IRF e-Learning Webinar Series – Public-Private Partnerships

Value for Money (VFM) in PPPs

 Presentation Index

I. PPP Structure

II. VFM Analysis and Practices

III. Practice Suggestions

Discussion / Questions
 I. PPP Structure

Characteristics

§ Design-Build-Finance-Maintain-Operate (or variations of) § More expensive in initial stages of planning

and procurement
§ Financing provided by the private sector
§ Cost efficiencies through innovation, taking
§ Risks assigned to the entity best able to handle the risk risks, and good management

§ Projects need to be “bankable”

§ Selection skewed towards the lowest cost to owner (NPV)
§ Payments are (generally) made after
§ Terms are generally about 30 years+ substantial completion (availability deal)

§ Key to success is good planning and

§ Based on availability payment or revenue generation
reasonable risk transfer.

§ Attract internationally experienced teams and financing

 I. PPP Structure – PPP Objective and Approach

PPP Objective
§ Value for Money Exercised
§ Use Alternative Financing and Procurement to maximize
risk transfer and achieve value for money in the delivery § Procurement efficiency achieved with
of large, complex projects experience

Approach

§ Establish a maximum project cost prior to RFP release

§ Exploit the discipline of private sector capital
§ Drive innovation in scope, schedule and budget
§ Tightly manage procurement process
§ Ownership remains with the public sector
§ Funding could be combination of public and/or private
 I. PPP Structure – Roles, Relationships, Risk Sharing
Organization / Stakeholders

Advisors
§ Technical Advisor
§ Legal Advisor
§ Process Advisor
§ Financial Advisor
Owner (Gov. Agency)
§ Markets Advisor (Capital)
§ Insurance Advisor
§ Traffic & Revenue (applicable)

Lenders Advisors
§ Lenders’ Technical Advisor
Project Co Banks / Investors / § Lenders’ Legal Advisor
(Private Consortium) Equity Partners § Lenders’ Insurance Advisor

Advisors
§ Engineering
Design-Build JV Op. & Maint. Life-Cycle/Rehab.
§ Financial
(DBJV) Service Provider (Project Co)
§ Legal
§ Insurance

Construction Phase Operations Phase

Risk
Transfer
 I. PPP Structure – Funds Flow

$ Revenue (if any)

Public Authority (Owner)

Availability $ $ Milestone $ Revenue (all or share)

Payment Payment

$ Revenue (if any) Concession Company

(Private Sector)
 I. PPP Structure – Concept of Value for Money

§ VFM is a process of comparing costs using two delivery models to determine which is the
better value proposition: If the PPP cost is less than the Traditional Procurement Cost, then
there is positive Value for Money by procuring a project using PPP

+ Value For Money

Risk Retained
Risk Premium
Ancillary Cost
Financing Cost

Base Cost

Traditional PPP
Procurement Cost Procurement
(DBB - PSC) Cost
 I. PPP Structure – Procurement and VFM

Business
Procurement Phase Implementation
Model
Bus. Case
RFQ RFP
+
Value for
Money VFM Update Design
Analysis / OM&R
(VFM) Const.
RFP Prep. /
Evalt./ Evalt./ Comm.
Market RFQ Proponent FC
Select Select Close
Sounding Response

Risk Management
Financial Modeling

Project Agreement (Draft) Proj. Agrmt.

Note: Political, operational and other influences can also make PPP a consideration as a procurement option.
 I. PPP Structure – Business Case and VFM

Project Planning
§ A project comes from a technical planning exercise
§ Define the general project scope
§ Have some engineering and costing data
§ Qualitative Analysis:
§ Score corporate objectives against potential procurement options
§ Identify which models should be further considered by Quantitative Analysis

Quantitative Analysis (Value for Money Analysis)

§ Begins after it has been decided that the project will proceed
§ To establishes the most appropriate procurement model
§ It is a tool for comparing procurement models (and not for assessing whether a
project should proceed or not)
§ Compares total risk-adjusted cost of shortlisted options against a traditional Public
Sector Comparator (PSC) procurement: design, and then build separately by a
contractor with no private financing or private operations considered
§ PSC is compared with one or more PPP option

§ Value for Money $ : (Total PSC Present Value Cost) – (Total PPP Present Value Cost)
 II. VFM Analysis – Components

Identify the Procurement / PPP Option

§ DBF, DBFM, DBFOM vs. Public Sector Comparator (PSC) traditional
procurement
1. Base Costs – Develop Project Costs
§ PSC Procurement Costs
§ Shadow Bid (PPP) Costs
§ Ancillary Costs
§ Efficiency Factors
§ Spent Curve – what is spent when / construction duration
2. Risk Pricing – Develop a Risk Matrix
§ Consider all risks throughout the project cycle: planning, design,
construction, operations, maintenance, life-cycle / rehabilitation,
end-of-term
3. Financial Model (technical perspective: inputs)
§ Input – Construction period + the operations period $ + Cash flow
§ Apply Risk $ (retained risks)
§ Discount Rate
§ Net Present Value for comparing PSC against the PPP (Shadow Bid)
 II. VFM Analysis – Costing

