Regan 2014

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12-26-2014
Value for money in project procurement

Michael Regan
Bond University, michael_regan@bond.edu.au
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Regan, Michael, "Value for money in project procurement" (2014). Faculty of Society and Design Publications. Paper 120.
http://epublications.bond.edu.au/fsd_papers/120
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2650.22
DRAFT RESEARCH PAPER
Value for Money in Project Procurement

Research Report for the Asian Development Bank 2013
Research Manuscript WP107

Updated 26th December 2014
Michael Regan
Faculty of Society and Design

Bond University 4229 Gold Coast, Australia.
www.bond.edu.au
Table of Contents
Executive Summary................................................................................................................................. 7
Part 1 Public Private Partnerships and Infrastructure Procurement ...................................................... 8
1.1 Introduction .................................................................................................................................. 8
1.2 What is Infrastructure? ................................................................................................................. 9
1.3 What are the Infrastructure Procurement Options? .................................................................. 10
1.4 What is a Public Private Partnership? ......................................................................................... 12
1.5 What is Value for Money? .......................................................................................................... 14
1.6 Assessing Value for Money ......................................................................................................... 18
Part 2 Value for Money Measurement ................................................................................................. 20
2.1 Formal Assessment ..................................................................................................................... 20
Quantitative Measurement .......................................................................................................... 20
The Public Sector Comparator ...................................................................................................... 20
Elements of Public Sector Comparator ......................................................................................... 22
Competitive Neutrality.................................................................................................................. 23
Transferable Risk ........................................................................................................................... 24
Retained Risk................................................................................................................................. 24
The Discount Rate ......................................................................................................................... 25
Life Cycle Costing .......................................................................................................................... 25
2.2 Qualitative Analysis ..................................................................................................................... 26
Advantages of the Public Sector Comparator Method ................................................................. 28
Disadvantages of the Public Sector Comparator Method ............................................................ 29
2.3 The Role of Risk in Value for Money ........................................................................................... 29
What is Risk? ................................................................................................................................. 29
Valuing Risk ................................................................................................................................... 30
Risk Allocation ............................................................................................................................... 31
2.4 Informal VFM Assessment .......................................................................................................... 32
2.5 The Drivers of Value for Money .................................................................................................. 34
2.6 Value for Money and Policy Design ............................................................................................ 35
Relationship to Bidder Selection Criteria ...................................................................................... 35
Relationship to the Output Specification ...................................................................................... 35
Importance of a Managed Bid Process ......................................................................................... 36
Unsolicited Bids ............................................................................................................................. 37
Incomplete Contract Principles ..................................................................................................... 37
Part 3 International Surveys ................................................................................................................. 39
3.1 International Survey of PPP Policy .............................................................................................. 39
Conclusion ..................................................................................................................................... 39
3.2 OECD Value for Money Survey 2011........................................................................................... 41
Conclusion ..................................................................................................................................... 41
3.3 Survey of National PPP Policies................................................................................................... 41
Conclusion ..................................................................................................................................... 42
Part 4 Case Studies................................................................................................................................ 43
Case Study 1. Victoria, Australia ....................................................................................................... 43
Institutional Framework................................................................................................................ 43
Policy Framework.......................................................................................................................... 44
Integration of Partnerships Victoria and National PPP Policy ...................................................... 45
Value for Money Framework ........................................................................................................ 46
Projects Delivered ......................................................................................................................... 47
Role of Agencies ............................................................................................................................ 47
Case Study 2. South Africa ................................................................................................................ 49
PPP Policy ...................................................................................................................................... 49
Case Study 3. The United Kingdom ................................................................................................... 52
PPP Policy ...................................................................................................................................... 52
Case Study 4. Indonesia .................................................................................................................... 55
PPP Policy ...................................................................................................................................... 55
Case Study 5. India ............................................................................................................................ 58
New National PPP Policy Framework............................................................................................ 58
Case Study 6. The Philippines ........................................................................................................... 61
PPP Policy ...................................................................................................................................... 61
The BOT Law ................................................................................................................................. 61
Glossary ......................................................................................................................................... 63
References ............................................................................................................................................ 65
Appendix A ............................................................................................................................................ 71
The Value for money Assessment of PPP Projects ........................................................................... 71
Case Study: The Victorian Desalination Project, Australia ............................................................ 71
Public Sector Comparator ............................................................................................................. 71
Additional value for Money Benefits ............................................................................................ 72
Appendix B ............................................................................................................................................ 73
The Value for Money Assessment of PPP Projects ........................................................................... 73
Case Study: The Royal Children’s Hospital Project, Melbourne, Australia ................................... 73
Public Sector Comparator (PSC) .................................................................................................... 73
Additional Value for Money Benefits ............................................................................................ 74
Appendix C ............................................................................................................................................ 76
Appendix D ............................................................................................................................................ 82
Appendix E ............................................................................................................................................ 83
Endnotes ............................................................................................................................................... 85
Figures
Figure 1 - Value for Money Procurement Process ................................................................................ 14
Figure 2 - Quantitative and Qualitative Factors .................................................................................... 16
Figure 3 - Meaning of Value for Money ................................................................................................. 17
Figure 4 - Composition of the Public Sector Comparator ..................................................................... 22
Figure 5 - Public Sector Comparator .................................................................................................... 24
Figure 6 - Public Sector Comparator and Value for Money Analysis.................................................... 45
Figure 7 - The Public Private Partnership Project Cycle ....................................................................... 50
Figure 8 - Indonesia Public Private Partnership Policy ......................................................................... 56
Figure 9 - Indonesia Public Private Partnership Law ............................................................................ 57
Figure 10 - Procurement Procedures .................................................................................................... 82
Tables
Table 1 - Public Sector Comparator Components ................................................................................ 23
Table 2 - Qualitative Risk Factor Examples .......................................................................................... 27
Table 3 - Typical Public Private Partnership Project Risks ................................................................... 30
Table 4 - Typical Public Private Partnership Risk Allocation Schedule ................................................ 32
Table 5 - Public Private Partnership Policy Survey............................................................................... 40
Table 6 - Major Stages in Developing a Partnerships Victoria Project ................................................. 46
Table 7 - Partnerships Victoria Projects 2001 - 2013 ........................................................................... 48
Table 8 - PFI Transactional Experience ................................................................................................ 54
Table 9 - Public Sector Comparator ...................................................................................................... 71
Table 10 - Quantitative Value for Money Comparison .......................................................................... 72
Table 11 - Public Sector Comparator .................................................................................................... 74
Table 12 - Quantitative Value for Money Comparison Between Public and Private Sector Delivery ... 74
Acronyms
BOT Build Operate Transfer
EOI Expression of Interest
HMSO Her Majesty‟s Stationary Office (United Kingdom)
OECD Organisation for Economic Co-operation and Development
PFI Private Finance Initiative
PFP Privately Financed Projects
PhP A unit of The Philippines currency
PPI Private Participation in Infrastructure
PPIAF Public Private Infrastructure Advisory Facility
PPP Public Private Partnership
PR Presidential Regulation (Indonesia)
PSC Public Sector Comparator
PV Partnerships Victoria
RA Law of The Philippines Government
RFP or RfP Request for Proposal
VFM or VfM Value for Money
USD United States dollar
Executive Summary
Public private partnerships are a method for the delivery of social and economic
infrastructure services in over 80 countries worldwide. PPPs are a contractual arrangement
between public and private entities through which the skills, assets and/or financial
resources of both sectors are allocated in such a manner that provides optimal service
delivery and good value to society. The international evidence suggests that public private
partnership procurement methods using value for money evaluation criteria are delivering
better infrastructure services at lower cost than traditional procurement methods.
Central to the operation of public private partnerships is the systematic evaluation of the
procurement options available to government, an output specification to encourage private
design, risk transfer, construction and operational innovation, the detailed analysis of
projects over their operational lifecycle, a rigorous and competitive bid process, and the
selection of proposals that deliver value for money.
Unlike traditional procurement, which is predominantly based on lowest cost to government,

value for money is a measure that takes into account both the quantitative and qualitative
outcomes over the term of a contract. The quantitative assessment uses a public sector
comparator, which is based on a risk-weighted traditional procurement contract costed over
the project life cycle. This enables government to select the optimal service delivery solution
at two stages in the procurement process: during the investment stage with its focus on
selecting the most appropriate project for delivery as a public private partnership, and in the
final stages of the procurement process it is used to assess differences between bids and
the public sector comparator. The matters taken into account here include the expertise and
track record of the contractor or consortium, early completion, unquantifiable risk transfer,
certainty and sustainability of service delivery over the life of the contract, amenity and the
public interest, asset utilisation, third party revenue, and improved service quality.
Value for money assessment provides important information to assist government decision-
making in matters such as the identification, measurement and allocation of risk, life cycle
costing of the service options, and develops in-house expertise in matters such as
specification of service requirements, business case analysis, risk weighted financial
forecasting, project appraisal, multi-stage bidding processes and bid evaluation. Value for
money enables government to configure and measure procurement alternatives and identify
optimal procurement solutions.
Value for money is enhanced with other features of the procurement process. These include
the selection of projects for PPP delivery that offer scope for risk transfer, the preparation of
an output specification that creates an incentive framework for sustainable service delivery
to requirements, governance and approval arrangements, the pre-qualification of contractors,
and a competitive bid process. International evidence and the international surveys
undertaken for this study suggest that public private partnership policies that adopt value for
money principles and practices will provide government with more accurate information to
configure optimal procurement solutions for infrastructure service delivery. Value for money
principles enable governments to derive more from their public private partnership programs.
7
ADB Value for Money Guide
Part 1 Public Private Partnerships and Infrastructure Procurement
1.1 Introduction
First introduced as part of the Private Finance Initiative in the United Kingdom in the 1990s,
public private partnerships (PPPs) have come into wider use around the world as an
important method for government procurement of economic and social infrastructure
services. In contemporary practice, the PPP is a specialised form of procurement that
changes the role of government from owner and manager of infrastructure assets to a buyer
of infrastructure services.
PPPs are a method of public procurement that employs a combination of private sector
capital and management to deliver infrastructure services to, or on behalf of, government
(Regan 2010). To determine which procurement method is best for government, a
comparison of the procurement options is undertaken in the early stages of the procurement
process. The criteria used to select the optimal procurement method is known as value for
money (VFM) although the criteria used to ascertain which method or which bid offers the
best deal for government is determined under PPP policy and this varies significantly
between nations. VFM was introduced to infrastructure procurement in the 1980s and has
long served as a measure of the impact of international aid and assistance programs, and
spending programs of government agencies for audit purposes (Australian National Audit
Office 2012). In OECD countries, VFM generally includes the formal cost benchmarking of
the PPP option against a traditional procurement option on a life cycle costed basis over the
term proposed for the PPP contract (the public sector comparator or PSC). This occurs in
the bidder selection or investment stage of the project. Further VFM analysis may be
conducted following a competitive auction process (the procurement stage of the project)
after bids have been received. Policy may also require a qualitative comparison of the best
bid and the PSC to identify the best VFM for government. The stages of the procurement
process are set out at Figure 1.
VFM enables government to measure two key dimensions of infrastructure procurement.

First, it requires government to undertake a detailed ex ante quantitative evaluation of a
project over its life cycle in order to compare and select the best procurement option.
Second, with adjustment for risk and competitive neutrality, it provides a means of
comparing the most efficient procurement mechanism available to government with
proposals received from contractors in a competitive bid process. In this second application,
VFM will also take into account the qualitative dimensions of a proposal thereby equipping
government with the information to make an informed selection of the bid that best meets the
service requirement contained in the specification, and offers the best financial return.
Among non-member Organisations for Economic Co-operation and Development (OECD)

countries, practices vary and VFM assessment may use a formal assessment method such
as the public sector comparator or one of several informal methods such as a requirement
for detailed project analysis during the investment stage, technical service specifications,
detailed bidder selection criteria, special approval and governance standards, the
prequalification of bidders, and a requirement for competitive bidding, standard commercial
principles or competitive dialogue during negotiations.
VFM is gaining traction as a measure of public procurement performance because of the
8
emphasis that it places on both the quantitative and qualitative aspects of infrastructure
services and the changing role of government from the owner and producer to a buyer of
services, which shifts focus from production to the quality of services delivered. To monitor
service standards, the responsible government agency will put in place a contract
management framework to monitor the quantity and quality of services. For PPPs using a
unitary payment mechanism, such as a hospital or school project, the contractor only
receives payment for services that meet specification. This is a performance-based payment
system and the contractor has a strong incentive to maintain high quality services over the
life of the contract. For PPPs using an availability payment arrangement, failure to deliver
services to specification results in abatement of payments or financial penalties. VFM also
encourages contractors to apply innovation, entrepreneurialism and technology in their bids
with a view to improving the quality of services delivered to government and reducing life
cycle operating costs. Design and construction innovation can also produce other benefits
including early delivery of services, improved asset utilisation and third party income. These
improvements are generally reflected in lower charges to government or improved VFM.
There are two additional and important drivers of VFM in PPP contracts. First, the transfer of
project and service delivery risks from government to the contractor. This may include risks
associated with construction time and cost, life cycle costing, operations, finance,
connectivity to support networks, industrial relations and environmental management. These
risks are transferred when the contractor is in a better position to manage the risk at lower
cost than government. Second, a competitive bid market also drives VFM because
contractors compete on the basis of time and price, their experience and efficiency, track
record, the innovation that they bring to the construction and operational tasks, and the
added value that they can bring to the service delivery objectives of government.
A review of the international evidence suggests PPPs that use VFM evaluation criteria are
achieving improved procurement outcomes for government. This is more prevalent with
larger and more complex projects that make greater use of risk transfer, innovation,
technology, and a competitive bid market. International evidence suggests that PPPs are
lowering the cost of services to government, improving regional economic performance, and
are making a significant contribution to improved service quality. Examples include reduced
in-patient stays and faster recovery times in public hospitals, better educational
performances in state schools, improved efficiency in waste management, water supplies
and recycling, better asset utilisation and faster delivery of services (Regan, Smith and Love
2011).
1.2 What is Infrastructure?

Infrastructure refers to the hard assets, networks and human capital that facilitate the
functioning of both the economy and civil society. Economic infrastructure refers specifically
to the services produced by airports, roads, ports, railway systems, electricity generation
plants, water supplies, telecommunications, and waste management and recycling. Social
infrastructure refers to services provided to develop human capital in areas such as primary,
secondary and tertiary education, facilities for police services, court facilities and corrective
services, the health sector, and public buildings. The cost of providing social infrastructure is
mostly met from the government‟s budget and services possess the characteristics of a
public or merit good. However, economic infrastructure may also be fully or partly financed
9
from user-charges, which enables services to be outsourced to private providers on a stand-
alone basis.
Infrastructure is an important national asset class contributing to an economy‟s output

capacity, productivity, and its economic and social development. Infrastructure investment is
also linked to employment (short and long-term), reduced private sector costs, productivity
and growth (Weber and Alfen 2010, Regan 2004).
As an asset class, infrastructure assets and services possesses a number of distinguishing

features:
 Investment is long-term, involves high sunk costs and is capital intensive

 Output quality standards and prices are generally regulated
 Long service intervals favour life cycle costing
 Assets generally form part of complex networks
 Output pricing of utilities such as electricity, gas and water have important impacts on
the input cost structures of most sectors of the economy
 Assets are generally site and use specific
 Services are generally essential public goods
 Investment is subject to limited competition and economies of scale.
The investment economics of infrastructure assets are well matched to the PPP method of
procurement and analysis based on VFM principles.
Further Reading
Regan, M. 2004, Infrastructure, The New Asset Class, Gilberton Press, Walkerville, Adelaide, pp.
73-123.
Weber, B. Alfen, H.W. 2010, Infrastructure as an Asset Class, Investment Strategies, Project
Finance and Public Private Partnerships, John Wiley and Sons, Chichester, pp. 1-20.
1.3 What are the Infrastructure Procurement Options?

