VfM in PPP projects: Introduction to the concept
Owain Ellis
12 June 2008
Contents
• Introduction to the concepts of VfM and Affordability • Measuring VfM: Drivers of good VfM • Merits of UK’s previous and current guidance • A phased approach • Conclusions
Introduction
• What is VfM?
“The optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements. VfM is not the choice of goods and services based on the lowest cost bid.”
• VfM is a comparative concept
• VfM and Affordability
• What is its importance?
Why Assess VfM ?
• Starting Point:
– Major capital investment
• Desired End point:
– Optimum and enforceable risk allocation to the private sector partner
Drivers of Good VfM - Enablers
• Definable and contractible outputs • Balance of assets and non-asset based services • Whole life costing
• Adequate size and duration
• Competition
Drivers of Good VfM - Necessary
• Stable requirement/ long term use/flexibility • Stable delivery – technology • Private sector can manage risks and deliver • Procurement costs are proportionate
Previous UK Approach
• PSC ‘risked’ & cashflows compared with PFI • Shortcomings:
– Reliant on a single-point, cost-based test – Uses (limited) empirical data
– Timing of decisions
– Manipulability
Measuring VfM – Public Sector Comparator
• Experience
• Availability of empirical data
• Policy / legislative / political issues • Public perception
Measuring VfM - Public Sector Comparator (PSC)
• Same outputs specified under PFI • PSC helps to determine: – indicative costs (as benchmark)
– risk transfer
– VfM of private sector bidders’ solutions
UK’s Revised Approach – phased assessment
The assessment is conducted in 3 stages:
• Programme level
– Suitability of using private finance
• Project level – pre market launch
– Important decision point
• Procurement level
– Check that procurement will deliver the forecast VfM benefits
UK’s Revised Approach
• Balance between qualitative and quantitative assessment • Considers project and market features • Embeds an evidence-based approach
• Uses a generic quantitative VfM model
• Includes technical adjustments
Conclusions
• VfM compares options • Affordability is a constraint • Assessment of VfM for PPPs is a balance between qualitative and quantitative assessment • Uses an evidence-based approach • Qualitative factors are very important • Assessment undertaken in phases • Quantitative VfM model includes technical adjustments