1. Base Costs – Develop Project Costs

§ Design and Construction Costs – typically the same for PSC and PPP options
§ Maintenance Costs – Agency input, past data, expert input
§ Operations Costs – Agency input, past data, expert input
§ Life-Cycle Costs – What rehabilitation will happen when, end-of-term
§ Inflation Rate – Applied to the construction duration for each model. Typically
taken and adjusted at mid-point of construction
§ Ancillary Costs – Both will have full costs for the term of the project (spent by
public or private sectors)
§ Costing Adjustments (optional) – if the same PSC / PPP cost basis are used:
- PSC Construction Cost: Sometimes increased, if same PSC/PPP Cost is used to
reflect efficiencies in PPP procurement (if used the same PSC / PPP base costs)
- Life-Cycle Cost Adjustment: PSC life-cycle cost is reduced to reflect typical lack
of expenditure by the public sector
Costing Adjustments:
§ Based on historical data
§ Based on expert input
§ Will depend on the sector: road, transit, social, etc.
 II. VFM Analysis – Risks

2. Risks – Allocation, Costs and Impacts

§ Project-Specific or Typical? – Depends on agency
§ Identify Risks for each phase: Planning, policy, site, design/construction,
operations, ……
§ Costs ($) impacted and associated with each risk: Total costs, design and
construction $, operations $, life-cycle $
§ Who will carry the risk? Public (Retained), Private (Transferred), Shared
§ Cost of each risk: (probability of occurrence %) x (impact %) x ($ of costs impacted)
§ Statistical Analysis: Monte Carlo Analysis to assess cumulative impact of risks
§ Assign Risks:
- PSC Cost + Retained PSC Risks $ = Total PSC Cost for Financial Model input
- PPP Cost + Retained PPP Risks $ = Total PPP Cost for Financial Model input
Name Graph Min Mean Max 5% 95%

Retained Risk / DBFM $810,000 $179,000,000 $356,000,000 $51,000,000 $222,000,000

Retained Risk / Traditional $4250,000 $789,000,000 $1,215,000,000 $642,000,000 $1,001,000,000

§ Analysis based on expert input

§ Base costing would include transferred risks
§ In VFM analysis, the risks cost is often the factor bringing VFM to PPPs
 II. VFM Analysis – Risks
DBFOM Traditional Model DBFOM Traditional Model
Probabil Probabil
Cost Base Impact Impact
ity ity

Risk Category 10th Typica 90th 10th 90th Public Transfer Shared Public Transfer Shared
Portion of DBFM % perct l perct % perct Typical perct
1.00 Policy / Strategic
1.01 Government Approvals for Program (not
applicable) Total Contract
1.02 Government Approvals for Project Total Contract 20% 5% 20% 40% 20% 5% 20% 40% $62,864.000 $0 $0 $62,864,000 $0 $0
1.03 Government Funding Total Contract 5% 1% 3% 10% 20% 3% 6% 25% $2,858,000 $0 $0 $12,986,000 $0 $0
1.04 Project Schedule Design &
Construction
2.00 Transaction / Tender Process
2.01 Due Diligence (by the owner in preparation of
tender in RFP)
Total Contract
2.02 Tendering Competition Total Contract
Scope Changes during Tendering (combined with
4.03)
Total Contract
2.03 Delays in Contract Award/Financial Close Total Contract
2.04 Termination prior to Contract Award/Financial
Close
Total Contract
3.00 Project Agreement
3.01 Ambiguities In Legal Agreements Total Contract
3.02 Termination For Convenience During Construction Design &
Construction
3.03 Termination For Convenience During
Operations &
Operations/Maintenance Phase
Maintenance
4.00 Design
4.01 Stakeholder Consultation Pre FC Design &
Construction
4.02 Stakeholder Consultation - Post FC and Tender Design &
Construction
4.03 Scope Changes initiated by Owner During Tender
Design &
Process and Design Construction
4.04 Compliance with Codes and Standards - During
Design &
Design
Construction
5.00 Site Conditions / Environmental
5.01 Utility/Services Relocations Design &
Construction
5.02 Geotechnical Design &
Construction
 II. VFM Analysis – Risks
Risk Category Owner P Co Share Comments
Policy / Strategy: Gov. Approval and Funding x
Transaction / Tender Process
Due Diligence x
Scope Changes x
Delays in Award / Financial Close x x Some delays may be expected
Termination (without cause) x P Co will suffer some costs
Project Agreement x
Ambiguity x
Termination During Construction / Operations x If without cause
Design
Stakeholder Consultation x External stakeholders
Design / Innovation / Code Compliance x
Scope Changes x By Owner
Site Condition / Environmental /
Geotechnical x Sometimes $$$ to transfer
Environmental / Exist. Contamination / Archaeology x Known / Unknown
Utilities Relocation x Shared if external utilities
x
Construction x
Specialized Equipment / Technology x If prescribed by Owner
Completion / Commissioning x
Maintenance and Life Cycle x If no change in road usage
Operation x Toll Revenue – Special Cases
Inflation – During OM&R x Indexed
 II. VFM Analysis – Financial Model