There are several procurement options available to government, which can be grouped into
three distinct categories. The first is traditional procurement, which accounts for the majority
of infrastructure provision throughout the world today. Traditional contracts have a number of
distinguishing characteristics that generally include:
 The contract is based on an input specification

 Contractor selection methods is mainly determined on price
 An adversarial contractual framework in which the objectives and incentives adopted
by the client, the contractor and other parties to the contract are non-aligned and
therefore contributing to agency problems
 Mostly used with short-term complete contracts for construction-only services
 There is limited risk transfer beyond the typical time and cost provisions that apply
under fixed price contracts.
10
The second group of contracts covers a variety of arrangements that adopt a less
adversarial contractual framework and make greater use of the benefits of long-term
contracts that incorporate both asset provision and service delivery, privately sourced capital
and a greater sharing of project risks. The most common procurement forms include the
build operate transfer (BOT) family of contracts, PPPs and outsourcing, franchises and
concessions. These alternative procurement methods generally possess some or all of the
following characteristics:
 An output specification
 A long-term incomplete contractual framework with a much greater alignment of the
objectives and incentives of the parties compared with traditional contracts
 Transfer of decision-making to the contractor designed to encourage greater
innovation in the construction and service delivery process
 Private finance
 The contractor carries a greater level of project risks than other procurement
methods which may include construction time and cost, life cycle costs and
operational risks
 Embedded regulatory arrangements including alternative dispute resolution
mechanisms and a performance-based remuneration arrangement.
The third group of contracts are relationship-based arrangements for short-term or staged
projects. These are an alternative to traditional and PPP procurement methods and are
widely used for complex projects in which the specification may be incomplete or the
contract price difficult to ascertain prior to commencement of works. The characteristics of
relationship contracting include:
 Contractor selected on qualitative criteria including track record, expertise, previous

experience with collaborative contracts and cultural match with client values
 A collaborative contractual framework with cost overruns and cost savings shared
between the client and the contractor
 A contractual relationship based on high levels of trust and cooperation supported by
a joint project management group, “open book” project accounting and an agreed
contractor margin
 Agreed project scope and specification.
Procurement methods should be selected on a case-by-case basis and no single method is

suitable for all projects. PPPs are a specialised form of procurement that may entail longer
preparation times, complex documentation and higher transaction costs than other forms of
procurement. Nevertheless, these disadvantages may be outweighed by better VFM
outcomes for government determined on a risk-weighted comparative basis.
PPP‟s are not an appropriate procurement vehicle for delivery of all infrastructure projects or
services. VFM is best achieved with projects or services involving complexity, economies of
scale, where there is scope for significant risk transfer from government to private
contractors, and when opportunities exist for innovation in design, construction and
operations. The factors that contribute to VFM in PPP projects are examined at 2.5 The
Drivers of Value for Money.
11
Further Reading
City of London 2008, Developing India’s Infrastructure Through Public Private Partnerships, A
Resource Guide, January, pp. 18-21.
Delmon, J. 2009, Private Sector Investment in Infrastructure, Project Finance, PPP Projects and
nd
Risk, 2 edn. The World Bank & Wolters Kluwer, Biggleswade, United Kingdom, Chapter 3, pp.
93-121.
European Commission 2003, Guidelines for Successful Public Private Partnerships, Director-
General Regional Policy, Brussels, March, pp. 21-26; 28, 33.
Savas, E.S. 2000, Privatization and Public-Private Partnerships, Seven Bridges Press LLC, New
York.
1.4 What is a Public Private Partnership?

A Public Private Partnership refers to a contractual arrangement between public (national,
state, provincial or local) and private entities through which the skills, assets, and/or financial
resources of each of the public and private sectors are allocated in a complementary manner,
thereby sharing the risks and rewards, to seek to provide optimal service delivery and good
value to society (ADB 2012).1
PPP policy may take the form of a special PPP law, the amendment of existing procurement
laws and regulations, or a policy and guidance framework issued by a central agency of
government such as Treasury and Finance.
The characteristics of a typical PPP include the following:
1. An output specification that specifies the service to be delivered and not how it will be
delivered (effectively transferring control rights and creating performance incentives
for the contractor)
2. Scope for the exercise of private expertise, innovation and incentivised management
3. The transfer of significant service delivery and life cycle cost risk to the contractor
4. Contractor selection relies on qualitative and quantitative criteria (VFM) and not
simply lowest price
5. Contracts are incomplete, long-term and generally self-regulating
6. The delivery process may be more complex than alternatives
7. Payment for performance: the government pays only for services that conform to
specification.
In OECD member countries, a PPP is generally understood to mean a long-term contractual

arrangement under which a private contractor is selected through a competitive bid process
to finance and deliver goods or services to, or on behalf of the state.2 Contractor selection is
on the basis of best VFM, determined using quantitative and qualitative criteria and/or the
application of a comprehensive and rigorous PPP policy framework (Regan, Smith and Love
2011).
Central to PPP procurement is the criteria used to select both the procurement method and
the best proposal received from the contractors bidding for the project. Unlike traditional
procurement that compares lowest-cost bids by contractors with an input specification, VFM
12
is a life-cycle costed measure of the qualitative and quantitative aspects of a proposal.3 It
describes the aggregate benefits from a particular procurement solution and measures the
net positive gain or welfare benefits that a procurement strategy brings to government. VFM
is a technique for selecting the best possible outcome for the money spent by government
on a particular activity, program or undertaking.4 It is widely used in project procurement and
particularly for PPPs to determine whether a particular bid or proposal offers a lower cost
and better service solution than an alternative procurement route (European Investment
Bank 2010). VFM is an objective that allows procuring agencies to ascertain whether service
delivery is designed to appropriately meet the service specification while achieving a
reasonable return on investment (Infrastructure Australia 2008a).
In contemporary PPP practice, VFM has assumed greater importance for measuring
procurement solutions for infrastructure applications. In some jurisdictions, VFM is the critical
determinant for determining whether the PPP is the optimal procurement method. This is
done with a comparison of detailed models of a PPP with a traditional procurement
alternative. In some jurisdictions, VFM is implied by creating a rigorous project
implementation process and a competitive bid market (Delmon 2009, pp. 13-15). In other
countries PPP policy requires the use of the PSC for both the procurement and contractor
selection processes.
Further Reading
General Regional Policy, Brussels, March, pp. 14-16; p. 18.
Grimsey, D. Lewis, M.K. 2004, Public Private Partnerships, The Worldwide Revolution in
Infrastructure Provision and Project Finance, Edward Elgar, Cheltenham, Chapter 4, pp. 71-81.
Finance and Public Private Partnerships, John Wiley and Sons, Chichester, pp. 62-80.
World Bank 2012, Public Private Partnerships Reference Guide, Version 1.0, Washington,
Module 1, pp. 15-58.
PPPs are a specialised method of procurement used to deliver economic and social
infrastructure in many countries. PPP transactions possess a number of distinguishing
characteristics: the project is financed by a private firm or consortium of firms (“the
contractor”) who bears significant project risk over the term of the contract, the financial
evaluation of the project is undertaken on a life cycle basis, and the evaluation criteria takes
into account both the quantitative and qualitative outcomes that the contract offers to
government. PPPs are used to construct and operate electricity plants, roads, bridges and
tunnels, water supplies, public buildings, hospitals, airports, police stations, public housing,
schools and universities, and corrective service establishments. Measuring the performance
and benefits of these contracts can be complex compared with traditional contracting where
the primary evaluation method is based on cost.
13
1.5 What is Value for Money?
This may mean services at lower cost, of better quality or a combination of these outcomes.
VFM assessment includes the quantitative (or whole-life costs) and the qualitative attributes
(or fitness for purpose) of a particular procurement decision (HM Treasury 2006) and is a
key objective of most national PPP policies. VFM assists government to decide which
procurement method will deliver the best outcome and/or which bidder proposal maximises
the public benefit. There is no international standard or test of VFM and both its meaning
and the criteria used to measure it may be different between countries, between industries
and different PPP policy frameworks.
The formal assessment of VFM requires an articulated procurement process of two or three
stages: project selection and appraisal, project procurement options and project
implementation (See Figure 1).
In the United Kingdom, VFM is ascertained at two points in the procurement cycle, the
investment stage during which the project‟s specification, technical requirements and
feasibility are being established and the procurement options are being assessed, and the
procurement stage which refers to the bidding process and comparative evaluation of
projects (HM Treasury 2006, 2011). Under most national policies, the primary VFM
determination is made during the investment stage and the stage 2 review following
completion of bidding is used to compare contractor proposals with the specification and
technical requirements for the project, and undertake a comparison of bids. This is
particularly helpful when bidders also submit non-conforming proposals with their bids.
Figure 1 - Value for Money Procurement Process
Project Selection Project Procurement Project Implementation
Needs analysis technical Project development Commissioning

or feasibility study Bid Process using: Contract management
Pre-qualification (EOI) Ex post analysis
Risk Assessment
Competitive tender
Bidder selection
VFM determination 1 VFM determination 2
Competitive dialogue
Contract, financial close
The investment stage VFM determination involves the assessment of a project‟s suitability
for delivery as a PPP project and requires a needs analysis of the service required and
particularly the economies of scale of the undertaking, the level of complexity, the scope for
14
innovation and new technology, and the opportunity it presents for risk transfer to the private
sector (see Figure 1). An option analysis is conducted to select the best procurement
method from alternatives that may include an alliance contract, a design and construct
outsourcing contract, a traditional construction contract, a managing contractor arrangement,
and a PPP.
When a project is confirmed as suitable for PPP procurement, a technical or feasibility study
is undertaken to scope the project, prepare a preliminary output specification and measure
the project‟s affordability. Many national PPP policies require approval from the responsible
agency or ministry for the project before entering into the procurement stage of the process.
The analysis during the procurement stage generally takes place at the beginning of the bid
process at the time of market soundings which is followed by further project development,
stakeholder consultation, and the establishment of a bid team, finalisation of the specification
or technical requirements for the project and design of the bid process. The bid process for
larger projects will generally require a pre-qualification expression of interest, the short-listing
of the best contractors and a formal request for tender process. On receipt of bids, an
assessment can be made of the proposal that offers the lowest cost and best PPP option for
government. This is then followed by competitive dialogue with the selected contractor
(usually with the under-bidder involved in the process) through to finalisation of the contract
and financial close. In those jurisdictions that use the PSC to assess VFM, a comparison is
also made at this time between the preferred contractor‟s proposal and the comparator.
Third, the contractor undertakes construction and commissions the project. The agency will
put in place contract management arrangements and undertake an ex post performance
analysis following a period of operations.
VFM for money can be viewed from two perspectives:
1. Quantitative analysis: The overall cost of delivering the service using the most
efficient alternative procurement method. If the PSC is used to build a reference
case for the project, this model will include a life cycle costed financial model
adjusted for risk transfer and competitive neutrality to ensure like-to-like comparison
with bids received from contractors. Factors taken into account here include third
party revenue, which can lower the cost to government. If the PSC is not used, this
will be the lowest cost to government offered by a rigorous bid process and a
competitive bid market.
2. Qualitative analysis: the elements of bids that will result in a better quality services,
such as innovative design and construction methods, new technology, sustainability,
early completion and increased asset utilisation. These attributes of bids are difficult
to measure and should be determined on a case-by-case basis. The technical
strengths, resources and track record of the contractor and sub-contractors are also
taken into account as well as sustainability and demonstrated capacity to provide
construction finance. In some jurisdictions, the selection of a bid proposal may also
require consideration of the public interest (see Figure 2).
15
Figure 2 - Quantitative and Qualitative Factors
Defined: the cost difference between the Defined: the non-quantifiable attributes of
reference projects delivered using contractor‟s bid. Example, improved service
traditional procurement methods (or PSC) quality or early delivery.
and bids submitted by contractors.
Other qualitative benefits:
The factors taken into account in a PSC:  Unquantifiable risk transfer to contractor
 Value of risk transferred to contractor  Contractor experience, financial strength,
 Value of risk retained by government expertise and capacity of project lender
 Competitive neutrality  Innovative design/construction
 The cost of delivering services over the management (example, off-site
life of the contract using a traditional prefabrication)
procurement method  User benefits over and above specification
 Third party income (improved asset  Sustainability of contractor‟s bid
utility), rents, prepayments and profit  Complies with public interest test
sharing  Minimal environmental impacts
 Improved community access
.
Infrastructure procurement frequently involves capital intensive projects that are complex,
capital intensive, and form part of networked supply chains, VFM permits government to
examine the qualitative benefits of proposals that add value to government. These benefits
are not easily quantified and include matters such as the reputation, track record and
financial capacity of the contractor or consortium, early project completion, and design and
construction innovation. The output specification used with PPPs encourages contractors to
look at ways to deliver projects that deliver additional service benefits to government and
users of the service. For example, a contractor for a PFI hospital project in the United
Kingdom introduced building design features that improved National Health Service labour
productivity of staff delivering core medical services. This created a windfall gain to the Trust
that operated the hospital and lowered operating costs. Similar outcomes have been
achieved with PFI and PPP projects in a number of jurisdictions such as law courts, schools
and toll roads (Partnerships Victoria 2009b; Davis 2005; National Audit Office 2005).
The beneficiaries of better VFM practices may include the government agency (rigorous
assessment, lowest procurement cost on a risk-weighted life-costed basis), the beneficiaries
of the service (faster delivery, improved service quality), the contractor (bids are won using
the competitive advantages of new construction technology, design and construction
innovation) and the wider economy, which benefits from improved capital and labour
productivity. Other community stakeholders may also benefit depending on the infrastructure
service being delivered.
16
Figure 3 - Meaning of Value for Money
Value for money (VFM) in public–private partnership (PPP) projects is gained through the
engagement of private sector efficiency, effectiveness, and economy and through the appropriate
allocation of risks in the project. The assessment of the potential to secure VFM is a key element of
the PPP assessment process. The conclusions on VFM potential will inform governments in
developing member countries (DMCs) on whether to proceed with a PPP procurement, and, if so, the
form of PPP that could be used. (ADB 2012, Public–Private Partnership Operational Plan 2012–2020).
Value for money allows procuring agencies to establish whether service delivery has been structured
to appropriately meet the service output while continuing to ensure reasonable stewardship of
financial resources. The assessment of value for money should encompass all aspects of the
proposal including both quantitative and qualitative elements (Infrastructure Australia 2008, National
PPP Guidelines, Vol. 4, Public Sector Comparator Guidance).
Value for money is the best deal that satisfies the government‟s service objectives (National Audit
Office 2009).
Value for money is the optimum combination of whole-of-life costs and quality (fitness for purpose) of
the good or service to meet the user‟s requirement (HM Treasury 2006, p.7).
Value for money is about obtaining the maximum benefit over time with the resources available. It is
about achieving the right local balance between economy, efficiency and effectiveness, or spending
less, spending well and spending wisely to achieve local priorities … VFM is high when there is an
optimum balance between all three elements, when costs are relatively low, productivity is high and
successful outcomes have been achieved” (Audit Commission (UK) webpage, accessed 12 October
2010).
As a guide, VFM in most procurement applications to the best deal that the principal can
derive from contractors willing to bid for the contract in a competitive market (See Figure 3).
It must also be measured so that the principal may make informed decisions about the
design of the PPP contract and the implementation process.
Further Reading
Bidne, D. Kirby, A. Luscombe, L.J. Shatluck, B. Standley, S. 2012, The Value for Money Analysis:
A Guide to More Effective Public Sector Comparator and Value for Money Evaluation, Research
Paper for the National Council of Public Private Partnerships, Washington, Appendix F, pp. 41-
43.
European PPP Expertise Centre 2010, A Guide to Guidance. A Source Book for PPP,
Luxembourg, pp. 16-17
Infrastructure Provision and Project Finance, Edward Elgar, Cheltenham, pp. 135-138, 145-148.
World Bank 2012, Public Private Partnerships Reference Guide, Version 1.0, Washington, pp.
132-145P
17
1.6 Assessing Value for Money
Many countries specify VFM as part of project selection and bidder evaluation criteria
although not all provide detailed methodology for measuring it. Grimsey (2006) suggests that
there are four methods for determining VFM in project procurement:
 A full cost benefit analysis of the most likely public and private sector alternatives
 A detailed modelling of risk-weighted and life cycle costed models of traditional state
procurement (the PSC) and a shadow bid for a PPP before bids are invited
 A VFM comparison of the PSC and the contractor proposals received following the
tender process
 Reliance on a competitive bidding process.
A recent survey of 18 OECD countries and one subnational government found all but one
jurisdiction conducted ex ante VFM analysis for PPP projects (Burger and Hawkesworth
2011, p. 11).5 The survey suggested that the manner and time at which VFM was assessed
was different in most of the countries surveyed.
The two common methods for ascertaining VFM are as follows. First, a public sector
comparator (PSC), which is a life cycle costed model of the most expedient alternative
procurement method to a PPP, generally a traditional procurement model. The PSC is a
theoretical construct based on the initial scope and specification for the service and is used
to select the best procurement option (HM Treasury 2011). In some jurisdictions, the PSC
undergoes further adjustment to create a benchmark that is used to measure risk-adjusted
cost differences between proposals received from private contractors in a competitive bid
process (Infrastructure Australia 2008b; HM Treasury 2006).
In most OECD policy frameworks that employ VFM, the PSC is used to measure quantitative
differences in procurement methods and bids. The measurement of VFM will also take into
account the qualitative aspects of bidder proposals that may not be reflected in the PSC
such as third party revenue, asset utilisation or early delivery. Qualitative criteria may be
identified by government at the time of preparing the output specification although qualitative
benefits are unique to each bidder proposal and are valued on a case-by-case basis.
Examples of a PSC-based VFM calculation is set out at Appendices A and B.
Alternative methods are available for assessing ex ante VFM with PPP projects during either
the investment or the procurement stages of the project. At the investment stage, this may
take the form of multi-criteria analysis, cost effectiveness studies, options analysis, and
comparisons against earlier procurement benchmarks (South Africa 1999, Treasury
Regulation 16). During the procurement stage, government may require review of the short-
listed bidder proposals by independent consultants, a systematic in-house analysis of the
preferred bid, or the coordination, oversight or monitoring of projects by the PPP unit or the
Treasury and Finance Department (The Philippines BOT Law RA 7718/2012). Each of these
methods of assessing VFM is examined in the following section.
A further requirement to enhance VFM outcomes is a competitive bid process, which

