6. Value for Money

Most traditional procurement is based on an input specification for the assets and/or services being acquired, separate contracts for design, construction and asset management, and a public tender for each contracts. Contracts are let by government departments and agencies pursuant to conventional procurement guidelines and in all but the largest value projects, without Treasury, Public Accounts Committee or Works Committee oversight.

There is a presumption in favour of the lowest price tender and this tends to dominate evaluation criteria. The Egan Inquiry in 1998 examined the state of the UK construction industry and in its recommendations observed,

“Too many clients are undiscriminating and still equate price with cost, selecting designers and constructors almost exclusively on the basis of tendered price. This tendency is widely seen as one of the greatest barriers to (industry) improvement. The public sector, because of its need to interpret accountability in a rather narrow sense, is often viewed as a major culprit in this respect. The industry needs to educate and help its clients to differentiate between best value and lowest price (Egan 1998, Report of the Construction Task Force, p. 7)”.

Table 2 PPP Procurement Cost Savings

SOURCE

Compiled Michael Regan from original reports 2006

NOTES

a Comparison of PPP
/PFI outcomes against the PSC b,c Contracting out only
d All procurement
e Buildings only

In the past 15 years, state procurement policy in Australia and the United Kingdom has moved away from strict lowest tender selection criteria to value for money (VfM). VfM is a wide construct that examines the direct and indirect impacts of a particular procurement. The Northern Territory Government's procurement directions policy employs the following VfM tender assessment criteria:

● Past performance

● Whole of life costs

● Local development and value-adding

● Timeliness

● Capacity, and

● Innovation.

For PPPs, comprehensive qualitative and quantitative criteria are employed that may include:

● Lower procurement cost or user charges using a comparative evaluation against a risk-weighted traditional procurement model

● Early project delivery or minimum community disruption during construction

● Variations to specification that create additional utility or value for the state

● Improved state resource allocation or utilisation

● The transfer of additional project risks

● Service delivery outcomes that exceed specification or improve service standards, consumer utility or enhancements to the public interest

● Improvements in the quality, scope and scale of service delivery

● The use of processes and inputs which are likely to produce more reliable and better quality services

● Sustainability and environmental protection

● Design amenity (NAO 2003; PV 2001, 2003; Grimsey and Lewis 2004).

Table 3 SURVEY OF PROCUREMENT OUTCOMES a

SOURCE

MR 2008

NOTES

a Sources as noted. Sample sizes vary. Parenthesis denotes average overruns for sample

b Qualitative assessment from independent NAO 2004, 2006 reports. Defect reporting.

d 2000-01 results: NAO 2001 Modernising Construction. Delivered on or under time and price.

e 1999 results: NAO 2005 Improving Services Through Construction Part B

f 2004 results: NAO 2005 Improving Services Through Construction Part A

g Fitzgerald 2004; Audit Office Reports Victoria & NSW 2004-08; IPA 2007

h NAO 2004c, 2006 MOD Defence Contracts

The key quantitative measure of value for money with PPP projects is the PSC. The PSC is frequently criticised on grounds of accuracy. The general rule adopted in many countries is for a PSC to be prepared when traditional procurement is an option. When the state does not have the capital to undertake the project, a PSC may be prepared as a benchmark although it is expected that, in these circumstances, a competitive market will deliver lowest procurement cost and value for money. The PSC is based on a reference case built around the best traditional procurement option. As with the private bids, preparing a financial forecast for an infrastructure project is a complex exercise that is more art than science and relies on the estimates, advice and judgement of the project management group.

The qualitative measure of value for money involves an analysis of each bid on the basis of:

● A public interest test

● The prospects for the quality and reliability of service delivery

● Design amenity

● The sustainability of the bidder's proposal (PV 2003, pp. 12-14; NAO 1999b).

The evidence suggests that the drivers of value for money in PPP projects include:

● Risk transfer

● Innovation in design and construction

● Price certainty including lifecycle costing of refurbishment, repair and maintenance obligations

● Timeliness of delivery

● The use of new and more effective technologies (Fitzgerald 2004; Regan 2007).

The literature also points to wide variation in the achievement of these outcomes between projects. Matters that affect value for money outcomes include the size of the project, the complexity of the construction and operational tasks, the scope for innovation and technology, and bid criteria. Another source of difference is qualitative outcomes such as landmark design (Southern Cross Station project); e-tolling (Transurban Citylink, Melbourne); construction methods that do not impose congestion on existing roads (Heathrow Terminal 5; Eastlink, Melbourne); up-front payments to the state (Cross-City Tunnel, Sydney; River City Motorway); new filtration technology (Enviro Altona); early commissioning (Albury Wodonga Treatment Plant); public security, technology services and user amenity (County Court Building, Melbourne), lower consumer charges (Eastlink, Melbourne) and improved asset management (NSW Schools Project; Darent Valley Hospital). The value for money evaluation process offers are more comprehensive method for evaluating proposal attributes and offers a platform for comparing proposals and the PSC. Value for money is acknowledged as a best practice template for project procurement especially one off, large and complex projects offering scope for innovation and the deployment of new technology.

Nevertheless, a number of recent UK PPP audit reviews point to inaccuracies and systemic optimism bias in state agency evaluation of major projects. The PSC can be difficult to price particularly when a government agency has a long history of underperformance under traditional procurement principles (NAO 2004b). Optimism bias is being addressed by a number of techniques being employed at the early business case development stages of the project including reference forecasting methods (Flyvbjerg and COWI 2004). Lifecycle costs are also difficult to accurately predict over service intervals of 20-40 years and may account for up to 5 times the initial procurement cost, in nominal terms, for an average commercial building over a 20 year investment period. This suggests that the PSC is not definitive for large and complex projects and offers little more than a guide (NAO 2004b). The identification, measurement and pricing of risk are a subjective exercise for long-term projects and forecasts prepared on a risk-weighted basis are as sound as the quality of the thinking that is employed in their construction. The same problem exists for the private sector bidders although the financial costs of error go straight to the bottom line. Possibly it's a question of incentive and the marginal utility of investment - the investor with more at stake is more likely to take greater care in measuring the risk profile of an undertaking than one with less.