As with PPP, there is no single definition that fully encapsulates the concept of 'VfM'. For the private partner, it may simply represent the size of its profit margins in delivering contracted services. However, for government, VfM is based on the achievement of planned social outcomes, and hence the 'social dividend', through the delivery of contracted services. The New South Wales Treasury (in English 2006) offers the following definition for VfM: 'getting the best possible outcome at the lowest possible price'. In contrast, the UK Treasury (2006, p.7) provides additional detail, defining VfM as 'the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user's requirement'. This differs from the following definition supplied by the Victorian Department of Treasury and Finance (2011, p.19):
'VfM denotes, broadly, a balanced benefit measure covering quality levels, performance standards, risk exposure, other policy or special interest measures, as well as price. Generally, VfM is assessed on a "whole of life" or "total cost of ownership" basis'.
Although the other definitions take into account full lifecycle costs, (stating that price should only be one factor when making a VfM determination), the latter is the favoured definition for this paper as it refers to the need for managing both performance and risk. Furthermore, with the New South Wales Treasury definition, it is unclear how 'getting the best possible outcome at the lowest possible price' can be successfully applied in situations where there are several options under consideration and where the preferred option (the one that is believed to provide the best possible outcome) does not offer the lowest possible price.
The achievement of VfM is considered to be one of the greatest drivers of risk transfer between the partners (Partnerships Victoria 2001a, p.4). It is claimed that, over time, this can lead to cost savings up to 66% throughout project lifecycles (Commonwealth Department of Administration and Finance 2006, p.2) depending on how well the PPP project phases are integrated and the extent to which assets are effectively managed (AECOM 2007, p.41). These claims are complementary to a study undertaken by Cambridge Economic Policy Associates (2005, p.39) which found that 96% of contractors and 85% of government officials believed that operational risks had been properly allocated. However, efficient allocation may not always be realised (Asian Development Bank 2008, p.2). For instance, Ergas (2009) claims that poorly allocated risk may unintentionally see potential cost savings turn into profits for project 'promoters', whist Davidson (2006) argues that the cost of 'transferring' financial risk to the private partner may actually be built into partnership deals (at the tendering stage) which would obviously detract from accomplishing genuine VfM outcomes, particularly during operational phases should ongoing under-performance occur.
Moreover, the concept of 'VfM' is based primarily on hypothetical calculations, often made at the business case stage of the project lifecycle, that may fail to fully account for unforeseen cost overruns or adjustments perhaps due to technical failures, obsolescence or lower than expected service user numbers (Edwards et al 2004, p.9; Grimsey and Lewis 2004, p.167; National Audit Office 2009, p.46-48). These are issues of uncertainty. There may also be failure by government to provide comprehensive and realistic pricing of all quantifiable and material risks. Grimsey and Lewis (2004, p.144) suggest that these risks are often misjudged and should be part of wider risk management practices. Eventually, all procurement relies on human judgement, skills and experience (National Audit Office 2009, p.47) and thus becomes subject to the errors, imperfections and biases in the decision-making processes of people. A 'solution seeking a problem' criticism of mega-project procurement is made by Flyvbjerg, Holm and Buhl (2002) who suggest that such judgements and decisions may be deliberately biased in order to achieve political ends.
In order to achieve VfM outcomes, co-operative relationships between partners must be established (Weihe in Hodge, Greve and Boardman 2010, p.520) as un-cooperative working environments (Klijn and Teisman 2003) can lead to operational difficulties between partners. Partnerships, therefore, should be based on establishing the 'right' working culture (Edwards, Bowen and Stewart 2005; National Audit Office 2009, p.55) that is beneficial to both partners and then maintaining good relations (Partnerships Victoria 2003, p.16; AECOM 2007, p.75) over the life of the contract to deliver agreed outcomes.
Developing good working relationships between partners can decrease levels of corrective action that may otherwise be taken to improve contract management outcomes (Ernst & Young 2008, p.13). This is important because the 'end goal' for PPPs is not cost reduction (i.e. simply abating for under-performance) - it is ensuring the private partner performs to the agreed standards under the contract (HM Treasury 2011, p.15) and that VfM is being delivered as expected.
With regard to public partner oversight management of PPP contracts, McCann (2014) identifies a range of public partner partnership and performance management factors that may contribute towards achieving VfM outcomes during the operating phase. These are shown in Table 1. The documentation and/or actions that can potentially be used as a foundation to build evidence-bases to assess whether VfM outcomes are being achieved in practice are shown in Table 2.