assumes that private contractors can generally deliver assets and services more efficiently
and at lower cost than a public sector agency. The requirements here may include a
minimum number of bidders, a pre-qualification process, an open auction approach to the
18
EOI or RFP stages of the bid or a two-part evaluation process whereby the technical
evaluation of bids proceeds independently of the commercial evaluation. These practices are
adopted with many concessions and BOT contracts and rely on a competitive bid market to
enhance VFM outcomes compared with traditional procurement, which is widely accepted as
the benchmark for measuring infrastructure procurement. Unlike a PPP, a traditional contract
is an adversarial contract with an input specification and the contractor is selected using
criteria heavily weighted in favour of lowest cost. The advantages of traditional procurement
are that it is a simpler procurement process to follow and a relatively low cost procurement
option for government.
The steps that can be taken during the procurement process that increase the likelihood of a
VFM include a requirement for significant risk transfer (South Africa 1999, Treasury
Regulation 16), a well-drafted output specification (India Ministry of Finance 2011), a review
of the administrative and technical requirement of bids with the government‟s project
requirements (Indonesia Law PR13/2010), the adoption of competitive bidding with minimum
number of bidders (Indonesia Law PR13/2010), a rigorous or two-part bidding process (The
Philippines BOT Law RA 7718/2012, Rule 5), separate technical and financial selection
processes (India Ministry of Finance 2012; The Philippines BOT Law 2012 RA 7718/2012),
observing competitive negotiations following appointment of the preferred contractor, and the
use of comprehensive selection criteria. For example, India‟s draft national PPP policy
proposes a weighting for technical assessment accounting for 70% of selection criteria. This
may include qualitative factors such as the bidder‟s experience and track record with PPP
projects.
Further Reading
Delmon, J. 2009, Private Sector Investment in Infrastructure, Project Finance, PPP Projects and
nd
Risk, 2 edn. The World Bank & Wolters Kluwer, Biggleswade, United Kingdom, pp. 13-15.
General Regional Policy, Brussels, March, pp. 55-57.
Infrastructure Provision and Project Finance, Edward Elgar, Cheltenham, pp. 135-138.
Organisation for Economic Cooperation and Development 2008, Public Private Partnerships in
Pursuit of Risk Sharing and Value for Money, Paris, pp. 36-46
19
Part 2 Value for Money Measurement
There are two ways of calculating VFM with PPP procurement. The first involves the
preparation of a PSC or the use of benchmarking to compare the procurement options
during the investment decision-making for the project. As noted above, many OECD
countries employ formal evaluation of VFM because of the information that it provides
government with information about the value of project risk for allocation purposes, life cycle
costs, and the optimal configuration of projects. This information informs government with
decisions about investment, procurement and bidder selection. Formal VFM determination is
examined in Section 2.1 below.
VFM may also be enhanced for PPP projects with a comprehensive procurement process,
competitive bid markets, and independent evaluation and approvals process. These informal
methods are examined in Section 2.2 below.
2.1 Formal Assessment

Formal VFM assessment generally involves the preparation of a life cycle-costed traditional
procurement benchmark used to compare alternative procurement options, and during the
bidder selection process, following adjustment for risk transfer and competitive neutrality, it is
used for the comparative assessment of contractor bids. Formal VFM assessment requires
assessment of both the both the quantitative and qualitative characteristics of bids.
Quantitative Measurement
Quantitative measurement sets out to compare the costs and benefits of different
procurement options. It may be undertaken on a formal basis using a procurement
benchmark such as the PSC, or a combination of technical and financial requirements
prepared by government for the project. Both methods attempt to compare the PPP
procurement option against a benchmark such as a traditional design and construction
solution. The choice of measurement method will be based on a number of considerations
unique to the project such as the level of complexity, the size of the project, and opportunity
to achieve VFM cost savings through risk transfer, private management efficiency, or design
and construction efficiency.
In OECD countries, VFM is determined using a PSC, which measures the difference
between a traditional procurement method and either a shadow PPP bid during the
investment stage of the project or actual bids received during the procurement stage. The
PSC and shadow bid can be undertaken during the investment stage of the project to inform
government decision-making about the procurement method, and later to compare the
preferred bidder‟s proposal during the procurement stage. In non-OECD countries, the
selection of both the procurement method and successful bidder is made against informal
criteria such as a competitive bid process (see Paragraph 1.6.2 Competitive Bid Process) or
comprehensive bid market selection criteria (see Paragraph 1.6.3 Other Methods).
The Public Sector Comparator
The PSC is a hypothetical model of government procurement using the most expedient
method available to deliver services to specification over the term of the proposed PPP
contract. The PSC represents the quantitative measure of VFM with an infrastructure project.
20
It is supported by a qualitative analysis of bids received from a competitive tender process
that takes place later in the procurement process.
The PSC is an estimate of the financial cost of the project over term of the proposed PPP
contract. It includes the initial capital cost of constructing the infrastructure, and the
operational and other expenses incurred delivering services over the project lifecycle. It also
provides a comparative tool for selecting the contractor bid that best meets the project
requirements. In fully-developed form, the PSC is also weighted for risk. This means that the
major cost variables over the life of the contract such as site conditions, construction cost,
operating expenses, hold-ups and delays, demand for services, financing costs, compliance
with environmental and service requirements, and force majeure events are taken into
account when calculating the aggregate cost of delivering the service. Many of these risks
will be allocated to contractors and the remainder borne by government. The risks are
identified and fully costed using a number of conventional techniques, and a final adjustment
made for competitive neutrality (the value of government‟s tax exemptions and immunities)
and ex post regulatory and contract management costs incurred by government. The
adjusted PSC is called a reference project and it permits a like-with-like comparison to be
made between the two methods of procurement. Risk identification, measurement and
pricing are examined in further detail below.
The design of the PSC and its use varies between jurisdictions. In the United Kingdom, an
early assessment is made of financial models of the most efficient method of traditional
procurement and a shadow PPP bid using a standard spreadsheet template. The shadow
bid is based on historical data received from earlier bidder proposals of similar type. The
agency then can determine which procurement option offers best VFM. In other jurisdictions,
the PSC takes the form of detailed options analysis or feasibility study that takes into
account technical, legal, environmental and financial due diligence assessment.
In different jurisdictions not all of these stages in the development of the PSC are
necessarily observed. Nevertheless, the PSC used to determine VFM is a model of the most
efficient method of government delivery of the service for similar assets or services.
The PSC uses discounted cash flow analysis that meets the output specification for the
project. It takes into account the value of the risk withheld by government, the value of the
risk transferred to the contractor and competitive neutrality, which adjusts for the tax and
other exemptions that apply to government and its agencies. The PSC has several
applications: it can be used to establish a project‟s feasibility, to prioritise a short-list of
projects, and used to select a successful bidder from a competitive tender process. As a fully
costed procurement option for government, it enables government agencies to identify the
financial differences between procurement options.
The PSC plays an important role in the evaluation of proposals and the assessment of VFM.
However, its accuracy depends on the assumptions used to establish costs, and to identify,
measure and price risk. The PSC should be robust and consistent with the project scope
issued to bidders (KPMG 2011, p. 2).
21
Figure 4 - Composition of the Public Sector Comparator
Transferable Risk
Risk Transferred to the
Contractor
Competitive Neutrality
Expected
Cost
Raw PSC
Risk-weighted cost of
conventional procurement
Retained Risk
Risk retained by the
government
The elements of the PSC are the “base” or “raw” PSC, which is a costing of the asset or
services under government ownership and management, an adjustment for competitive
neutrality, the value of risk transferred to the contractor, the risk retained by government, and
the discount rate.
Elements of Public Sector Comparator
The base PSC provides a costing for delivery of the project as a traditional procurement
owned and operated by the government, including capital and life cycle costs and delivering
services over the same period as the proposed term of the PPP and to the standard of
service as defined in the output specification.
The base PSC includes the following elements:
 An output specification and scope of works

 All capital and operating costs associated with building, owning, maintaining and
delivering the services to the standard required in the specification
 The application of discounted cash flow methodology at the recommended discount
rate
 Adjustments that reflect income from third parties.
The costs included in the base PSC are land and development costs, professional fees for
design and development approvals, building materials, the cost of professional advisers,
plant and equipment, and raw materials. For the operating period, the costs will include
employee wages and salaries, consumables, direct management costs and insurance, plant
and equipment, rates and taxes.
22
The base case PSC is not generally distributed to bidders although some policies
recommend the agency distribute the base case as a guide to bidders in the request for
proposal stage (for example, Partnerships Victoria 2003, p. 9).
A worked example of PSC for a hospital project is set out at Appendix B. The data includes a
risk-weighted forecast of costs over a 12 year term by cost segment, that is, the base or raw
PSC, transferred risk, retained risk and competitive neutrality. The composition of these
costs is set out in the following table (Table 1) and provides a useful demonstration of the
value of the PSC, particularly the information that it provides to government about the value
of risk transfer and quantitative differences between traditional procurement and the
proposals received from bidders in the auction process.
Table 1 - Public Sector Comparator Components
Value a %
Base or Raw PSC 309,900 69.1
Competitive Neutrality 14,200 3.2
Transferable Risk 114,200 25.5
Retained Risk 10,400 2.3
Total PSC 448,700 100.0
Source Appendix E
Note a NPV Currency Unit 000s
Further Reading
Paper for the National Council of Public Private Partnerships, Washington, pp. 5-9.
European PPP Expertise Centre 2010, A Guide to Guidance, Sourcebook for PPPs, Luxembourg.
Infrastructure Provision and Project Finance, Edward Elgar, Cheltenham, pp. 136-138.
Organisation for Economic Cooperation and Development 2008, Public Private Partnerships in
Pursuit of Risk Sharing and Value for Money, Paris, p. 69.
Partnerships Victoria 2001c, Practitioners Guidance, Guidance Material, Department of Treasury

and Finance, Melbourne, June, pp. 6, 20.
In a competitive market, government holds a number of advantages when bidding against

private firms. Competitive neutrality is an adjustment that removes the net competitive
advantage that accrues to a government business because of its public ownership. It is
designed to recognise material advantage (and disadvantage) that government may hold in
23
comparisons with non-government institutions, such as an exemption from stamp duties,
income and payroll taxes, and the management costs of corporate and other services that
government may not explicitly recognise such as accounting, human resources and
administrative services. The purpose of this adjustment is to ensure elimination of
competitive advantage in a like-for-like comparison of the two estimates.
Transferable Risk
The optimal allocation of risk is a key objective of PPP policy and maximising VFM. The
decision to allocate risk to the contractor depends on whether the bidder is best able to
manage the risk at least cost. This involves an optimal rather than maximum transfer of risk
and requires assessment of the contractor‟s risk appetite and capacity to mitigate and
manage risk determined on a case-by-case basis. Transferring risk that the contractor does
not have the capacity to manage may result in excessive risk premiums being factored into
the availability payment that contractors will charge government, and diminishing VFM in the
process.
Retained Risk
This refers to risk retained by government and generally relates to the output specification
and the core services delivered by government. For example, in a PPP project for a regional
hospital, it refers to risks associated with the delivery of medical services, the selection and
training of medical staff and the optimal utilisation of hospital facilities. Retained risk may
also take into account the cost of insuring assets and operational risks, such as public
liability risk premiums.
Figure 5 - Public Sector Comparator

Adjustment for
lower risk
Transferred Risk VFM acceptance
Competitive
Net Present
Neutrality Net Present Cost
Cost of Service
of Service
Payments or
$ Payments
Revenue Stream
Base PSC
Retained Risk
Retained Risk Retained Risk
Public Sector Winning Under-bidder

