to decision-maker | Non-financial benefits to users/society | Non-financial costs to users/society |
Schools | Capital and maintenance costs | Energy cost savings | Improved educational outcomes | Increased congestion around school |
Roads | Capital and maintenance costs | Toll revenues | Reduced accident costs | Noise and pollution from generated traffic |
Light rail | Capital and maintenance costs | Fare-box revenues | Reduced commuter time | Congestion during construction |
Prisons | Capital and maintenance costs | Reduced revenue costs | Improved environment for prisoners | Negative impact on local property prices |
Valuation, quantification and identification of NFBs
Throughout the paper a distinction is drawn between those NFBs that are capable of being:
∙ valued in monetary terms (e.g. increased property prices);
∙ quantified but not generally valued in monetary terms (e.g. improved educational outcomes for school students);
∙ identified but not quantified or valued (e.g. an improved environment for prisoners).
The valuation of NFBs is desirable where it is possible. But this paper stresses that it is inappropriate to simply ignore benefits which cannot be valued, or even measured.
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1 Economists point out that "costs" are simply "benefits foregone".
2 A possible example is the costs of future uncertainty regarding pension provisions for staff transferred from public sector to private sector employment as a result of a PPP. To the extent that these (or other non financial costs) are relevant they should be incorporated in the VfM analysis.