Value for money needs standardization: If only it were that simple

The concept of value for money (VfM) has long been questioned and criticized in P3 projects around the world. Now efforts are being made to create a level playing field for public authorities when choosing their preferred procurement method

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When a public authority comes to the decision to build a new piece of infrastructure, the question of how best to procure the new asset can sometimes be overwhelming. There are so many different procurement models to choose from, so establishing a process to decide which one offers the best value is critical.

Except that even this is far from straightforward. For a start, what is meant by ‘best value’? Is that the cheapest option; the one that will last the longest; the one that offers most additional community benefits; or a mixture of these - and many other - factors?

As more and more solutions enter the lexicon - such as alliancing, ‘progressive’ P3s and others - helping authorities navigate this path to make an informed choice is an increasingly important part of the procurement journey. In theory, a standardized model should be within the industry’s grasp.

“It would be good to get at least some standardized principles,” says Carter Casady, research engineer in the Center for Sustainable Development and Global Competitiveness at Stanford University.

Work is already underway in this area. “The bottom line is VfM applies to nearly all projects, not just P3s,” points out Lisa Buglione, executive director, at the Association for the Improvement of American Infrastructure (AIAI) . “That’s the conclusion from AIAI’s member experts and will be reflected in the association’s forthcoming VfM best practices guide. It will demystify the process by showing how agencies can - and should - use VfM to compare traditional delivery and alternative procurement like P3.

“Importantly, we show graphically how agencies explain to the public and to elected officials which model delivers total best value, showing total lifetime cost of ownership, O&M costs across any delivery method, and potential cost savings of project acceleration using private investment.”

Such practical demonstrations are important, but there is still clearly plenty of work to be done. Experts say there can sometimes be skepticism from public authorities when private parties put forward a set of principles for them to develop their thinking, amid concerns that these principles have been designed to lead down a specific path.

This can be particularly tricky when P3s are part of the equation, as there can sometimes be a fear that analysis is being skewed to support a privately financed option.

Such concerns are perhaps not unfounded: it is well known that early PFI project analyses in the UK were often weighted in favor of a private finance outcome, rather than providing a level playing field for VfM judgments to be made. As one minister is famous for saying back in the midst of the UK’s PFI boom, the decision facing many authorities planning a project was ‘PFI or bust’.

The same issues have occurred elsewhere in the world. Andrée Blais, partner at law firm Nossaman, explains: “Value for money became controversial because people questioned whether it was done to provide certain results.

“The public sector needs good expertise so that it can truly understand the risks and critically compare the risks that an agency retains on a design-build project against the risks it would retain in a P3, and understand which risks can be efficiently transferred across to the private sector in a P3.”

This is not about trying to ensure that P3 is the option of choice - rather it is about ensuring that a public procurer is choosing a model that best fits the particular project they have in mind.

That is why a set of more objective principles, that can be properly applied by experts, would go a long way to assuaging those concerns and allowing authorities to choose from a suite of potential procurement methodologies from a level playing field. As well as allowing authorities to gain a better insight into alternative models, in many cases it may bring to light options that an authority had previously not been aware of.

A number of industry organizations are working on trying to create an approach to VfM that will give that level playing field. Last year, we spoke to the Build America Center's Qingbin Cui on this issue, and you can listen to his views here.

Not all about the money

So how can authorities make wise choices, and what does VfM mean?

To begin with, it’s important for public sector decision-makers to feel empowered to choose the best option - not simply the cheapest. “Agencies need to understand what the implications are of different delivery models,” says Blais. “For example, to consider the overall cost of public versus private investment, such as differing tax implications.”

Richard Threlfall, global head of infrastructure, government and healthcare at KPMG, admits that while VfM is “incredibly hard”, simply focusing on a project’s price tag is not the answer. “Most projects tend to underestimate what they are going to cost,” he says. “So why are we willing to take decisions primarily on money, when it has been shown to be wrong time and time again, but we are not willing to take decisions based on other factors, such as the impact to the planet, for example?”