Comparator Bidder
Source: Regan 2009.
24
The Discount Rate
The forecasting of future revenue and costs for the PSC or a shadow bid is based on
standard investment principles and discounted cash flow (DCF) methodology. The DCF
requires a cash flow forecast, underlying assumptions, initial and residual capital values and
a discount rate. The selection of a discount rate for government investment is one of the
more contentious areas of public economics and is essentially a government policy decision.
Discount rates may be calculated using one of several methods: social time preference (a
value calculated for the price the community will pay to defer immediate consumption), social
opportunity cost (the marginal return on investment from alternative state investment
opportunities), or a nominated proxy for both methods being the marginal cost of state debt
(Harrison 2010). Governments generally simplify this process by prescribing the discount
rate to be used for public infrastructure investment from time to time.
In OECD countries, the discount rate is generally the marginal cost of government debt, the
so-called risk free rate of the country (HM Treasury 2011c). In other jurisdictions, the
discount rate may include an adjustment for unsystematic risk, which refers to risks
associated with the subjective circumstances of the project under consideration, such as
supply chain or market demand risk. In sub-national jurisdictions, the discount rate may also
be adjusted for systematic risk, which cannot be eliminated by diversification and affects all
investment activity within the jurisdiction, such as political and fiscal risks (Partnerships
Victoria 2003).
In non-OECD countries, Treasury will generally issue policy directives for agency application
of investment discount rates. In most countries, this rate is the marginal cost of state debt.
Life Cycle Costing
One of the features of a formal measurement of VFM is the forecasting of operating costs
over the life of the project. Lifecycle costs include capital expenditures incurred rehabilitating
and improving assets, all maintenance and operating expenses, and is a major risk factor
with infrastructure services procured over terms of 20 or more years. Future costs, real
depreciation of assets, energy and labour costs are difficult to estimate particularly when
there is incomplete information or lack of precedent. The lifecycle operating costs of capital-
intensive assets in most infrastructure sectors may be up to 5 times the initial procurement
cost (National Audit Office 2003). In the preparation of the PSC and shadow bid forecasts,
these costs are included and discounted using the recommended government investment
rate. As assets age and deteriorate with use, lifecycle costs tend to increase during the latter
stages of the investment. Accordingly, the ratio of life-cycle costs to initial capital investment
will be lower under discounted cash flow analysis than with a comparison of nominal costs.
For example, in the West Middlesex Hospital PPP project in the United Kingdom, the
nominal life cycle cost ratio for core hospital services over the 30 year term of the contract is
32.4:1 and 14.1:1 discounted at the UK Green Book discount rate, which at the time of this
project, was 3.4%. The nominal life cycle cost ratio for non-core services is 4.9:1 and 1.86:1
on a discounted basis (National Audit Office 2003, HM Treasury 2011c).
Life cycle costing of projects informs both the investment and procurement decision-making
of government for infrastructure projects. It represents good practice for traditional as well as
PPP procurement and is one of the core elements in programs designed to improve
25
technical skills in government line agencies.
Worked examples of the PSC are available at the websites of H.M. Treasury on 30th January
2013 at http://www.hm-treasury.gov.uk/ppp_vfm_index.htm and Partnerships Victoria on 14th
February 2013 at http://www.partnerships.vic.gov.au/.
Case studies demonstrating VFM can be viewed at the following websites:
South Korea http://www.adb.org/publications/public-private-partnership-infrastructure-

projects-case-studies-republic-korea viewed on 15th March 2013.
Partnerships Victoria
http://www.partnerships.vic.gov.au/CA25708500035EB6/0/A8FBE27F965DFEE5CA257626
001BC0CF?OpenDocument viewed on 14th March 2013.
Two case studies that demonstrate VFM in actual Partnerships Victoria projects are set out
at Appendices A and B.
2.2 Qualitative Analysis
The qualitative elements of contractor bids may be taken into account when determining
VFM with PPPs. Typically, these are matters that bring benefits to government, such as
unique construction technologies, innovation in construction or early completion for
accelerated service delivery. The qualitative attributes of a contractor proposal that
contribute to VFM may be complex and difficult to identify and specify in advance. The
benefits to government are not always similar for different types of projects. The things that
deliver qualitative performance include early completion of assets and early delivery of
services, innovation in design and construction methods and materials, better service
outcomes, improved capital productivity, third party revenue, and the expertise and capacity
of the contractor to meet service delivery requirements over the life of the project. There are
many additional factors that can be taken into consideration although this will depend on the
particular characteristics of the project being procured. In some jurisdictions may include
social impacts such as access and amenity, and a public interest test that takes into account
factors are important for both social and economic infrastructure services and will generally
be reflected in benefits to government that are not available with alternative procurement
methods. 6 Qualitative evaluation generally follows the quantitative assessment of bids.
Qualitative factors such as lower user charges, improved service quality, improved asset
utilisation and early completion may outweigh higher cost to government in some cases
although the final assessment is best undertaken on a case-by-case basis.
26
Table 2 - Qualitative Risk Factor Examples
Qualitative Risk Factors Case Study Examples
Unquantifiable risk transfer to contractor Berlin Wasser, Germany
Contractor experience, financial strength, Channel Tunnel Rail Link, United Kingdom
expertise and capacity of project lender Desalination Project, Victoria
Innovative design and construction management Southern Cross Railway Station, Victoria
(example, off-site prefabrication) Royal Children‟s Hospital, Victoria
NHS Romford, United Kingdom
User benefits over and above specification
Country Court Building, Victoria
Service sustainability without subsidy ASA and Rethmann PPP, Hungary
Complies with a public interest test Eastlink Toll Road, Victoria
Compliance with new environmental laws Apa Nova Water, Romania
Improved community access Southern Cross Railway Station, Melbourne
Apa Novo Water Project, Romania

Access to expertise, efficiency and technologies
Scottish Water Solutions, Scotland
not otherwise available to government
Dublin Wastewater Scheme
Compliance with environmental standards Scottish PPP Water Projects, Scotland
Berlin Wasser, Germany

Technology transfer
Noise abatement at airports Hamburg International Airport
Service performance Darent Valley Hospital, United Kingdom
Source European Union 2004, NAO 2005; European Commission 2004, Resource Book on PPP Case Studies,
Directorate-General Regional Policy, Brussels; National Audit Office 2005, Improving Public Services through
better Construction, HC 364-1, Session 2004-05, London, March.
27
Advantages of the Public Sector Comparator Method
The advantage of the PSC is that it applies a standardised project implementation process
across all disciplines and agencies at national, provincial and local government levels.
Nevertheless, few national PSC methodologies are similar and in most OECD countries, the
model is configured to adapt to local institutions, commercial practices and governing
accounting and reporting requirements (Burger and Hawkesworth 2011). The advantages to
government of using a PSC is that it develops agency skills and experience in activities such
as options analysis, risk-weighting project financial forecasts for risk allocation and
management purposes, life cycle cost measurement, discounted cash flow analysis of
government investment activities, and a better understanding of optimal methods for
financing major projects. The PSC also requires government agencies to take into account
the qualitative dimensions of procurement decision-making including the contractor‟s
experience and track record, the identification of efficiencies through contractor design and
construction innovation, and indirect benefits in the form of improved productivity, technology
transfer, improved services and compliance with international environmental and other
standards.
The adoption of PSC measurement also introduced significant change to conventional

government procurement practice in those jurisdictions where it is employed. The Gateway
Program introduced in the United Kingdom in 2001 requires traditionally procured projects
above prescribed thresholds to be approved through a series of independently monitored
approval gateways. Projects must be accompanied by a business case, periodic
independent reviews, life-cycle costing and be accompanied by operational plans. The
Gateway Program is used in many countries and has led to significant improvement in
project delivery outcomes, reduction in optimism bias and improved the delivery
performance (National Audit Office 2003).
In the United Kingdom where PPPs are used to procure a large number of projects
delivering similar services such as non-core services in schools and hospitals, there is a
case for the simplification of the PSC to fast-track projects and reduce transaction costs. In
2001, the UK adopted the PSC for the quantitative assessment of VFM with PFI transactions
(HM Treasury 2004). The process was modified in recent years to improve standardisation
and consistency across government agencies. Recent changes compare a life cycle-costed
representative project using conventional procurement with a PPP option (HM Treasury
2006, 2011a). The methodology uses a generic financial model which can be adjusted for
third party income, transaction costs and competitive neutrality. Sensitivity analysis is
recommended to test the model‟s underlying assumptions (HM Treasury 2011a, p. 11).
Policy frameworks in other jurisdictions simply require analysis in which the procurement
options available to government are rated against specific qualitative criteria (Infrastructure
Australia 2008b, p. 29).
In several OECD jurisdictions, policy may require all infrastructure procurement above a
minimum threshold to be examined for delivery as a PPP. In many non-OECD countries,
VFM principles and the use of the PSC contribute to more exacting selection criteria, multi-
stage or articulated bid processes and place emphasis on the benchmarking of bids against
comprehensive technical requirements. Evidence suggests that VFM principles improve
government procurement processes, develop the capacity of line agencies and contribute to
28
the delivery of better government services. The PSC also provides information to
government to inform decisions about risk allocation, life cycle costs and term of the contract,
the configuration of the specification and the design of the bid process.
Disadvantages of the Public Sector Comparator Method
The PSC is a long-term operational model that relies on assumptions about revenues, costs,
risks and economic conditions well into the future. As a financial forecast, the PSC should be
used as a best estimate informed by government experience, reliable data and robust
analysis. However, it is an estimate only and should be taken into account with a wide
margin of error.
In recent years, the PSC has attracted criticism for inaccuracy as a measure of procurement
performance. In the United Kingdom, the National Audit Office found that understanding the
differences between public and private sector approaches to the same output specification
was central to assessing VFM (National Audit Office 2000, pp. 2-3). In its review of the
London Underground PPP contract, the National Audit Office found that financial modelling
of complex projects over long periods of time was inherently uncertain. In cases where the
responsible agency had experienced an average 20% overrun with 242 past projects, the
National Audit Office considered this to be a risk factor that should be explicitly costed into
the PSC (National Audit Office 2000, p. 5).
The PSC is also based on historical data and information, which may not be an accurate
guide to actual site conditions or the state of existing assets, data may be missing or is
incomplete. Historical information also may not provide an accurate basis for forecasting
future operating conditions or risks, particularly if the project is complex or reliant on existing
assets and networks. Care must be taken in the preparation of the PSC and particularly the
development of underlying assumptions. The PSC provides a broad guide to the likely cost
of traditional procurement with a margin for error factored into its application for VFM
purposes.
2.3 The Role of Risk in Value for Money

The primary driver of VFM in PPP projects is the transfer of project risks to private
contractors. The principle underlying risk transfer is that risk should be borne by the party
best able to manage the risk which implies at least cost.
What is Risk?
Risk is any outcome at variance to expectation and is a particular problem with complex
infrastructure projects in which the likelihood of cost and time overruns is high. In a PPP
project, risks may include site risks such as pre-existing soil contamination and poor sub-soil
stability, construction risks such as time and cost overruns and industrial disputes, and life
cycle cost risk, which is the estimation of all capital and operating expenses to be incurred
over service intervals of up to 20 years or longer. Risk may have a positive or a negative
impact on project revenues and costs. Most design and construction risks are well known to
contractors, form part of the day-to-day management of a construction company and are
factored into the cost structure of contractor bids. However, there are risks that the
construction company may be asked to carry under a PPP contract that do not form part of
their day to day core business, such as project finance risk, network, operational and life
29
cycle cost risk. When these risks are allocated to the private sector, it is essential that
bidders understand the risks that they are accepting, can measure and value those risks,
and put in place controls for their monitoring, mitigation and management.
Table 3 - Typical Public Private Partnership Project Risks

Risk Category Typical Risks
Pre-Design Risk Suitability of the output specification
Development consents, permits and approvals, stakeholder consultation
Tenure, site access and network issues (connectivity to utilities and services)
Site Risk Site conditions, contamination, environmental impact assessment and approvals
Existing buildings
Design and Construction time and cost, fitness for purpose, weather, change in scope or
Construction specification, technology interface, quality of building for life cycle cost risk
Hold-up risk, changes in scope or specification
Market Risk Risk of insufficient market demand, tariff setting and escalation factors
Technology Technology failure
Financial Risk Interest rates, compliance with lender covenants, currency exchange rates
Technology Risk Downtime and third party risk with technology failure
Operational Risk Lifecycle cost risk, repair and maintenance risk, accelerated asset deterioration
Network Risk Access and pricing, regulatory interventions, interface relationship management
Industrial Delays caused by industrial action
Relations
Political Risk Change of law, tax regulation
Force Majeure Unanticipated exogenous events such as floods, earthquakes, war and riots
Valuing Risk
Before adjusting the PSC for retained and transferred risk, it is important to develop a risk
valuation methodology. Risk is central to delivering a successful project and it is measured
by assessing the probability and cost of an outcome at variance with expectation.
Quantifying risk forms part of project risk analysis, which is a process for identifying,
measuring, valuing and managing risk, and to some degree, anticipating and mitigating the
uncertainty associated with infrastructure projects. Risk is a dynamic variable, its effects may
be cumulative or spontaneous and the riskiness of projects increases with complexity and
with time. Risk is also difficult to forecast and PPP procurement requires government
agencies to develop a good understanding of risk analysis methods employed in delivering
economic and social infrastructure services. For example, cost overruns, late delivery and
force majeure events are risks that may have a negative impact on the contractor‟s financial
economics or may delay the delivery of services to the community. 7 Common risks
encountered with infrastructure projects are described in Table 3.
The proposals received from contractors will be based on recognition of a number of risks
not included in the PSC. These may include the risk of government cancellation of the bid
process, change of taxation and other laws that adversely impact the project and
government appropriation of assets without fair compensation. Private bidders may need to
consider risks not normally borne by government such as capital raising and underwriting
costs, credit and sovereign risk insurance, expenses related to bond issues, compliance with
lender covenants regarding financial management, the term of loans, refinancing risk,
30
withholding taxes on foreign remittances, interest rate and currency exchange risks. The
bidder proposals will include a risk acceptance schedule and a unitary or user pays charge
based on its risk-weighted costing of the PPP project.
A relatively simple method of risk valuation for infrastructure projects is the qualitative
probability approach which requires the analyst to identify a risk event, measure the cost of
the impact, and multiply the cost of the impact by the probability of its occurrence. The
formula for risk-weighting an expenditure estimate is as follows
Risk weighted cost = Original prime cost + (Cost of a risk event x Probability)
Assume a prime cost of $100, a risk that would add $25 to the prime cost if it occurs
and a 20% probability that it will occur:
Risk weighted cost = $100 + ($10 x 15%) = $100 + $5 = $105
The importance of risk-weighting is that it quantifies risk for the purposes of risk allocation
and preparation of the project budget.
Further Reading
nd
APM 2004 Project Risk Analysis and Management Guide, 2 edn. APM Publishing, High Wycombe.
Cooper, D. Grey, S. Raymond, G. Walker, P. 2005, Project Risk Management Guidelines, Managing Risk in
Large Projects and Complex Procurements, John Wiley and Sons, Chichester.
European Commission 2003, Guidelines for Successful Public Private Partnerships, Director-General
Regional Policy, Brussels, March.
World Bank Institute-PPIAF 2012, Public Private Partnership Reference Guide, Version 1.0. pp. 152-160.
Risk Allocation
Most design and construction risks are well known to construction firms, and form part of the
day to day management of a construction company. However, there are risks that the
construction company may be asked to carry under a PPP contract that are not part of their
day to day activities, such as project finance risk, operational and life cycle cost risk. These
risks may be absorbed by the company and managed internally or sub-contracted out to
others such as insurance companies. They may also be rejected by the company in which
case the VFM outcome may be weakened because of the value placed on risk transfer for
the PSC and VFM assessment.
31
Further Reading
Paper for the National Council of Public Private Partnerships, Washington, p. 17
European PPP Expertise Centre 2010, A Guide to Guidance, Sourcebook for PPPs, Luxembourg,
pp. 14-16
Partnerships Victoria 2001b, Risk Allocation and Contractual Issues, Guidance Material,
Department of Treasury and Finance, Melbourne, June.
Finance and Public Private Partnerships, John Wiley and Sons, Chichester, p. 165
World Bank 2012, Public Private Partnerships Reference Guide, Version 1.0, Washington, pp.
155-157
2.4 Informal VFM Assessment