| Public partner VfM contributors | |
| Partnership management | Performance management |
| Proposed corrective actions for under-performance are mutually agreed with the private partner and these actions are implemented as agreed. Development and continuation of productive relationships with service users, employees and applicable community groups. Consortia informs the public partner of emerging risks and performance issues that have the potential to impact upon the achievement of planned VfM outcomes. No occurrences of negligence, fraud and/or corruption. Public partner employees adhere to all accountabilities and responsibilities under governance, probity and compliance frameworks. Disputes are quickly resolved with little to no impact on service delivery obligations and litigation is avoided. | Public sector agency/departmental project obligations are delivered within budget and on time. Services are delivered in line with business case/project brief objectives, concession deed, service specifications and subsequent contract amendments. Agreed changes to service delivery are aligned/realigned with business case/project brief objectives, concession deed, service specifications and subsequent contract amendments. Consistently high levels of service user and wider community satisfaction are reported. Incidences of negligence, fraud and/or corruption are appropriately dealt with. |
| (Source: McCann 2014) Table 2: Evidence-based foundations for assessing VfM for the public partner in PPP | |
| VfM evidence-base foundation | |
| Partnership management | Performance management |
| Progress made against partnership/stakeholder management strategies and plans e.g. assessing whether key messages between the public and private partners or internal project teams and their working groups have been properly understood and complied with. Assessing public partner employees' behaviour through staff appraisals to ensure they are effectively discharging their duties in line with project accountabilities and responsibilities e.g. the contract administration manual. Outputs comply with relevant industry standards e.g. assessing partnership relations that may relate to people involvement and competence. | Project expenditure remains within prescribed budgetary limits. Achievement of VfM outcomes as defined by the business case/project brief objectives, concession deed, service specifications and subsequent contract amendments. Incident rates/Key Performance Indicator (KPI) failure rates decline. Public partner accountabilities and responsibilities relating to the contract administration manual are satisfactorily discharged. Outputs comply with relevant industry standards e.g. those that may relate to process improvement and facilities management. Relevant audit findings/recommendations are implemented. Implementation of opportunity risk proposals e.g. innovations that lead to improved VfM outcomes. |
| (Source: McCann, 2014) | |
Partnership management is here defined as 'a relationship involving the sharing of power, work, support and/or information with others for the achievement of joint goals and/or mutual benefits' (Kernaghan in Trafford and Proctor 2006), whilst performance management is characterised by 'the use of inter-related strategies and activities to improve the performance of individuals, teams and organisations' (Management Advisory Committee 2001, p.14).
While many operational phase issues are yet to receive widespread attention in PPP literature, a VfM focus is not entirely absent. One Australian example is found in the Melbourne CityLink project, where the Victorian State Government sought to improve its VfM position on this PPP project through negotiation over scope changes with the private concessionaire, Transurban, which led to widening of the Southern and Eastern sections of the toll road and an extension to the original concession period (Clayton Utz, 2006; The Age, 2014).
Public benefits from the road-widening have been greater traffic capacity and improved safety. At the same time, the Victorian State Government negotiated with Transurban for a 50% share of any increase in CityLink toll revenues directly attributable to improvement work ('compensatory enhancement') carried out on contiguous non-toll road infrastructure, i.e. improvements which have led to increased usage of CityLink. In this instance, improvement work carried out by the Government and completed by 2011 has included the creation of extra lanes on the West Gate Bridge and on the West Gate and Monash freeways. Negotiations and calculations over the precise amount of compensation payable by Transurban are currently underway (The Age, 2014). This VfM improvement should be contrasted with conditions in the original concession agreement for CityLink, whereby the Victorian State Government agreed to avoid making alterations or traffic flow changes to roads in nearby areas that would improve alternative routes ('rat runs') and lead to greater avoidance of the toll road by road users. This example might be construed as a shift in public thinking about VfM in PPP, from plans and actions designed to attract and protect private concessionaires and their risk-taking, towards negotiating direct compensation for public work that will yield greater returns for the private partner.
A second example of VfM focus is found in a recent invitation from the Victorian Department of Treasury and Finance (2012) for contributions to discussion about future directions for PPPs in that state. Comments have been requested that will inform potential reforms to this model for public procurement. Contemplated reforms (Victorian Department of Treasury and Finance 2012, p.2) include:
• Shifting the PSC parameters from a purely financial pass/fail test to a more general affordability assessment (by including more qualitative and less tangible outcome criteria and adopting a more flexible understanding of 'affordability');
• Modifying financial arrangements to improve VfM outcomes (such as the 'compensatory enhancement' strategy noted above; and some level of public sharing in project debt financing, particularly during the construction phase);
• Expanding the PPP model by including additional ancillary and core services (e.g. including prisoner rehabilitation in prison PPPs, or combining transport and communications infrastructure projects where they can be physically colocated);
• Trialling a system of partial reimbursement of tender costs for bona fide PPP bidders (thereby encouraging more bidders and raising the level of competition between them); and
• Adopting a streamlined PPP model for smaller projects (to open up the PPP market and attract more private participants).
While no formal report of the responses to the Department's invitation is available, the areas for discussion suggest that public sector strategic thinking about PPP is shifting to more diverse and flexible perceptions of VfM.
The issues relating to the definition and achievement of VfM for the public partner in the operational phase of PPP are now explored in greater depth, through interviews conducted with appropriate experts from the public and private sectors.