Assessing Value for Money of PPPs to Deliver Quality Infrastructure

Value for money tests can help assess if a project would be more efficient under a PPP scheme or under other procurement modalities. These assessments, from the perspective of the procuring authority, consider the broader interests of society. VFM is the optimum combination of life-cycle costs and quality or “fitness for purpose” of a good or service to meet the user’s requirement. It answers the question: which procurement and delivery method provides the “best deal” for implementing a specific project from the perspective of the government? It creates an understanding of the differences between PPP and other delivery methods and leads to a better grasp of the potential value drivers of the PPP option, especially when competitive tension is ensured. These VFM assessments provide the government with an approximate quantitative range of outcomes, sensitivity analysis, and risk analysis to determine the robustness of the key procurement choice, as well as other qualitative considerations.

Implementing the value for money governance approach is a progressive (and cumulative) effort across at least four distinct stages of the PPP—appraisal, procurement, structuring, and the ex-post management phase. So, it is more than a particular test at a particular point in time or decision stage. From the early moments of the appraisal effort, qualitative VFM tests can set the stage for later, quantitative, and more comprehensive efforts that can support a decision to proceed with a PPP procurement option or not. It is crucial that this is done within a public investment management framework through which a government can transparently decide on what project investments it should pursue, irrespective of procurement method. After completing the initial assessment in the appraisal phase and before the project is awarded, it is also advisable to update the VFM exercise to check for modifications made during the structuring phase to make sure that VFM expectation is still maintained. At award, governments are expected to have formed a sound and informed expectation that a PPP option can produce VFM throughout all the forthcoming challenges of the implementation period, especially those that can affect the ex-post VFM of a PPP. But experience has also shown that costly PPP renegotiations are way more frequent than justifiable and take place for far more strategic behavior motivations from the contracting parties than what could be anticipated by most observers. Experience indeed shows that ex-post VFM can end up different than (and much below) original expectations, especially when there is a lack of institutional capacity to guard against strategic behavior at award or monitor contract performance during implementation. It is thus useful to also conduct an ex-post evaluation of VFM during contract management and implementation of the project, especially if the authorities have agreed to modify the contract for whatever reason, or if a contract extension (or other consequence of renegotiation) occurs.

Producing a raw public sector comparator (PSC) is the first step in a quantitative value for money analysis. This is the estimated whole-life costs of the project if the government implements the project through traditional procurement. The next step is to turn the raw PSC into an adjusted PSC for fair comparison with a PPP so the two cash flows will reflect, as far as possible, identical risk profiles. The last step is to compare the net present value (NPV) of the PPP and the traditional option and apply a discount rate to the projected costs. Once the government contracting authority has reduced the public sector comparator and PPP alternatives to one net present value, the final step is to indicate which one represents a positive value for money and the best alternative to implement the project.

Typically, the quantitative value for money assessment is based on unproven assumptions especially in developing countries with low institutional capacity to collect data on comparable infrastructure projects. The valuation of risks and cost estimates, the adjustments made to the public sector comparator, and the discount rate are estimates with a considerable level of inaccuracy. Often proxy estimates need to be used. Therefore, its conclusions should be for reference purposes, and project teams should do sensitivity analyses on the numerical recommendations.  Likewise, a qualitative analysis should follow the quantitative analysis to ensure that a PPP model is appropriate, and to assess nonquantitative issues, such as government intuitional capacity to implement a PPP effectively.

Even though qualitative factors should be a part of the early decision processes, and a positive value for money (quantitative) estimation does not necessarily imply that the best option will be a PPP route, this is still the best analytical basis to form such expectation in terms of ex-ante VFM for a PPP procurement choice; The mathematician George Box said “…all models are wrong, but some are useful. However, the approximate nature of the model must always be borne in mind.” Taken as an approximate reference point and in combination with a qualitative analysis, VFM is a useful model to indicate the capacity of the PPPs relative to other forms of procurement to increase efficiency in infrastructure delivery and to check whether the general concept of the project fits the PPP model. VFM analyses and a purposeful governance framework to maximize VFM are also the best way governments can ensure accountability and transparency throughout the project cycle from project screening and identification, project preparation and structuring, to tender award and project management.   

Regardless of the rigor of the various techniques, guidance, and analyses, value for money will not be achieved if the overall infrastructure governance is flawed. The framework for public investment decisions and procurement should be purposefully designed to ensure that public investment projects are selected and procured to maximize impact and fiscal efficiency. Many countries are working to improve the overall infrastructure governance framework and to avoid unintended fiscal consequences from public investments. This underscores the importance of strong public institutions, processes, and procedures to guide government decisions in planning, allocating funds, and implementing public investment projects, including PPPs that are cost-efficient, affordable, and deliver inclusive infrastructure and services.  

Asian Development Bank (ADB). 2022. Value for Money in Public–Private Partnerships: An Infrastructure Governance Approach. Manila.