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Public Private Partnerships: A licence to print money … or value for money?

Author - Raymond Turner


 


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8 Value for money

Farrell Grant Sparks (1998) define VfM as the optimum combination of cost, quality, efficiency and effectiveness. Yescombe (2007) defines VfM as the combination of risk transfer, whole life cost and service provided by the facility as a basis for deciding what offers the best value to the public authority.

VfM is a measure used to determine whether PPPs increase VfM over traditional procurement methods and the decision-making tool CBA is one of several tests. Other VfM tests use the tools of NPV, IRR and B/C ratio. In accounting and economic terms, value is perceived as a net benefit from the use of an asset. In order words, if the benefits accrued to the public exceed the costs incurred, then the public has received VfM.

In determining the value of a public asset, it is necessary to do an evaluation of an asset. Damodaran (2002), Pratt and Grabowski (2008) and Pratt and Niculita (2008) have written extensively about the valuation of any asset. The methodology used is driven by questions concerning what the purpose of the appraisal is and who the audience is (Reilly and Schweihs 1998).

The NDFA in Ireland issues specific guidelines for the measurement of VfM (see http://www.ndfa.ie/home.html). The NDFA identifies the optimisation of risk allocation as central to deciding whether VfM is achieved. This is dependent on the following risk factors and how their weightings are applied in the Risk Allocation Matrix to determine VfM. However, the approach to risk will vary from PPP to PPP and from country to country. The area in which the author believes further research is required is the transfer of risk. In the Irish situation, the NDFA considers the following risk categories:

  1. Project specific
  2. Planning and environment
  3. Design and technical
  4. Construction (overspend or delay)
  5. Demand and revenue
  6. Operational and maintenance
  7. Financial and insurance
  8. Political/ethics/regulatory/legislative/legal/contractual
  9. Technological and obsolescence
  10. Residual value

These risk factors are weighted and used as inputs in determining whether a project passes the tests for VfM. Risk and uncertainty are used as proxies to establish VfM however value does not equal cost or benefit as illustrated by Figure 9. However all three are characteristics of an asset and can determine whether the asset P offers VfM. Risk is used as a proxy for determining VfM.

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