Public Private Partnerships: A licence to print money … or value for money?
7 Cost–benefit analysis
The economic value of a project should include all of the costs and all of the benefits. A tool or technique that is often used is the Cost–benefit analysis (CBA) but this does not determine the value of the underlying asset. It is often used as a decision-making tool in order to decide which alternative projects should be chosen. The economist measures the value of asset by what the asset contributes positively to the wealth of a nation. It is the sum of all the benefits less the sum of the total costs.
What is critical is how the total costs are identified and measured and similarly how the total benefits are measured. There are a number of accepted quantitative and qualitative techniques such as shadow pricing and willingness to pay.
Due to the nature of public projects, the tools required for decision making and evaluation were quite scientifically developed over time. There are three alternative tools such as:
- Equivalent annual worth
- Rate of return
- Benefit–cost ratio
All four tools make the assumption that:
- All cash flows are known for the life of the project
- All cash flows are measured in monetary terms
- All interest rates are known
- The comparison of projects is on the basis of before tax cash flows
- All intangible benefits that cannot be measured are excluded from the evaluation
- Availability of funds is irrelevant
(Yescombe 2007; Rogers 2001)
The tools used to determine VfM for PPPs do not meet these criteria.
CBA is a decision-making tool based on economic and accounting principles. These tools require specific assumptions to be made which are not compatible with the intangible and intrinsic nature of a PPP.
A number of autonomous bodies use the term VfM for determining whether a project has enhanced value using a PPP. The Green Book from the UK Government (2008) offers a set of comprehensive guidelines on how VfM can be established using the Public Service Comparator (PSC) to determine whether a PPP project offers VfM. The PPP Task Force in Ireland is the NDFA; they produce a comprehensive set of guidelines for PPPs and a number of tests to determine VfM. But what is VfM?