In some countries, PPP policy may endorse VFM principles without providing specific criteria
to determine how VFM will be calculated. The reasons for this may be that government
needs to fast-track projects or the government‟s fiscal position limits public investment
options. The informal assessment of VFM uses systematic approaches to the procurement
process that embeds VFM principles in project evaluation and procurement methodologies.
In jurisdictions where a formal VFM process is not required, a comprehensive procurement

process that embeds VFM principles may achieve a similar outcome. The elements of a
VFM procurement process include a detailed feasibility or procurement options analysis, a
pre-qualification procedure, competitive dialogue, technical and administrative requirements
Table 4 - Typical Public Private Partnership Risk Allocation Schedule
Risk Category Description Responsibility
Existing Structures Suitability of existing buildings for use in Government

redevelopment
Site Conditions Pre-existing contamination Government
Construction contamination Contractor
Environmental Risk Compliance with Environmental Contractor
Management Plan for redevelopment
Design Fitness for Purpose Contractor
Construction Responsibility for time and cost risk Contractor
Industrial Relations Labour disputes and hold-ups Contractor
Commissioning Delays and rectification costs Contractor
Demand for Services Derivation of third party revenues Contractor
Network Risk Connectivity to supply chain Contractor
Lifecycle Cost Risk Responsibility for cost blow-out Contractor
Political Risk Change of Tax Law Government
Financial Risk Interest and exchange rate risk Contractor
Force Majeure Non-insurable calamity Contractor
32
that incorporate quantitative and qualitative performance benchmarks, and adoption of a
gateway system that prescribes the stages through which a project must pass before it is
finally approved. A. Delmon (2009, p. 13) describes this approach as “… a holistic
assessment of the project delivery and the marginal benefits provided by private investment
and the competitive procurement process used”.
The procurement measures commonly used to improve VFM outcomes include:
 Comprehensive evaluation of the service need to guide agency decision-making

during the investment and procurement stages of the project
 The preparation of technical requirements for the project
 A framework for the systematic identification, measurement and optimal allocation of
risk particularly lifecycle cost and operational risks, force majeure, finance and
construction risk
 An experienced and well-trained agency PPP project management unit
 A two stage bidding process requiring pre-qualification before the request for
proposal is issued
 A competitive bid market
 Bidder selection criteria incorporating quantitative components (risk transfer, cost to
government, technical requirements) and qualitative components (contractor
expertise and track record, design and construction innovation, early completion).
A PPP policy that adopts one or more of these principles has a greater likelihood of
achieving VFM outcomes for government than a PPP policy that does not. However,
informal VFM methods do not provide government with sufficient data with which to improve
the procurement process, document lessons learnt, raise the skill levels in line agencies and
optimise risk transfer with future projects. These outcomes can only be achieved with
adoption of a formal approach to VFM assessment.
A number of countries use a competitive bid market to enhance VFM outcomes. The
competitive bid market approach is based on the assumption that private infrastructure
procurement delivers projects at lower cost and in shorter periods of time than traditional
public procurement methods and represent a better VFM option for government. Competition
between private contractors in a well-managed bid market is considered the one of the
drivers of VFM with PPPs (Ismail, Takim and Nawawi 2011).
VFM is more likely to be produced by a competitive procurement process over one that is
not. However, competitive bidding alone does not ensure VFM outcomes. The factors that
contribute to VFM in PPP projects are examined at 2.5 Drivers of Value for Money.
When this option is chosen, the government will generally prepare an output specification,
consult widely with the market ahead of the bid, make an allocation of project risks and
proceed with a competitive bidding process. This is the practice adopted with many
concessions and BOT contracts and it relies on a competitive bid market to deliver a better
outcome for government than could be achieved with traditional procurement, which is
widely accepted as the benchmark for measuring procurement performance. Unlike a PPP,
a traditional contract based on an input specification is an adversarial contract and
contractor selection employs criteria heavily weighted toward lowest cost. Policies that use
33
competitive bid markets rely on bidder depth, transaction flow, risk transfer, and rigorous
management of the bid process. Procurement method is also important and policies may
require a minimum number of bidders, pre-qualification, open or closed bids, and competitive
dialogue during negotiations. In some jurisdictions, a best and final offer may be requested
from short-listed bidders although this may contribute to hold-up delays and rapid escalation
of bid costs if not carefully managed. Experience in a number of OECD countries suggests
that VFM outcomes are determined by the efficiency with which government manages the
competitive bid process, an appropriate risk allocation strategy, and post-selection
negotiations to ensure achievement of the best VFM outcome (Delmon 2009, pp. 13-15).
Most international PPP policy frameworks now require competitive bidding for PPP projects
and a sample of six national PPP policies is examined at Part 4, Case Studies.
2.5 The Drivers of Value for Money

Information about VFM outcomes may be published by government after the contract has
been finalised. A benefit of post-bid VFM data is that it helps identify the VFM drivers of PPP
projects and the effectiveness of PPPs as an alternative procurement method. Examples of
post-bid publication of VFM assessment of projects is set out at Appendices A and B.
A number of recent international surveys point to the characteristics that drive VFM in PPP
procurement (Mott McDonald 2002; Fitzgerald 2004; Harvey 2010; Regan, Smith and Love
2011; National Audit Office 2005). The characteristics include:
 An output specification that transfers to contractors responsibility for meeting the

service requirements of government. An output specification encourages design,
construction and operational innovation
 Risk-weighted benchmarking criteria to mitigate the risk of optimism bias and
transfer risk to a contractor best able to manage it at least cost
 Certainty and sustainability of service delivery over the life of the contract
 Early completion and commencement of service delivery
 A contractual form that encourages high-powered incentives for better service
outcomes including quality construction for low life cycle costs
 Ex post performance measurement. Contractors are paid only for services
delivered to specification over the life of the contract
 Contracts are long-term, incomplete and transfer to the contractor responsibility
for life cycle costing. This creates a trade-off in which the contractor must
balance life cycle cost risk with cost savings from cutting corners during the
production process. The trade-off ensures that contractors will deliver quality
assets when life cycle cost risk is significant
 Competition in bidding processes and competitive dialogue during negotiations
 Quantitative and qualitative bid selection criteria
 Design, construction and operational innovation
 Improved asset utility
 Third party income.
34
2.6 Value for Money and Policy Design
Relationship to Bidder Selection Criteria
The assessment of bidder proposals is undertaken on a subjective case-by-case basis. The

PSC measures the cost or quantitative differences between the PSC and bidders including
matters such as the actual risk transferred to the contractor, completion time, compliance
with the government‟s technical requirements, and financing costs. However, government
may also benchmark bidder cost proposals against the costs incurred in earlier and like
projects procured either traditionally or as a PPP. However, procurement options and
individual contractor proposals may possess important qualitative differences in matters
such as design and construction innovation, sustainability and improved service quality,
which may make it difficult to use only a quantitative comparison between bidder proposals
and between the preferred proposal and the PSC. A policy that uses both quantitative and
qualitative criteria to evaluate proposals for contractor selection purposes provides
government with better information to make an informed decision than a policy that does not
possess these characteristics.
Relationship to the Output Specification
Traditional procurement is generally based on an input specification which is a

comprehensive description of the good or service that the government is acquiring. An input
specification may include the design of works or buildings, the scope of works to be
undertaken, dimensions, technical standards of building materials, plant and equipment, and
the manner in which the contractor‟s work is to be performed. For example, for a hospital
building an input specification will include the design, configuration and size of patient wards,
the capacity, quality and location of electrical and plumbing plant and services, the type and
quality of patient beds, the requirements for the design and equipping of operating theatres,
day surgery facilities, consulting rooms, kitchens, floorcoverings, room lighting,
communications facilities and the thickness of the glass in patient rooms.
The input specification leaves little scope for the contractor to exercise discretion in the
choice of construction materials or the manner in which the work will be conducted. For
many projects, the design and construction tasks are undertaken by different firms. This
limits the construction company‟s contribution to design and construction innovation,
selection of new and improved building materials and construction methods when these
benefit government through improved service delivery or reduced cost to the government.
An output specification describes the services to be delivered to government and the

performance standard required for each of those services. The contractor will determine how
best to meet the output specification which encourages innovation in design, construction
and management of service delivery and new technologies. An output specification may
create quantitative benefits for government by reducing the cost of service delivery. For
example, in the United Kingdom, a PPP contractor introduced innovative building design that
located each of the operational areas of the hospital in a single precinct. The new design
reduced the distances required for patient transfers within the building with significant
improvement in labour productivity, health outcomes and operating costs (Davis 2005). An
output specification may also create qualitative benefits for the government. These may
include more efficient or faster service delivery, longer hours of operation, greater facility
35
utilisation or better quality services. For example, a PPP contractor delivering schools in
Australia constructed buildings with removable partitions between rooms, introduced
sustainable energy solutions and made greater use of natural light and ventilation, which
lowers school running costs, improves utilisation of the facility and contributed to better
student behaviours and academic performance (National Audit Office 2005).
The output specification can be seen as an important driver of the qualitative and
quantitative benefits that improve VFM with PPPs. The output specification also transfers
significant risk to the private contractor and creates the incentive for a better quality asset if
the contractor is responsible for life cycle operating costs.
Importance of a Managed Bid Process
A competitive bid process is important if government is to achieve best VFM outcomes from
PPP procurement. However, a competitive bid market may be hard to achieve if domestic
bidders lack the experience or technology to undertake complex projects, if finance is difficult
to source, when transactions are few and far between, when bid costs are high or the
procurement process is slow, prone to rebids (best and final offers) or delays, and subject to
changes to scope or specification. In these conditions, the market has little confidence in the
PPP procurement process and contractors will be reluctant to bid. A managed bid process
and rigid delivery timetable contribute to a competitive bid process, reduce transaction costs,
and should include all or some of the following practices:
 Early market consultation about the project including the delivery timetable. This
gives the market sufficient time to form consortia and adjust work schedules to
accommodate the preparation of a bid. The consultation may involve project
information sessions or workshops
 Steady transaction flow that allows bidders to retain experienced bid teams and
skilled employees for this work. Infrequent transaction flow has the opposite effect
and leads to redeployment of resources elsewhere in the country or the firm‟s
business activities
 A two stage bid process commencing with an open expression of interest (EOI) or
pre-qualification stage containing an output specification, a draft risk allocation
schedule and pro forma PPP contract
 A request for tender to a limited number of EOI respondents. A limited bid field
improves the chances of contractor selection, reduces bid costs and expedites bid
evaluation and selection of a preferred contractor. In OECD countries, bid fields of
three or four contractors are typical and offer competitive tension and lower
transaction costs for government and bidders
 Opportunity for government to modify the PSC following receipt of proposals
 The external review of the key stages of the procurement process by the Treasury
and Finance agency or an independent reviewer
 A transparent bidding process which may include the publication of the PSC or the
results of the bidder evaluation (see Appendices A and B)
 The use of competitive dialogue during post-tender negotiations to contract and
financial close. This can be achieved with parallel negotiations, the separation of the
technical and cost components of the bid, and the use of well-trained and
experienced negotiation teams.
36
Competition in bid markets reduces prices (Estache, Iimi and Ruzzier 2009, p. 31) and
provides greater information to government. When there is little difference in prices between
bidders, contractors will compete on qualitative terms using points of difference such as
accelerated delivery, greater asset utilisation, and design and construction innovation. These
outcomes improve VFM outcomes for government.
Unsolicited Bids
National PPP policies and laws differ on the treatment of unsolicited proposals although the
practice in those countries with most PPP transactional experience requires unsolicited
proposals to be tested in a competitive tender situation particularly if they require periodic
payment by the state of a unitary charge. The contractor bringing the proposal may be given
a preference in the selection process although government appropriation of intellectual
property remains a risk. The competitive bid process improves the VFM outcomes for
government although rarely in these cases will a PSC be constructed retrospectively.
Incomplete Contract Principles
PPPs are incomplete contract which refers to agreements with long operational periods that
cannot contain sufficient provisions to deal with every conceivable event that will occur over
the duration of the contract (Coase 1937, Maskin 2001, Hart 2008). Incomplete contracts
may also contain embedded and real options that offer flexibility and avoid contract
renegotiation in the event of changes in the operating environment such as a need to
increase or reduce the quantity or quality of services required, changes in urban
demographics that affect demand for services or the availability of substitutes. Incomplete
contracts also contain mechanisms for managing change and for resolution of disputes
between the parties without recourse to civil litigation. This will generally take the form of
mediation and arbitration provisions.
A second feature of incomplete contracts is provisions which regulate the commercial

relationship between the agency and the contractor. For example, the service specification,
protocols for the timing and amount of availability payments, abatement provisions for
services that do not meet specification, incentive payments, key performance indicators and
the rules for dealing with minor and major breaches of the contract. In OECD countries,
contracts are generally designed to responsive regulatory principles which provide for
graduated responses for minor breaches of contract (warnings, negotiations, cure periods for
remedial work) progressing to liquidated damages and penalties for more serious breaches
and finally contract termination as a last resort (Ayers and Braithwaite 1992).
In non-OECD countries, contracts will often contain abatement provisions that fail to meet
specification and liquidated penalties for minor breaches of the contract. The objective of
responsive regulatory principles is to preserve the contract and avoid civil litigation for all but
the most serious breaches of contract. Early cancellation of the contract may require an
agency to pay compensation, renegotiate the contract or return service delivery to the line
agency. These options reduce or eliminate the VFM gains to government from the contract.
37
Further Reading
Coase, R.H. 1937, The Nature of the Firm, Economica, vol. 4, no. 16, pp. 386-405.
nd
Hart, O. 2008, Incomplete Contracts in The New Palgrave Dictionary of Economics, 2 edition, Eds.
Durlauf, S. Blume, L.E. vol. 4, Palgrave Macmillan, New York.
Maskin, 2001, On Indescribable Contingencies and Incomplete Contracts, a paper presented at the
European Economic Association meeting at Lausanne, Institute for Advanced Study and Princeton
University.
38
Part 3 International Surveys
This part has information about international PPP policies and the role that VFM plays is
determining benefits to government from this method of procurement. A survey of 80
countries was used to identify the incidence of PPP policy and the use of VFM in the
procurement process (see Paragraph 3.1). A second study of 20 countries examined
national PPP policy in greater detail to examine differences in the use of VFM principles
between OECD and non-OECD countries (Appendix C). A third study used a sample of six
countries for more detailed explanation of PPP policy and the application of VFM principles.
3.1 International Survey of PPP Policy

A survey of 80 countries was conducted in January 2013 to identify nations with a PPP
procurement policy and the extent to which the national policy employed VFM assessment
criteria.
The survey found wide divergence in national PPP policies with few regional PPP policies
replicating national policy, few similarities between national policies and a variety of
methodologies for assessing VFM with PPP procurement. What was evident, however, was
the adoption of regional commercial principles and practices. For example, in South East
Asian countries, bids are generally submitted in two stages, a technical proposal that
includes compliance with legal and specification requirements and a statement about the
track record and experience of the consortium and individual managers, and a financial
proposal. This practice is not widely employed in Europe or North America. The survey
suggests that the majority of countries have a procurement policy for transactions that
include PPPs, BOT and concession contracts. The survey searched for PPP policies in each
country using the word search term “value for money” and found 52% of the sample used
the term but only 21% offered methods for its calculation. This suggests that in recent years,
the use of VFM has been an aspirational policy objective and not often used as an
instrument for its calculation.
Conclusion
The survey suggests that VFM is a term commonly employed with PPP policies but only one
in five PPP policies had formal mechanisms for the systematic application of VFM
measurement. Nevertheless, a significant number of countries do take risk into account for
planning and investment purposes and achieve transfer of operational, finance, construction
and life cycle risks with standard PPP contracts, and employ market competition in the
bidding process. If PPP policy includes a PSC, qualitative and qualitative analysis and
optimal risk transfer, government agencies may calculate the difference between a PPP
proposal and all other procurement options. These practices also impart rigour to the
procurement process, contribute to a better understanding of risk within government
agencies, and create a benchmark for future projects. However, the lack of a formal process
does not mean that VFM is not being achieved. It suggests that agencies cannot measure
their procurement performance over time and have a lower level of understanding of the
underlying economics and incentive frameworks that drive this method of procurement.
Nevertheless, VFM may still be achieved.
39
Table 5 - Public Private Partnership Policy Survey
PPP/BOT VFM PPP/BOT VFM

Country Country
Policy Principles Policy Principles
Algeria Yes Finland Yes

Argentina Yes France Yes
Australia Yes Yes Germany Yes
Austria Yes Ghana Yes
Bangladesh Yes Greece Yes Yes
Belgium Yes Hong Kong Yes Yes
Botswana Yes Hungry Yes
Brazil Yes India Yes Yes
Bulgaria Yes Indonesia Yes
Cambodia In Progress Ireland Yes Yes
Cameroon Yes Israel Yes
Canada Yes Yes Italy Yes
Chile Yes Japan Yes
China Yes Kazakhstan Yes
Colombia Yes Kenya Yes Yes
Costa Rica Yes Kosovo Yes Yes
Croatia Yes Latvia Yes Yes
Czech Republic Yes Lithuania Yes
Denmark Yes Macedonia Yes
Ecuador Yes Madagascar Yes
Egypt Yes Malawi Yes Yes
PPP/BOT VFM PPP/BOT VFM

