VFM Analysis in Infrastructure Project Delivery

Improvement in infrastructure and improved service quality are critical drivers for economic growth. Such investments could include new installations or upgrades to existing facilities across the following sectors: power generation and distribution, clean water supply, wastewater treatment, healthcare, road or rail networks, airports, or other infrastructure.

Infrastructure development has traditionally been undertaken by the government, which procured the same through construction contracts. Over time, public-private partnerships (PPPs) have evolved as an alternative option. The government contracts private sector entities to develop, finance, construct, and operate infrastructure facilities per an integrated long-term contract.

Government agencies undertake Value For Money analysis (VFM) to evaluate the benefit of seeking the private sector to deliver the project instead of the traditional procurement option. The private party would have sufficient sector expertise, greater innovation and higher efficiency of operations. Even though the PPP option does not create fiscal space, it reduces the immediate budgetary requirements. The private party finances the initial investment and receives corresponding government payments during the concession term.

VFM compares the costs and benefits of using the PPP model for project implementation to the traditional government procurement approach. The analysis includes a review of financial, socio-economic and development objectives to determine if the PPP delivery option is effective. A project is said to have a positive VFM if the project’s lifecycle costs implemented through the PPP model are lower compared to traditional procurement.

A typical VFM analysis includes both Qualitative and Qualitative assessments. The Qualitative Assessment uses data collected through questionnaires, engaging with technical experts, interviews, or observation to determine if a PPP option is the optimal option for project delivery. The Quantitative Assessment compares the costs of the chosen PPP option with the traditional choice of the government implementing the project – the Public Sector Comparator (PSC) and should consider the benefits of bringing in private sector expertise, experience and efficiency in project delivery.

The VFM analysis decides the best project delivery model and is typically part of the project planning phase, called the ex-ante assessment. A review of the VFM analysis after the project award, during the operating phase of a concession would be beneficial. Such an ex-post assessment helps evaluate PPP contract performance enabling governments to take any necessary corrective actions in subsequent transactions. The VFM analysis is a core tool to be continually leveraged throughout the project life cycle. Diverse in nature, once created the value for money is a continuous influencer of current and future projects.

 

Research Links:

 

  1. https://docs.google.com/document/d/1w1I5EchmbZKIoL34d0LyBkPSd-hVbAoL/edit
  2. https://mail.google.com/mail/u/0/?tab=rm&ogbl#search/shashank/FMfcgzGpFqdDnrWDVLPdfHgzVHrjprJD?projector=1&messagePartId=0.3
  3. https://docs.google.com/document/d/1lsRzK8zibm7rDjmP-k5coVYeB32P0vWSx_0A08H2F5Q/edit
  4. chrome-extension://gphandlahdpffmccakmbngmbjnjiiahp/https://irf.global/webinars/IRF-Webinar-160303-Value-for-Money-in-PPPs.pdf
  5. https://www.britannica.com/topic/public-private-partnership
  6. chrome-extension://gphandlahdpffmccakmbngmbjnjiiahp/https://www.atlantis-press.com/article/25853377.pdf
  7. https://pppknowledgelab.org/guide/sections/54-assessing-value-for-money-of-the-ppp
  8. https://www.worldbank.org/en/news/press-release/2022/05/03/new-data-private-sector-investment-in-developing-country-infrastructure-bounces-back-from-historic-lows
  9. https://pppknowledgelab.org/
  10. PPP Investment Model (drishtiias.com)
  11. extension://pjmlamaidnkoemaaofddboidllnogmhe/https://www.adb.org/sites/default/files/publication/783341/value-money-public-private-partnerships.pdf
  12. World Economic Outlook (imf.org)
  13. chrome-extension://gphandlahdpffmccakmbngmbjnjiiahp/https://www.oecd.org/development/effectiveness/49652541.pdf
  14. https://ppp.worldbank.org/public-private-partnership/ppp-contract-types-and-terminology
  15. https://ppp.worldbank.org/public-private-partnership/sector/transportation/airports
  16. https://hbr.org/2019/01/what-successful-public-private-partnerships-do