3. Financial Model (technical inputs overview)

§ Costs:
- Construction, Operations, Life Cycle
- Ancillary Costs
- Spent Curve – What will be spent when
§ Risks – Mean $ Value of “Retained Risks” for PSC, and “Retained Risks” for PPP
§ Public Sector Payments – Milestone Payments (if applicable)
§ Revenue Stream (if applicable)
§ Discount Rate – To Calculate Present Value of Costs, options are:
- Risk-Free Rate
- Risk-Loaded Rate
- Fixed Rate for each sector
- Different Rates for PSC and for PPP
- A point of contention – Obtain independent advice
§ Financing Considerations (non-technical): Inflation, financing structure
(bank/bond), milestone payment, debt service, internal rate of return, etc.

§ Use experienced financial + financing experts + rating agency input

§ Base costing would include transferred risks
§ In VFM analysis, the risks cost is often the factor bringing VFM to PPPs
 II. VFM Analysis – Financial Model

3. Financial Model (output summary)

Traditional - Public Sector Comparator (PSC) Shadow Bid (DBFM)
Nominal, in M$

Construction costs (1) 2,055 Construction costs 1,829

Maintenance Costs 212 Maintenance Costs 212
Life Cycle Cost (2) 420 Life Cycle Cost 700
Present Value terms, in M$ Present Value terms, in M$
PV of base PSC 1,950 PV of Annual Service Payment 451
PV of Life Cycle Cost Payment 234
PV of Substantial Completion Payment 1,500
PV of Shadow Bid 2,185

Risk retained under PSC delivery 945 Risk retained under PPP delivery 179
Transaction costs - Transaction costs 6
Other procurement costs - Other procurement costs 35
PV of Public Sector Comparator 2,739 PV of adjusted Shadow Bid 2,405

VFM savings ($) 334

VFM savings (%() 12.20%
Discount Rate: 5.5%

§ (1) Construction Costs: Applied Innovation Factor (increased PSC)

§ (2) Life Cycle Costs: Applied Life Cycle Factor (reduced PSC)
§ Consider other Discount Rates – a range
 II. VFM Analysis – Practices (samples)
Agency A Agency B Agency C
Base Costs
Who provides base costs Typically provided by an external cost Capital and lifecycle costs typically provided Combination of internal resources (including
(construction, consultant. by an external cost consultant. Authority reference to past projects) and external
maintenance, lifecycle)? often provides maintenance costs. consultants.
Are base costs consistent Yes - prior to adjustments. No - separate cost estimates developed for the Yes - prior to adjustments.
for PSC and shadow bid? PSC and shadow bid.
Public Sector Comparator
Are PSC base costs Yes – The lifecycle cost is reduced to reflect No (project dependent) No
adjusted? anticipated underspending by the public
sector (based on historical observations). PSC
base costs are also increased to reflect an
assumed innovation factor of the AFP model.
Procurement model Traditional Design, Bid, Build (DBB) model Traditional DBB model unless a Design, Build Traditional DBB model always used. A DB
always used. (DB) model is deemed more appropriate. may be considered as one of the alternative
procurement models.
Financing Assumptions No explicit financing costs included in the No explicit financing costs included in the No explicit financing costs included in the
PSC when the AFP model is a DBFM. PSC. PSC.
Competitive Neutrality Tax – income tax payable under the AFP Tax – 100% of provincial income tax payable None
Adjustments model is added to the cost of the PSC. No and 50% of federal income tax payable under
distinction between provincial and federal the PPP model is added to the cost of the PSC.
taxes (since federal tax receipts also benefit
the province).
Ancillary Costs Various Authority planning and delivery costs Various Authority planning and delivery costs Various Authority planning and delivery costs
included (e.g. procurement and project included (e.g. procurement and project included (e.g. procurement and project
management costs). management costs). management costs).
Shadow Bid (PPP Model)
Are shadow bid base No – but the AFP model is assumed to benefit Permitted - efficiency factor reductions to Yes – efficiency factors often used to reduce
costs adjusted? from an innovation factor (by increasing PSC capital or lifecycle costs permitted if there is the base costs. This is to reflect the
base costs as noted above). justification based on the type of PPP model competition, design integration and
selected and provided there is no risk of innovation under a PPP model.
double counting with the risk analysis.
Infrequently used on recent projects.
Who provides financing Third party consultant with input from Third party consultant. Derived through: marketing sounding,
assumptions? Infrastructure Ontario based on precedent precedent projects, consultation with Alberta
projects. Finance and Enterprise, and/or consultant
input.
Ancillary Costs Various Authority planning and delivery costs Various Authority planning and delivery costs Various Authority planning and delivery costs
included (e.g. procurement and project included (e.g. procurement and project included (e.g. procurement and project
management costs). In addition, costs management costs). In addition, costs management costs). In addition, costs incurred
incurred by the project company (such as bid incurred by the project company (such as bid by the project company (such as bid fees and
fees and SPV management costs) are included fees and SPV management costs) are included SPV management costs) are included as part of
as part of the shadow bid cost. as part of the shadow bid cost. the shadow bid cost.
 II. VFM Analysis – Practices
Agency A Agency B Agency C