Country Country
Policy Principles Policy Principles
Malaysia Yes Romania Yes

Malta Yes Yes Russia Na
Mauritius Yes Yes Senegal Yes Yes
Mexico Yes Singapore Yes Yes
Mongolia Yes Slovak Republic Yes Yes
Morocco Yes Slovenia Yes
Mozambique Yes South Africa Yes Yes
Myanmar In Progress South Korea Yes Yes
Namibia Yes Spain Yes
Nepal Yes Sri Lanka Yes
Netherlands Yes Sweden Na
New Zealand Yes Yes Switzerland No
Nigeria Yes Tanzania Yes Yes
Northern Ireland Yes Yes Thailand Yes
Norway Yes Yes Tunisia Yes
PNG In Progress In Progress Turkey Yes
Pakistan Yes Yes Uganda Yes
Peru Yes United Kingdom Yes
Philippines Yes Uruguay Yes
Poland Yes Uzbekistan No
Portugal Yes Vietnam Yes
Puerto Rico Yes Zambia Yes Yes
40
3.2 OECD Value for Money Survey 2011
Burger and Hawkesworth (2010, 2011) compared PPP policy frameworks for a sample of 20
OECD countries. The study examined VFM practices and the extent to which institutional
frameworks influenced the scope and application of VFM principles in procurement and
bidder selection processes for PPP projects.
The survey identified design differences between countries, and found that most countries
(65% of the sample) limited policy application to national government and 35% included
state/provincial and local government within its application. However, there were significant
differences in policy design and Australia, for example, applies a uniform national policy but
permits subnational governments to modify policy to meet local requirements.
Countries implemented PPP policy under existing procurement law (45%) or as a specific
PPP law or policy (30%). The ex ante assessment of VFM was required in 55% of countries
and a further 25% required assessment above a prescribed value threshold. Only 15% of the
sample did not require VFM assessment. Nearly all countries applied standardised VFM
principles to all sectors of the economy. The PSC was used to calculate VFM in 85% of
countries. By comparison, traditional procurement is measured using cost benefit analysis
and lowest cost selection criteria and three countries conduct independent life cycle costing
of traditionally procured projects.
The investment decision precedes the choice of procurement method in 55% of countries
with a further 15% of the sample doing this in more than 50% of cases.
Conclusion
The findings confirm that most OECD countries possess a national PPP policy that in most
cases is integrated into a government procurement policy framework. VFM assessment is
conducted during either or both the investment and procurement stages of the project for 16
countries (80% of the sample) of which five set minimum transaction sizes. The PSC was
used to determine VFM in 17 countries (85% of the sample) which highlights the important
role played by the PSC in determining VFM outcomes in OECD countries.
3.3 Survey of National PPP Policies

A survey of 18 national and 2 subnational governments was conducted to identify
differences in PPP policy design for a random sample of countries. The sample was selected
to provide a representative group of countries in development terms and comprised seven
governments in the first stage or factor-driven level of development (GDP per capita
<USD2,000), two in transition to stage two (USD2-3,000, three in stage two efficiency-driven
economies (USD3-9,000), one in transition between stages two and three, and seven in
stage three innovation-driven economies (>USD17,000) (World Economic Forum 2012).
There was little to distinguish sub-national PPP policies from those applying at national level
although countries with a federal system of government are more likely to feature a
constitutional separation of powers between central and provincial governments for provision
of infrastructure. In Canada, Australia, India and the United States, the state or provincial
governments provide infrastructure with financial assistance from the national government.
The survey does suggest that stage three developed economies are more likely to employ
41
VFM principles in their PPP policies than countries at a lower level of development (see the
OECD 2011 VFM survey, para. 3.2 below).). Nevertheless, an omission of VFM criteria in
the policy framework does not mean that VFM principles are not embedded in the
procurement process during either selection of the procurement method and bidder selection,
or by a requirement for a competitive bid processes. The majority of countries that explicitly
refer to VFM criteria conduct the assessment at the feasibility stage of the project, 10%
assess VFM in the bid selection process and 15% conduct the assessment at both the
feasibility and post-bid stages.
On the question of explicit recognition of risk allocation in policy, 70% of the sample identify
risk allocation as a major driver of VFM and refer to it as a policy objective. However, only 50%
of the sample expressly assessed risk when calculating VFM. Some 15% of the sample did
not use risk transfer to calculate VFM and 15% made no mention of it. On the question of the
quantitative benchmarking of the procurement options, over half of the sample did not
require options analysis or a PSC. The countries employing a PSC were countries in more
advanced stages of development. The majority of countries in the sample used an output
specification (65%) while the policies of the remainder were silent on the matter. See
Appendix C.
Conclusion
The survey suggests a divergence in PPP policies between stage three (developed)
countries and those at other levels of development. Stage three economies typically employ
VFM principles in their policies both as an objective and as an assessment requirement, and
explicitly include risk transfer, a PSC/quantitative measurement, or an output specification in
their procurement decision-making. However, VFM can be achieved with a rigorous and well
governed PPP process, a two-stage (pre-qualification and tender) bid process, competitive
bidding and bid selection criteria that takes into account qualitative and quantitative factors.
The evidence for stage three economies suggests explicit recognition of VFM as a PPP
procurement objective and the adoption of an output specification, risk allocation practices,
and quantitative benchmarking enable PPP policies to better harness the benefits offered by
the PPP procurement method.
42
Part 4 Case Studies
Case Study 1. Victoria, Australia
The PPP program of the State of Victoria was implemented in 2001 and is managed by
Partnerships Victoria, a unit of the Commercial Division, Department of Treasury and
Finance. All PPP projects in Victoria are implemented under the Partnerships Victoria policy
that operates under the uniform national PPP policy implemented by the Australian
Government in 2008. While national policy applies throughout the country, states and
territories may modify the national guidelines to achieve a better interface with local
institutions, practices and market conditions.
Victoria has a long tradition of outsourcing, concessions and BOT contracts although major
projects initiated prior to 2001 are not technically PPP projects, they meet the general policy
principles contained in Partnerships Victoria policy. The policy is contained in a
comprehensive set of guidance materials without an enabling legislative framework. Victoria
has commissioned 22 PPP projects and has two additional projects in the bidding stage. The
project list spans a large number of different applications including corrective services,
bioscience and medical research facilities, hospitals, waste water reclamation and
processing services, court buildings, a convention centre, a rail and road transport
interchange complex, toll roads, schools, desalination plants, telecommunications and data
services. The Partnerships Victoria project list may be viewed at
http://www.partnerships.vic.gov.au/CA25708500035EB6/WebProjects?OpenView
Projects that conform to Partnerships Victoria Policy are referred to as PPPs and projects
delivered before the commencement of Partnerships Victoria or which involve alternative
implementation procedures are described as BOT contracts, franchises or concessions.
Victoria has undertaken a large number of non-conforming projects in the past 20 years
including the franchising of operations and management for the Melbourne metropolitan
public transport system and the construction and operation of the extensive Citylink toll road
network. BOT projects are also undertaken by statutory authorities and institutions but no
PPPs have been commissioned by local government.
Institutional Framework
The effectiveness of a government‟s PPP policy and delivery schedule is influenced by the
effectiveness of its institutions, both formal and informal. The following international
indicators provide comparable data about the efficacy of institutions for most nations but not
subnational governments. Victoria holds a similar credit rating to Australia and the national
institutional survey data serves as an appropriate proxy for Victoria‟s institutions.
The World Economic Forum 2013 Global Competitiveness Report, Geneva viewed on 3 April
2013 at www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
Transparency International 2010, Corruption Perceptions Index 2012, Berlin viewed on 29th
March 2013 at www.transparency.org/cpi2012/results
World Bank 2011, Worldwide Governance Survey, Washington and viewed on 17th January
2011 at www.govindicators.org
43
Policy Framework
Partnerships Victoria is a policy-based framework that operates in parallel with conventional

government procurement policy. The policy is issued by the Commercial Division of the
Department of Treasury and Finance which operates a specialist PPP unit to assist line
agencies with project selection, evaluation and implementation. Comprehensive guidance
has been issued for the program and periodic updating takes place to meet changes in the
operating environment and document the lessons learnt from both policy and project
implementation over time. As a subnational government, Victoria‟s PPP policy applies only
within the state of Victoria although Partnerships Victoria policy has been adopted in other
states and territories and serves as a best practice benchmark in many countries.
The foundations of Partnerships Victoria policy are the following guidelines:
 2001 Policy Overview

 2001 Practitioners Guide
 2001 Public Sector Comparator, Technical Note
 2001, 2008 Risk Allocation and Contractual Issues
 2003 Public Sector Comparator, Supplementary Technical Note
 2003 Use of Discount Rates in Partnerships Victoria Process
 2005 Standard Commercial Principles
 2005 Determining the Inflation Rate Advisory Note
 2005 Managing Interest Rate Risk Advisory Note
 2005 Disclosure and Management of Conflict of Interest Advisory Note
 2005 Interactive Tender Process Advisory Note
 2007 Public Disclosure Policy
 2008 Standard Commercial Principles
The PPP framework for Partnerships Victoria involves a number of well-defined steps in the
procurement process. The procurement evaluation process is initiated by the line agency
responsible for service delivery and involves identification of the service need, an appraisal
of procurement options, and the construction of a PSC. The project implementation stage
refers to the bidding and contractor selection process, negotiation of the contract and
contract close.
44
Figure 6 - Public Sector Comparator
and Value for Money Analysis
Business Case
for a Project
Preliminary Public Sector

Comparator
Procurement
Options
Analysis
Adjustment for risk retained &

transferred to contractor
Adjustment for
competitive neutrality
Public Sector
Comparator
Qualitative difference between

contractor proposals
Ascertain Best
Value for
Money
Integration of Partnerships Victoria and National PPP Policy
Prior to the introduction of the national PPP policy in 2008, Partnerships Victoria required
line agencies to approve PPP projects through a “gateway” system of eight well defined
steps (see Table 4). The PSC is developed for a reference project that is constructed from
the initial scoping exercise, the benefit cost analysis, the business case and procurement
options analysis. It is finalised during the project development stage and before the
distribution of expression of interest documentation to the bid market. When formal bids are
received at the end of the request for proposal process, a comparison is made with the PSC
and an assessment made of the qualitative attributes of each bid. Bidders are asked to
submit bids that meet the output specification, scope and risk allocation nominated in the
RFP. In reality, bids may not fully comply with the reference project: some may refuse to
accept the risks nominated and others may offer alternatives ways to meet the service
requirement. The assessment of VFM will need to consider these variations in bids and their
impact in quantitative as well as qualitative terms. The PSC may be modified after bids are
45
received if the agency believes that a significant component has been mispriced or omitted,
and when there has been significant change in underlying assumptions between the
commencement of the PSC and the receipt of formal bids (Partnerships Victoria 2003, pp.
15-16).
 2009 Statement
 2010 Partnerships Victoria Requirements
 Partnerships Victoria Annexures A1-A9.
Table 6 - Major Stages in Developing a Partnerships Victoria Project
Stage Description
Identify the service need
The Service Need Preliminary output specification
Consider wider long-term service needs
Options analysis
Option Appraisal
Preliminary work on risk identification, allocation and costing
Begin construction of the PSC
Business Case
Benefit cost analysis
Form the in-house project delivery team
Continue work on the PSC
Project Development
Develop commercial principles
Market consultation
Conduct an expression of interest (EOI)
Evaluate responses, develop short-list
Bidding Process
Design project brief and contract
Conduct request for tender (RfP)
Confirm VFM
Project Finalisation
Final approval to proceed
Contract Close Negotiate contract with preferred bidder
Contract Management Prepare brief and finalise monitoring arrangements
Source: Partnerships Victoria 2001c, Practitioners‟ Guidance, p.14
Partnerships Victoria guidance may be viewed on the Partnerships Victoria website at

www.partnerships.vic.gov.au under the Policy and Archives sections.
Value for Money Framework
Partnerships Victoria policy is based on VFM principles and employs the PSC to undertake
the quantitative analysis in both the procurement and the bidder selection stages of the
project. The policy provides comprehensive guidance to assist line agencies to undertake
options analysis, identify and measure risk and construct a life cycle costed and risk-
weighted PSC. For a PPP project to be approved, it is necessary for the line agency to
establish that the PPP option represents a better VFM proposition than government delivery
using a traditional model. This decision is not based solely on a quantitative comparison of a
bid with the PSC but takes into account both the quantitative and qualitative dimensions of
the bid. All things being equal, strong qualitative attributes may outweigh a more costly
procurement option for government.
The VFM assessment conducted for recent Partnerships Victoria projects is fully disclosed
on the agency‟s website www.partnerships.vic.gov.au (viewed on 10 April 2013).
46
Projects Delivered
Few international PPP programs have delivered PPPs in as many industry applications as
Partnerships Victoria which has delivered 22 PPP projects with a capital value of AUD11.5
billion since 2001 with a further AUD1.1 billion presently under tender (see Table XX). The
industry sectors include:
1. Toll roads and non-tolled motorways (2)

2. Biosciences research facilities
3. Water reclamation works (2)
4. Hospitals (4)
5. Medical research facilities
6. Corrective services (3)
7. Waste water and biosolids management (2)
8. Railway station and multi-modal transport node
9. Public facilities (showgrounds)
10. Convention centre
11. Schools
12. Judicial facilities
13. Desalination project
14. Emergency and security telecommunications and data storage (3).
Case studies for these projects and details about the PSC and VFM assessment are
available on the Partnership Victoria website (viewed 22 February 2013) at:
http://www.partnerships.vic.gov.au/CA25708500035EB6/WebProjects?OpenView
A review of the VFM determinations for the Victorian Desalination and Royal Children‟s
Hospital projects are set out at Appendices A and B respectively.
PPP contracts accounted for around 10% of Victoria‟s capital spending between 2001 and
2013. The majority of Partnerships Victoria projects are delivered within 24 months of
commencement, which reduces transaction costs and has assisted the development of a
competitive bid market.
Role of Agencies
Partnerships Victoria policy is managed by the Commercial Division, Department of Treasury

and Finance which operates as a PPP unit providing technical and other assistance to line
agencies for project evaluation and delivery. The Department also applies considerable
resources to the training of contract managers, conducting market briefings, preparing data
and completion reports for commissioned projects, and assisting line agencies to build their
own in-house capacity to deliver PPP projects under the Department‟s oversight.
47
Table 7 - Partnerships Victoria Projects 2001 - 2013
Project Sector
Biosciences Research Centre Agriculture Research
Ballarat North Water Reclamation Water Recycling
Ararat Prison Corrective Services
Barwon Water Biosolids Water Recycling
Peninsula Link Motorway
Campaspe Water Reclamation Water Recycling
Casey Community Hospital Health Services
Country Court of Victoria Judicial Services
Desalination Project Water Supply
Eastlink 39km Toll Road
Emergency Alerting System Communications
Melbourne Convention Centre Conventions
MM Radio Network Communications
Mobile Data Network Communications
Schools Project Education Services
Royal Melbourne Showgrounds Public Amenities
Southern Cross Station Complex Transport Interchange
New Royal Children‟s Hospital Health Services
Royal Women‟s Hospital Project Water Recycling
Victorian Correctional Facilities Corrective Services
VCCC Victorian Cancer Centre Health Services
Wodonga Wastewater Project Water Recycling
In Bidding Stage
Bendigo Hospital Health Services
Ravenhall Prison Project Corrective Services
th
Source: Partnerships Victoria 2013 Projects viewed on 16 February 2013 at
www.partnerships.vic.gov.au/CA25708500035EB6/WebProjects?OpenView
48
Case Study 2. South Africa
In 1997 South Africa commissioned its first build own transfer projects and in the following
years developed the most developed PPP market in Sub-Saharan Africa with strong
government support and a dedicated PPP unit providing technical and financial assistance to
line agencies. Since 1997, South Africa is a mature PPP market delivering 51 projects at
national and provincial level and more than 300 projects at local government level.
A number of institutional constraints impeded the early establishment of South Africa‟s PPP
policy including poor planning and financial constraints leading to affordability questions and
the scaling back of a large number of state-funded social infrastructure projects. A more
recent concern is the availability of project finance which has led to project implementation
delays, poor deal flow and a thinning of the PPP bid market. There was an increase in
momentum in 2010 and with strong political support and better infrastructure planning there
has been a significant increase in PPP activity with 26 projects in preparation, more than
were commissioned in the previous decade.
indicators provide comparable data about the efficacy of institutions for South Africa:
PPP Policy
PPP policy is regulated under the Public Finance Management Act 1999 and specifically, by
Treasury Regulation 16. This provides an enabling framework for PPPs that requires line
agency to undertake a feasibility study that examines the economic, financial and strategic
implications of the proposal. For approval purposes, a PPP must meet the following criteria:
 The procurement provides VFM

