"Value for money" (VfM) is a measure of the net value that a Government receives from a PPP project. The assessment of VfM helps the Government decide whether a project should be implemented as a PPP and how much support the Government should provide to that project. Assessing VfM is as much an art, as a science, given the various and changing concepts of "value" that the Government will want to access through PPP.
Various approaches and models endeavour to quantify VfM, in particular through public sector comparators (see Box 3.11), cost benefit analysis and shadow models (where a financial model is developed from the bidder's perspective to test likely bidder concerns). Best practice uses such quantitative analysis as important data, but looks to a qualitative analysis to respond to all relevant parameters rather than seek measurable accuracy in assessment. (see Box 3.10)
VfM is often used as an ex-post rationalization of a political decision to implement a project under PPP.
| Box 3.9: Lessons from London Underground - Allocating Too Much Risk to The Private Sector |
| "Contracts that were supposed to deliver 35 station upgrades over the first three years in fact delivered 14-40% of the requirement; stations that were supposed to cost Metronet SSL £2 million in fact cost £7.5 million-375% of the anticipated price; by November 2006, only 65% of scheduled track renewal had been achieved. They have ended in collapse and chaos. It was a spectacular failure." "The Government should remember … that the private sector will never wittingly expose itself to substantial risk without ensuring that it is proportionally, if not generously rewarded. Ultimately, the taxpayer pays the price." Source: House of Common, Transport Committee, "The London Underground and the Public-Private Partnership Agreements," Second Report of Session 2007-08, HC 45 (January 2008). |
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| Box 3.10: The UK's Latest Views on Quantitative Versus Qualitative VfM |
| The current approach to appraisal of PFI sets out that qualitative considerations-viability, desirability, achievability-should frame the approach to the quantitative assessment. The intention is that the quantitative assessment should form part of the overall value for money judgement rather than be seen as a stand-alone pass/fail test; neither the quantitative or qualitative assessment should be considered in isolation. The UK National Audit Office has, in the past, expressed concerns that too much weight is given to cost modelling; they have put considerable emphasis on the fact that financial appraisal is just one part of the overall assessment of the contracting approach, and have sought to discourage appraisers striving for disproportionate levels of accuracy. Source: Infrastructure UK, "A new approach to public private partnerships" (December 2012). |
This can jeopardize the sustainability of the project and PPP program. A robust VfM exercise at the time of project selection and procurement can protect a project from ex-post challenges.