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 (relative to doing no project). 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 TEN-T 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<9> 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 and it is a legal requirement in many PPP programmes worldwide. Advisers need to make various cost adjustments to be able to do 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 (additional bidding, contracting, and monitoring costs in a PPP setting) and financing costs (possible added costs due to private sector financing, especially equity financing) <10>,<11>,<12>

Experience suggests that the likelihood that a PPP provides Value for Money is higher when all or most of the following exist: <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 and is expected to offer Value for Money;

□  The public sector is able to define its service needs as outputs, which can be written in the PPP contract ensuring effective and accountable delivery of transport infrastructure services in the long run;

□  Risk allocation between the public and private sectors can be clearly identified and implemented;

□  It is possible to estimate the long-term costs on a whole-of-life basis of providing the transport infrastructure assets and services involved;

□  The value of the project is sufficiently large to ensure that procurement costs are not disproportionate; or

□  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 government or the users can afford to pay (and when), the impact on the project scope, service level, structure, and the associated risks the private sector might be prepared to accept. This exercise should help the public sector to identify and manage any long-term fiscal obligations - implicit and explicit - that may result from a TEN-T PPP.