 The project is affordable to the institution
 The contract transfers technical, operational and financial risk to the contractor (Sub-
Section 16.4.1 (c) of the Treasury Regulations).
The policy requires an open and transparent pre-qualification procedure, a competitive

bidding process for the short-listed and pre-qualified contractors, and criteria for the
evaluation of bids to identify the bid that represents the best VFM. The policy recognises the
importance of innovation and entrepreneurialism with unsolicited bids that nevertheless must
be summited to a competitive bid process with preference arrangements.
49
Figure 7 - The Public Private Partnership Project Cycle
 Agency registers proposal with Treasury

Inception  Appointment of a project manager/officer
 Appoint transaction adviser
 Agency undertakes a feasibility study that includes:

o Needs assessment and analysis
o Options analysis
o Project due diligence
Feasibility Study o Value for Money assessment
o Economic valuation
o Procurement Plan
o Treasury approval
 Design of the procurement system

Procurement  Prepare bid documents and draft PPP agreement
Step 1
 Treasury approval
 Pre-qualification of EOI respondents

 Issue RFP with draft PPP agreement
 Bid evaluation (including measurement against
feasibility study and other bids
 Select preferred bidder
Procurement  Prepare value for money report
Stage 2
 Treasury approval
 Final negations with preferred bidder
 Finalise PPP agreement management plan
 Treasury Approval
 Contract Close
Source: Gqoli, S. 2011, Public Private Partnerships in South Africa, PPP Unit, Treasury of South Africa
Further Reading
Republic of South Africa 2001, Treasury Regulations, National Treasury, April.
Facility for Euro-Mediterranean Investment and Partnership 2011, Study on PPP Legal and
Financial Frameworks in the Mediterranean Partner Countries, Volume 3: Best Practices and
Lessons Learned: Selected Experiences from Other Countries, European Investment Bank,
Brussels.
50
South Africa has adopted a pragmatic approach to VFM determination by requiring a two
stage feasibility study of the proposal, the first is conducted by the agency as part of an
options analysis with an output specification and the second is carried out by external
consultants during the procurement process. The feasibility study serves as a benchmark for
bidder selection purposes. PPP policy requires a PPP to meet three requirements: transfer
of appropriate technical, operational and financial risks, VFM and affordability to the
procuring institution (National Treasury 2007). VFM is calculated using a quantitative
comparative analysis between a PPP procurement model and a costing for traditional
procurement. Under the 2007 policy guidance, this analysis is performed by specialist
contractors for government and is followed by the procurement decision. The project is
commissioned by line agencies with technical assistance and oversight provided by the PPP
unit in Treasury.
Governance is a feature of South Africa‟s PPP policy and Treasury approval is required at
four stages in the procurement process: inception, the feasibility study, procurement, and
implementation. The policy also recognises that PPPs in certain industries may need to be
assessed differently and has issued a number of practice notes designed to ensure
consistency across industry sectors.
Projects Delivered
PPPs have been delivered in a large number of industry applications including public
buildings for the delivery of administrative, health, social and educational services, tourism,
defence, housing, corrective services, rail transport, energy and water services. However,
challenges for continuing rollout of PPP projects include maintaining sufficient transaction
flow to retain depth in the bid market and assist retention of labour market skills in the sector,
capacity constraints experienced by line agencies, and the need for a PPP policy framework
designed specifically for local government bodies.
51
Case Study 3. The United Kingdom
The United Kingdom has been a leader in the development of PPP procurement following
the introduction of the PFI program in 1992. PPPs are delivered by national government
agencies, government authorities, and local government supported by long-standing
institutions and the decentralisation of investment decision-making.
indicators provide comparable data about the efficacy of institutions for United Kingdom:
PPP Policy
PPP policy is managed by Treasury although government agencies with large numbers of
transactions such as the Department of Health may issue policy guidance materials that
meet specific requirements for delivery of health services through the National Health
Service, ensure reduced transaction costs and expedite project delivery (Department of
Health 2008). PPP policy in the United Kingdom is evolutionary in nature with periodic
changes reflecting wide transactional experience. The United Kingdom PPP market has a
large volume of transactions contributing to a competitive bid market and a good supply of
project finance.
The United Kingdom PFI policy requires a formal process for the evaluation, measurement
and procurement of projects and central to this has been the use of a PSC for both the
investment and procurement stages. The policy places VFM at the centre of the policy
implementation process. Policy changes in 2011 simplify the PSC, bring forward the VFM
assessment from the full business case to the outline business case stage and make wider
use of standardised templates. The options analysis at the outline business case stage uses
a standard Excel-based financial model for quantitative comparative analysis of a shadow
PPP and a traditional procurement option. The changes also introduce new qualitative VFM
assessment procedures (HM Treasury 2006, 2011). A feature of the changes is a
standardised Excel model used to measure cost differences between PPP and traditional
procurement options. The model may be viewed with a user guide and qualitative
assessment guidance at www.hm-treasury.gov.uk/ppp_vfm_index.htm
The HM Treasury qualitative guidance is comprehensive and takes into account a wide
range of factors during the early stages of the project (the “soft” factors) and the qualitative
52
assessment for VFM during the procurement stage, that is, the selection of a preferred
bidder. The “soft” evaluation factors attempt to translate desirable outcomes into outputs and
include matters such as whether the risk transfer incentivises the contractor to balance
upfront investment costs and low life cycle costs, an important driver of a VFM outcome,
contract management (minimising interface issues and single point of contact), design
integration for smooth service delivery, effective management of resources, flexibility and
scope for service quality certainty with contractor incentives within the unitary payment
system (HM Treasury 2006, pp. 23-25; 32-33).
The Department of Health released VFM assessment guidance in 2008 specifically for
projects in the health sector operated by the National Health Service (Department of Health
2008). The guidance identifies assessment criteria for the investment and transition to
procurement stages of the project. The qualitative assessment factors include the following:
 Project level outputs (is a PPP option viable? Are service needs deliverable as
outputs?)
 Operational flexibility (a balance between operational flexibility and term of proposed
contract)
 Equity, efficiency and accountability (contractor experience/expertise, non-core
services, VFM achievable?)
 Risk management (private sector capacity to manage project risks, does payment
mechanism incentivise good management?)
 Innovation (scope, asset utilisation)
 Contract duration and residual value (strength of future demand for services)
 Incentives and monitoring (contract management principles)
 Life cycle costs (degree of integration of design, build and operation stages of project)
 Market interest (degree of likely competition)
 Other factors (achievability of timelines and expectations).
The United Kingdom‟s VFM assessment guidance was viewed on 23rd March 2013 at the
following website: www.hm-treasury.gov.uk/ppp_vfm_index.htm
Projects Delivered
HM Treasury has conducted the longest-running and largest PPP program since the
introduction of the Private Finance Initiative in the late 1990s. The central and local
governments commissioned 712 projects to 31 March 2012 of which 648 were operational
with an aggregate value of £55 billion. The majority of projects are delivering services in
education (166), health (118), transport (62), local government and communities (64), and
defence (46). Northern Ireland has commissioned 39 projects and the Scottish Government
85. These agencies also account for around 84% of project value.
53
Table 8 - PFI Transactional Experience
Departments Projects Value £
Health Services 118 11,614
Defence 46 9,132
Education 166 7,731
Transport 62 7,349
Scottish Government 85 5,693
Environment, Food & Rural Affairs 28 3,844
Communities & Local Government 64 2,241
Northern Ireland Executive 39 2,000
Work & Pensions 4 1,086
Revenue & Customs 8 862
Home Office 25 851
Justice 23 799
Welsh Assembly 24 543
Other 25 968
Totals 717 54,713
Source: H.M. Treasury 2006, Value for money Assessment Guidance, HMSO,
London, November viewed at hm-treasury.gov.uk/d/vfm_assessment guidance
th
0610060pt.pdf on 16 February 2012.
54
Case Study 4. Indonesia
Indonesia was one of the first Asian countries to introduce PPP policy with enabling
legislation for BOT transactions in electricity generation (1985, 1989), road (1987) and toll
road projects (1990). Supporting regulation providing for land acquisition for these purposes
was introduced in 1993 and BOTs were employed for the acquisition and development of
new port facilities, and the provision of services in power generation, water supplies and toll
roads in the years leading up to the 1997 Asian financial crises. Today, Indonesia has a
strong commitment to private provision of infrastructure with the government viewing its role
as an enabler rather than a provider of infrastructure for national development.
indicators provide comparable data about the efficacy of institutions for Indonesia:
PPP Policy
Indonesia‟s PPP policy is an evolutionary process designed to deliver on the nation‟s

infrastructure plan also known as the PPP Book. In the years between 1985 and the present,
the national government has enacted a number of laws and regulations designed to facilitate
PPPs projects. The legal framework includes support for projects in the form of rezoning
applications, development approvals, coordination with provincial infrastructure planning and
the provision of land. Additional support for projects is provided in the form of financial
contributions, tax incentives and guarantees. A more detailed explanation of Indonesia‟s
PPP policy framework is available in a presentation given by Dr. Ir. Bastary Pandji Indra,
MSP to an OECD forum on 8th February 2011 which was viewed on 26th February 2013 at
www.oecd.org/gov/regulatory-policy/47377646.pdf. The PPP implementation agenda is
based on the Five Year Mid-Term Development Plan which is managed by the National
Development Planning Agency in the Ministry of National Development and Planning
(Bappenas). The PPP Book was viewed on the Bappenas website on 24th February 2013 at
http://pkps.bappenas.go.id/index.php/publikasi/ppp-book.
PPPs are permitted for land transportation projects, roads and motorways, water supplies,
waste water management, telecommunications, energy generation and transmission and the
extraction, transmission and distribution of oil and natural gas (PR13/2010) (Republic of
Indonesia 2010). Policy requires a competitive tender with a minimum of three bidders but
there is no requirement for a case to be made for VFM. The responsible state agency is not
required to value transferred risk nor prepare a PSC (Husnullah, Suryanto and Susilawati
55
2010; Law PR13/2010).
Indonesian PPP policy does not require VFM assessment for PPP projects. 8 Many early
projects were implemented using direct negotiations with contractors without formal
procurement protocols which contributed to performance failures and contract renegotiations
in several toll road and water supply projects. Following PR13/2010, competition
requirements were strengthened in matters such as tariff determination, performance
benchmarking, bidding process and contract management. The bidding process is
competitive and selection criteria include an evaluation against the administrative and
technical requirements of the project and reasonableness of the price. The technical criteria
may include qualitative factors such as engineering design and performance standards while
the financial requirements require the contractor to furnish a financial forecast that includes
third party income but does not take into account design, construction, operational or
demand risk.
PR13/2010 states that the objectives of PPP policy is to improve the quantity, quality and
efficiency of infrastructure services through stronger competition, greater asset utilisation
and the introduction of user pay principles. Risk is referred to in the regulation but there is no
specific requirement for risk-weighted benchmarking for contractor selection purposes.
Projects Delivered
In the period 1990-2011 Indonesia approved 91 privately financed infrastructure projects of

which 32 were PPP projects with an aggregate value of USD7.9 billion. The majority of these
projects were for the delivery of land transport, telecommunications and energy projects
(World Bank-PPIAF 2013).
Figure 8 - Indonesia Public Private Partnership Policy
Potential PPP projects are selected by the Government Contracting Agency using multi-criteria
analysis. The evaluation criteria includes overall importance and priority, financial and economic
feasibility, socio-environmental impacts and the level of state support required. Priority projects are
listed in the Bappenas annual PPP Book.
Project implementation requires further feasibility studies, market soundings, assessment of project
risk and state financial support. The project proceeds to tender monitored by a governance
committee.
Source: ERIA 2011 ASEAN PPP at a Glance, Laws and Regulations
56
Figure 9 - Indonesia Public Private Partnership Law
Presidential Regulations
67/2005 Public and private collaboration principles.
13/2010 Amendments that tightened up PPP procurement practices and introduced competitive
bidding and formal bid evaluation methods
56/2011 Further amendments to 67/2005 and 13/2010 that prescribe the form and content of PPP
projects including risk transfer, the provision for annual audit of the consortium SPV, and new
protocols governing the market consultation and bid process.
Other Laws
17/2003 Government financial assistance to projects
2/2012 Land procurement and the public interest
PR36/2005 Land acquisition provisions
PR65/2006 Amendment of PR36/2005
PR42/2005 Committee for acceleration of the infrastructure priorities
PR12/2011 Amendments to PR42/2005
PR78/2010 Guarantee support for projects through Infrastructure Guarantee Fund
MoFR38/2006 Guidance for public agency risk management
MoFReg100/2009 Establishing of infrastructure finance vehicle
CMoEA4/2006 Evaluation methodology for PPP projects requiring State support
Source ERIA 2011 ASEAN PPP at a Glance, Laws and Regulations
57
Case Study 5. India
PPPs have been widely used for infrastructure procurement in India since the 1990s with
most transactions implemented at state government level. The Indian Government has
supported PPP procurement in India with enabling laws and policies, and following the issue
of a consultative draft in 2011, the Ministry of Finance issued a draft National Public Private
Partnership Policy in 2012. The Government supports PPP projects by providing funds for
project assessment (India Infrastructure Project Development Fund) and to meet viability
shortfalls with projects (Viability Gap Funding Scheme). Assistance is also made available to
government agencies to meet availability funding arrangements, long-term loans and
refinancing facilities which are important with projects delivering services in education, health
and corrective services.
indicators provide comparable data about the efficacy of institutions for India:
New National PPP Policy Framework
The new draft National Public Private Partnership policy has legislative form and provides a
comprehensive regulatory framework determined using an output specification and VFM
analysis. The policy provides different implementation processes for projects above and
below USD1 billion in size. Project below this amount may adopt a single stage request for
tender method employing open and competitive tendering. Projects that exceed that value
are required to use a multi-stage tender featuring competitive dialogue, an auction, and best
and final offer stages (Ministry of Finance 2012, pp. 12-13). In the case of exceptionally
complex projects, a pre-selection process based on technical competence is required for
short-listing the RFP invitees.
The new policy framework places emphasis on project evaluation criteria, the benchmarking
of procurement options, the bid process and governance. Unsolicited bids and not
encouraged by government and proposals will be offered to the market on a competitive bid
basis using the Swiss challenge selection process. If a market bid offers better VFM, the
original proponent will be offered an opportunity to resubmit with a better VFM submission. A
copy of the draft PPP policy is available on India‟s national PPP website at
http://164.100.52.24/draftpolicy.php viewed on 25th February 2013.
58
Most state governments have a PPP policy framework in place and agencies typically follow
a 2 stage technical and financial bidder selection process. With several exceptions, the
application of VFM principles is informal with technical assessment accounting for around 70%
of the weighting. This includes compliance with specification and qualitative factors such as
the contractor‟s experience and track record with similar work. The financial evaluation is a
benchmarking exercise in which a comparison is made of proposals and a reference project
based on traditional procurement mechanisms. Prior to 2006, state government PPPs
transferred most project risk to contractors and retained only political risk (change of law and
taxation). Since 2006, many states have introduced risk allocation criteria and VFM analysis
based on qualitative and quantitative assessment principles. The state of Gujarat has been a
leader in the development of subnational PPP policy introducing a comprehensive policy
framework in 1999 for private participation in economic and social infrastructure projects.
The policy prefers competitive bidding although there are alternative methods for private bids
for projects, including direct negotiation. Risk transfer is used and bidder selection employs
qualitative (or technical) and qualitative (or cost) evaluation criteria.
New national PPP policy adopts a formal VFM assessment process using a PSC and
qualitative assessment of proposals (Ministry of Finance 2011, p. 11-12; Ministry of Finance
2012, Appendix 4). VFM will be used to select the optimal procurement option and at the
conclusion of the bid process, to select a preferred contractor. The 2011 consultative draft
states that VFM will be conducted for every project regardless of fiscal support. The VFM
assessment will be based on the efficiency gains realised from private sector management
skills, integration of the design, construct and operate stages of the project, optimal risk
allocation, whole of life costing, innovation, outputs and a robust competitive process
(Ministry of Finance 2011, p. 12). The draft bill also takes into account revenue sharing.
The key elements of the VFM assessment include:
 An output specification
 A comparison of a benchmark constructed for a reference project based on the
lifecycle-costed and risk-adjusted model of the most efficient procurement alternative
available to the government. This may take the form of a PSC or a comparison of risk
adjusted costs of meeting the service requirements
 Asset utilisation
 A competitive bid process (Sub-sections 10,11).
PPP procurement is preferred for capital-intensive projects possessing economies of scale