Risk Quantification
Overview • Risk-free discount rate • Risk-adjusted discount rate • Risk-free discount rate
• Standardized Risk matrix • Largely standardized Risk matrix using • Standardized Risk matrix
precedents
• Tailored to project • Tailored to project
• Tailored to project
• Risk workshop(s) • Risk workshop(s)
• Risk workshop(s)
• Statistical simulation • Statistical simulation
• Statistical simulation
• All risks quantified • All risks quantified
• Key project specific risks quantified
Retained Risk (PSC) Quantified and added to cost of PSC. The Quantified and added to cost of PSC. Quantified and added to cost of PSC.
anticipated underspending on asset
maintenance is incorporated into the retained
risk assessment.
Transferred Risk (PSC) Not quantified as risk not incurred by the Quantified and added to cost of the PSC, but Quantified and added to cost of PSC.
Authority. priced based on an estimate of what the
contractor would charge for assuming this
risk.
Retained Risk (Shadow Quantified and added to cost of the shadow Quantified and added to cost of the shadow Quantified and added to cost of the shadow
Bid) bid. bid. bid.
Transferred Risk Not quantified as risk not incurred by the Quantified and added to cost of the shadow Quantified and added to cost of the shadow
(Shadow Bid) Authority. bid, but priced based on an estimate of what bid.
the private sector would charge for assuming
this risk.
Discount Rate Risk-free rate with project risk quantification Risk-adjusted rate (Project IRR of privately Risk-free rate with project risk quantification
addressed separately (provincial cost of financed model). addressed separately (provincial cost of
borrowing used as a proxy). borrowing used as a proxy).

Decision Process
Procurement model Determined by both qualitative and Determined by both qualitative and Determined by both qualitative and
selection quantitative factors. quantitative factors. quantitative factors.
 III. Practice Suggestions

§ The VFM analysis should produce through sensitivity analysis a band width / range of numbers: not a
precise number
§ Should we do a VFM Analysis ?
§ Yes. Need to be able to establish that a project can benefit from PPP procurement.
§ If it cannot, then it should not be procured as a PPP
§ When should a VFM analysis be done?
§ During project planning / business case development
§ Just before the RFP is issued – and after the Project Agreement terms are developed: PA can impact VFM risks and scope
analysis. Discount rate could change. Risk tolerance/transfer could change
§ After the bids are in: Dose the project still makes sense as a PPP?
§ Post Construction – As lessons learned
§ What steps are taken in VFM analysis?
§ Hire competent and independent consultants: technical, costing, finance, construction, operations, etc.
§ Define project scope and expectations: service delivery, roles, schedule, performance, financing options
§ Conduct Market Sounding – gather industry input (design, construction, operations, finance, rating agencies)
§ Conduct proper costing and risk analysis – Maintenance, Operations and Life-Cycle are often a challenge
§ Don’t let one skill set (finance, engineers, etc.) to run with the VFM analysis on its own
§ Look at what other agencies are doing – US FHWA tool kit, Canada, India, UK, Australia, The World Bank, ADB, etc.
§ Look at procurement options
§ Do not fudge!
§ How much time, $ should be allowed for proper VFM analysis?
§ Sufficient time (to meet goal timeline requirements)
§ Allow a reasonable budget – compare the Project costs with the analysis budget (it will be negligible)
§ What to do with the results?
§ Publish it
§ Update it
§ Use for the next project
Questions