Increasingly, there is a willingness to look beyond the upfront cost of a scheme and consider its long-term impact, with experts pointing out that at least some authorities are much more open to looking at the lifecycle of an asset than in the past.

“Advisors are looking at how to take a more pragmatic business approach and bring innovation through the life of the contract,” says Andreas Lucido, managing director at professional services firm Alvarez & Marsal.

Perhaps the biggest distinction here is between qualitative and quantitative benefits of any project. “There are ways to score those so they can be separated out as part of the procurement,” says Lucido. “Value for money should be about the entire portfolio, not just the return on dollars spent.”

Blais agrees. “There should be other considerations such as qualitative things which need to be evaluated. For example, the benefit to the community to have a well-maintained project over its life; or maybe a P3 can bring more innovation; or it can deliver sooner. That all needs to be considered alongside the cost.”

This is now beginning to happen more often, says Lucido. “We are now seeing procurements coming forward that focus on utilization, resilience and other factors that can be built in, so that cost is not the only consideration.”

Whatever approach is chosen, each decision on VfM needs to be taken with the procuring authority always asking one key question: what is it about this particular procurement route that offers better value over the other possibilities?

“For example, building a school will benefit the whole community whatever model is used,” points out Blais. “So what specifically is it about P3, for example, that will provide greater benefit? Is it the operation & maintenance; the accelerated delivery; or the innovation that the model can bring?”

Notably, these questions around what constitutes VfM tend to bring experts down the route of more early engagement with the private sector, and a focus, therefore, on the use of progressive P3 models.

“Assessing value is a fundamental part of a progressive P3,” says Blais. “As more risks are known and costs become clearer through the pre-development work, the public agency can compare pricing and the value of risks retained and transferred. This will inform negotiations at the point where the public sector is considering whether to deliver the full DBFOM approach or pivot to a different model.”

Lucido presents an example from his own recent work, in which the procuring authority wanted “the world’s best architectural and design firms involved”. As well as providing clear specifications, each competing firm was given some funding to work up their ideas to a certain level, thus giving the authority a clear picture of what could be delivered - and at what cost. Full funding was given to the winning design so that the team could continue its work.

This approach is similar to the one being undertaken by LA Metro in California, where its Sepulveda Corridor project currently has two teams developing early works for two differing modes of transit: a heavy rail system and a monorail. The authority will decide at a later stage which - if either - project it wants to be completed, meaning it has the flexibility to find the best solution much later in the process than in a traditional scheme.

This approach will require a mindset change from the public sector, though. “For decades, the public sector has relied on competition to provide VfM, so it needs to be prepared for negotiation at the end of the process, rather than competition at the start,” explains Blais. “It needs to be continually benchmarking against other options.” 


Assesing the Performance Advantage of PPPs

In November 2022, a book published by a group of academics offered one of the first in-depth looks at the perceived performance advantage of P3s. Carter Casady was one of the book’s editors, and he explained to P3 Bulletin how such analysis can help level the playing field by demystifying some of the claims around P3 as a procurement method.

One of the clear findings was around the question of long-term maintenance over the life of an asset. A case study looking at a bundle of Irish school projects revealed that those built through a traditional approach, rather than a P3, were “underfunded and had an inferior design quality”, says Casady.

This provides evidence for those considering how to look after an asset when preparing the procurement: a P3 option may cost more, but the authority may be paying extra for something that is a better quality over the long-term.

Another statistically significant finding that will be of interest to procuring authorities is that overruns in P3 deals were far less than in projects procured by other means. Furthermore, Casady adds: “We can say convincingly that service quality in a P3 outperforms a traditional procurement. That is likely to be contractually driven.”

He concludes that the evidence suggests P3s have a role to play “under certain circumstances”.

Casady is clear that this book is only the first step in analyzing the benefits or otherwise of P3 models. However, as more analysis is carried out, it will provide more information for public authorities on how to weigh the benefits of one model over another.