Assessing Value for Money of PPPs to Deliver Quality Infrastructure

Developing quality infrastructure can increase resilience to disasters and other shocks. Photo credit: ADB.

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A sound governance framework, supported by qualitative and quantitative value for money analysis, maximizes benefits from infrastructure investments. 

Introduction

It is frequently said that countries need to “spend better and smarter” to get the most impact for each dollar invested in infrastructure. This means maximizing investment efficiency to achieve the highest level of quality and access. It also means avoiding the fiscally damaging investment decision and procurement mistakes that increasingly tend to make negative headlines in the media.

Based on global estimates, developing countries need to invest $12 trillion in infrastructure to maintain growth from 2019 to 2030. This enormous need can exceed the fiscal capacity of most governments, some of which face fiscal sustainability issues currently. This raises the importance of using the scarce fiscal space on the right kind of projects, and procured in the most efficient way. Public–private partnerships (PPP), as an alternative procurement option to traditional public procurement, can, given the right context, help governments make the most efficient decisions in trying to address infrastructure investment gaps. However, this has not always been the case. And this is the crucial implementation concern and challenge as countries begin to emerge from the coronavirus disease (COVID-19) pandemic and PPP investments proposals are now increasing globally.

Quality infrastructure governance is key to building resilience against disasters and other shocks. With a tight fiscal space because of recent COVID-19 spending and economic difficulties, countries need to, even more than before, follow the principles of “value for money” (VFM) within a system of good infrastructure governance and purposeful institutions and frameworks to plan, identify the right projects, select the optimum procurement option, allocate medium-term fiscal space, and, when appropriate, implement PPPs for resilient, green, and inclusive infrastructure. This is a real challenge, not an automatic result, and can only be achieved within a purposeful governance framework.

This article is adapted from the study Value for Money in Public–Private Partnerships: An Infrastructure Governance Approach published by the Asian Development Bank (ADB).  

Analysis

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.

Implications

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.  

Resource

Hanif Rahemtulla
Principal Public Management Specialist, Public Sector Management and Governance Sector Office, Sectors Group, Asian Development Bank

Since joining ADB in 2017, Hanif’s focus is on leading and contributing to operational engagements in public investment management for better service delivery. Prior to ADB, he was the senior operations officer at the World Bank Group (2010–2017). He has supported operations in India, Viet Nam, Indonesia, Tajikistan, and Mongolia. He has a doctorate degree from University College London and is a postdoctoral fellow at Canada’s McGill University.

David Bloomgarden
Public Investment Management Specialist

David is a public–private partnership (PPP) expert with over 30 years of global experience in policy, management, and project design and implementation. As a PPP Consultant, he has advised the World Bank (Global Infrastructure Facility) and the Asian Development Bank on infrastructure governance and development of knowledge products on quality infrastructure investments. Prior to his current role, he was the Chief of the Inclusive City Unit of the Inter-American Development Bank.

João Pedro Farinha
Principal Financial Sector Economist, Public Sector Management and Governance Sector Office, Sectors Group, Asian Development Bank

João has helped ADB and its clients in the design and implementation of initiatives that advance fiscal and public financial management reforms (including fiscally responsible PPP ecosystems), financial sector and markets development, SMEs’ access to finance, and investment climate improvement, among others. He has an academic background in economics, financial markets, and monetary and financial economics.

Sanjay Grover
Senior Public–Private Partnership Specialist, Office of Public–Private Partnership (OPPP), Asian Development Bank

Sanjay is leading many of the One ADB initiatives at the PPP Thematic Group including Creating Investable Cities and flagship knowledge products, such as the PPP Monitor and the PPP Roadmaps. Prior to ADB, Sanjay worked as a Senior Equity Investments Manager with Fannie Mae in the United States. He has an MBA from MIT’s Sloan School of Management, a master’s in city Planning and a master’s in Transport from Georgia Tech.  

Asian Development Bank (ADB)

The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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