over long service intervals and in which the cost of bringing the project to market may be
fully amortised.
Projects Delivered
India is considered a mature PPP market with standardised concession frameworks and
institutional support for state governments and line agencies undertaking projects in
telecommunications, water supply, energy and transport which are principally national
government responsibilities. India is also one of the largest PPP transaction markets in the
world and data indicates that between 2007 and 2012, USD225 billion was invested by the
59
private sector in infrastructure of which PPPs accounted for USD30 billion and 758 projects
(The Economist 2013). The majority of PPP and concession contracts were in for delivery of
transport, water and energy services (World Bank and PPIAF 2013).
Further Reading
60
Case Study 6. The Philippines
PPP Policy
The Philippines has considerable experience with private participation in infrastructure

delivery under the Build Operate Transfer (BOT) Law introduced in 1993 (R.A. 6957/1993)
recently amended (R.A. 7718/2012).
indicators provide comparable data about the efficacy of institutions for Philippines:
The BOT Law
The BOT law as amended provides a comprehensive project implementation process but
does not require VFM assessment. The characteristics of the new policy framework are as
follows:
 Establishment of a new PPP Centre to coordinate and monitor PPP projects and
continuing use of PPP units within each agency to undertake project identification,
selection and contract management activities
 A widening of the types of infrastructure to which the policy applies to include power
plants, ports, airports, canals, dams, hydroelectricity projects, water supplies,
irrigation, telecommunications, railways, land transport systems, land reclamation,
industrial estates and townships, housing, public buildings, tourism projects, public
markets, warehouses, slaughterhouses, solids waste management, information
technology and database networks, health and education facilities, sewerage,
drainage, dredging, and other projects as authorised by an agency or local
government authority (Section 2.2)
 Approval levels are based on project value with projects less than PhP300 mill.
requiring single stage approval (<Php200 million for municipal projects) and projects
above that value requiring a two stage approval process (Section 2.2)
 A prescriptive procurement process that provides for the bid process, instructions to
bidders, contract documentation, and commercial terms (Rule 5)
 Bidders are required to undertake a two stage bidding process involving pre-
qualification against specific criteria (legal requirements, contractor track record, the
experience of key personnel, and capacity to finance the project) (Section 5.2)
 The second stage requires the issue of invitations to a short-list of qualifying bidders
to submit a proposal (Section 5.2)
61
 Bidders are required to submit technical proposals evaluated against criteria, which
include technical soundness, operational feasibility, compliance with environmental
standards, and financial proposals.
All bidding for PPPs is conducted on a competitive basis unless the agency is left with a
single bidder in which case direct negotiation is permitted. Special rules apply to unsolicited
bids (Sections 9.2 and 10.1). All projects are monitored by the PPP Centre with ex post
contract management conducted by line agencies.
The BOT Law is silent about risk transfer, the PSC or VFM. Nevertheless, the evaluation
process requires a two stage qualification and selection process against both qualitative and
qualitative requirements. For the pre-qualification, this includes:
 Compliance with licencing, local ownership and unincorporated consortium bids

 The experience of the consortium members, the project manager and key personnel
 Financial capability to meet the lifecycle requirements of the project including the
minimum equity subscription prescribed by the agency and a letter of standing from
an approved debt provider.
The bid evaluation takes into account the basic engineering design of the bid, construction
methods, the operational plan, compliance with environmental standards, the proposed
financing of construction and operation of the service, and the cost to government of lifecycle
service delivery including the value of financial assistance that government may provide.
Projects Delivered
In the period 1990 to 2011 the Philippines Government approved 111 privately financed
infrastructure projects of which 49 were PPP projects, accounting for 37% of all
infrastructure investment by value. PPP projects are presently underway in energy
management, automated transport ticketing systems, expressways, extension to urban rail
services, hospital and school projects.
62
Glossary
Agency, Line Agency
The government department or instrumentality responsible for delivering the PPP project or
delivering services in a particular discipline such as defence, health or educational services.
The term is generally used to describe actors in the business of government and delivery of
public services.
Complete Contract
A contract that anticipates each and all of the circumstances that will arise under the term of
the contract. These contracts are typically used for short-term construction services and
leave little flexibility to deal with change in scope, specification or the operating environment.
Contractor
The private firm or a consortium of firms participating in a PPP contract.
Incomplete Contract
A contract that does not attempt to address all of the circumstances that will arise over the
life of the contract. Incomplete contracts are typically for long service intervals and contain
mechanisms for dealing with disputes (alternative dispute resolution) and changes in the
operating environment (real options).
Input Specification
The detailed requirements to be delivered by the contractor under a contract including the
materials and work to be performed under the contract.
Output Specification
The services that government is seeking to procure and the performance levels required for
each of those services.
Preferred Bidder
The contractor selected from the bid process that offers value for money. The contractor
then enters into a negotiating period with government to finalise the contract or enter into
competitive dialogue with a view to contract close.
Public Sector Comparator
A life-cycle costed and risk-weighted shadow bid constructed for the most expedient
conventional method of procurement.
Qualitative Analysis
An assessment of the non-financial benefits and costs of a procurement solution. Matters

taken into account may include service quality, the timeliness of delivery and the contractor‟s
track record and experience.
63
Quantitative Analysis
The assessment of aggregate cost for a project that is based on measurable assumptions
and data.
Shadow Bid
A theoretical bid constructed for a private firm‟s bid for a project. It is constructed using
generic assumptions about variables such as risk transfer.
Value for Money
A term used to assess whether or not an organisation has obtained the maximum benefit
from its procurement activities. It takes into account cost and other important outcomes such
as quality, fitness for purpose, timeliness and utility which, when taken together, constitute
the best deal for government.
64
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70
Appendix A
The Value for money Assessment of PPP Projects
Case Study: The Victorian Desalination Project, Australia
The Partnerships Victoria framework seeks to identify and implement efficient infrastructure
delivery (VFM). The concept of VFM is not a simple selection of the cheapest solution. VFM
analysis requires consideration of the true value of each method of delivery whether by the
State or the Private Sector. The analysis considered quantifiable elements (i.e. items that
can be quantified in dollar terms) as well as subjective or qualitative elements.
Public Sector Comparator
The PSC is an estimate of the risk-adjusted, whole-of-life cost of the project if delivered by
the State. The PSC is developed according to the same output specifications included in the
Project Brief and assumes the most likely and efficient form of conventional (i.e. non-PPP)
delivery by the state
The PSC is expressed in terms of the net present cost to the State, calculated using
discounted cash flow analysis and seeks to take full account of the costs and risks of that
method of procurement. The PSC includes amounts to cover both the design and
construction costs and the maintenance, operation and facilities management costs during
the Project Term.
The net present cost of the service payments to be paid to AquaSure is compared with the
PSC. If it is lower than the PSC, it indicates that the bid represents VFM.
Table 9 - Public Sector Comparator

Components of the Public Sector Comparator Net Present Cost $m
Hypothetical, risk-adjusted estimate of the most efficient, (150 GL output per annum)
likely and achievable form of public sector delivery
Capital Cost 3,272
Operating and asset Replacement Costs (27 years) 2,602
Raw PSC 5,874
Transferred Risk 782
Competitive Neutrality 0
PSC 6,656
Note the assumptions used to calculate the PSC include:
 All numbers are expressed in net present values as at 30 June 2009
 Discount rate of 7.3% (real) to reflect the nature of the project
 Discounting basis: annual, period end
 The transferred risk calculation of $782 million refers only to the risks transferred to the
private sector under the Partnerships Victoria arrangements (i.e. those risks that the State
would otherwise assume) and excludes the State‟s estimates of its retained risks
 The competitive neutrality adjustment removes any net competitive advantages that accrue to
a government business by virtue of its public ownership
71
Table 10 - Quantitative Value for Money Comparison
Public Sector lComparator AquaSure‟s Winning Bid Saving

(Net Present Cost) (Net Present Cost)
$6,656 million $5,720 million 14.1%
The $5,720 million includes design, construction costs, lifecycle, 100% renewable energy
credits and chemicals (over the 30 year and 1 month contract). The cost takes into account
and provides for the fact that the Project is fully privately financed, and assumes annual
output of 150 GL of desalinated water per annum during the operating period and covers all
components of the project i.e. the plant with marine intake and outlet tunnels, the 84km
Transfer Pipeline and Booster Pump station, the 87km underground power supply and other
works required under the contract.
The $5,720 million NPC represents a cost of $1.37 per kilolitre, in June 2009 dollars, on the
assumption that the plant operates to produce its required capacity of 150 GL per annum for
27.75 years.
The Project Deed requires the project assets to be handed back to the State at the end of
the 30 year and 1 month Project Term, for no additional payment by the State. In addition,
on handover, the project assets are required to have a specified residual life in order to
ensure that they are in good working condition. Many of the project assets are to have a
design life longer than the Project Term, such as tunnels and pipelines which have a 100
year design life and the desalination plant building which has a 50 year design life. If the
cost of running the plant and other project assets at 150 GL per annum for 50 year period is
considered (20 years after handover to the State) the real cost of water per kilolitre of $1.37
has been estimated to reduce by around 40%.
Additional value for Money Benefits
The net present cost of the successful AquaSure proposal is approximately 14% below the
PSC, which is a key indicator that the Project delivers VFM for the State. However, this
comparison does not recognise a range of other significant VFM elements provided by
AquaSure‟s Final Proposal including:
 The certainty of the long term energy and renewable energy offsets;
 The certainty of the use of almost identical technology to that successfully deployed in
other desalination plants constructed and operated by members of the AquaSure
consortium;
 The design amenity delivered by the ground breaking design, with full integration of the
plant into the local coastal environment including a living “green” roof on the process
plant, recreational trails, wetlands and one of the largest ecological restoration programs
with more than 150,000 tress and millions of plants;
 A high speed communication cable along the entire length of the Transfer Pipeline,
which will facilitate broadband access to the region; and
 The benefit of the underground power solution delivering visual amenity to properties
crossed by the power supply
72
Appendix B
The Value for Money Assessment of PPP Projects
Case Study: The Royal Children’s Hospital Project, Melbourne, Australia
The Partnerships State‟s Partnerships Victoria policy seeks to identify and implement the
most efficient form of infrastructure delivery. The concept of VFM goes well beyond the
selection of the cheapest solution but instead, focuses on the true value of each delivery
option. This involves a careful analysis of State managed delivery options and each
proposal received from the private sector. The analysis considered quantifiable elements
(i.e. items that can be quantified in dollar terms) as well as subjective and qualitative
considerations.
Public Sector Comparator (PSC)
The PSC is an estimate of the risk-adjusted cost of the project if delivered by the State. The
PSC is developed according to the same output specifications included in the Project Brief
and assumes the most likely and efficient form of conventional (i.e. non-PPP) delivery by the
State.
The PSC is expressed in terms of the net present cost to the State, calculated by a
discounted cash flow analysis and takes full account of the costs and risks that would be
encountered by following the style of procurement. The PSC includes amounts to cover
both the construction costs, maintenance and facilities management costs during the 25 year
operating phase of the project.
The net present cost (NPC) of the service payments to be paid to CHP is compared with the
PSC. If it is lower than the PSC, it is an indication that the bid represents VFM.
73
Public Sector Comparator (PSC) Net Present Cost $m
Hypothetical, risk-adjusted estimate of the most efficient, $m

likely and achievable form of public sector delivery
Capital Cost 683
Operating Costs (25 years) 225
Other Costs 0
Raw PSC 908
Transferred Risk 107
Competitive Neutrality 1
PSC $1,016m
Note the assumptions used to formulate the PSC include:
 The budgeted $850m nominal capital cost of the project is included within the capital costs
and transferred risks figures stated in NPC terms above (as are the capital costs of the
expanded MCRI and The University of Melbourne research and educational facilities)
 A discount rate of 5.5% real
 The base date of the PSC calculation is 30 June 2007
 The transferred risk calculation of $107m refers only to the risks transferred to the private
sector under the Partnerships Victoria arrangements (i.e. those risks that the State would
otherwise assume) and excludes the State‟s estimates of its retained risks
 The competitive neutrality adjustment removes any net competitive advantages that
accrue to a government business by virtue of its public ownership
Table 12 - Quantitative Value for Money Comparison Between Public and Private Sector
Delivery
Public Sector lComparator AquaSure‟s Winning Bid Saving
(Net Present Cost) (Net Present Cost)
$1,016 million $946 million 6.9%
It should be noted that the original budget capital commitment of $850m (nominal) is not
directly comparable with the total project cost of $946m (NPC). The $946m includes both
construction costs and facilities maintenance costs (over 25 years). Moreover, the
construction costs included within the $946m incorporate additional research and
educational facilities that will be paid for by MCRI and The University of Melbourne.
Additional Value for Money Benefits
The net present cost of the project is approximately 7% below the PSC, which is a key
indicator that the project delivers VFM for the State. However, this comparison does not
recognise a range of other significant VFM benefits provided by the CHP proposal.
These additional benefits include:
 Enhanced amenity from expanded food and retail operations, gymnasium, hotel,
childcare facilities, consulting suites. These additional facilities will also be transferred
back to the State for nil consideration at the expiry of the Project;
74
 Significantly larger gross building area for the hospital compared with that assumed by
the State in its Reference Project, including additional shell space;
 Approximately $35m in underwritten donations to the RCH Foundation;
 World class, „iconic‟ design (both exterior façade and interior design);
 Capital and recurrent funding for the 25 year operating phase to be used to fund
extensive distraction / entertainment programs such as the feature aquarium, ongoing
programs with Melbourne Zoo, Science works, Melbourne Aquarium and a children‟s
cinema;
 A significant annual guaranteed payment to RCH from the retail precinct plus upside
sharing if actual retail performance exceeds forecast; and
 Various Environmentally Sustainable Development (ESD) initiatives that go significantly
beyond the State‟s minimum requirements as set out in the Project Brief (and assumed
in the Reference Project ) including CO2 reduction initiatives, 2.8MW trigeneration plant
providing base load electricity, heating and cooling and a blackwater treatment plant that
will provide approximately 100,000 litres of water per day in excess of that required for
the hospital that may be used for irrigation on Royal Park and Melbourne Zoo
75
Appendix C
Canada India Indonesia
Name of policy reviewed Draft National PPP Policy 2012 Regulation of the President of
http://164.100.52.24/pdf/draftnati the Republic of Indonesia
onalppppolicy.pdf number 67 year 2005
How is VFM defined VfM is the process of developing VfM is the difference between No definition provided
and comparing total project the PSC and the adjusted
costs, measured at the same shadow bid (PPP).
point in time under the 2 delivery
modes: traditional procurement
and alternative procurement.
Value for money exists when risk
adjusted costs of PPP are less
than risk adjusted costs of
traditional procurement
When in the VFM Investment stage (business Investment stage: PPP Not known
determination take place case) identification which includes
in the project initiation strategic planning, project pre-
process feasibility analysis, VfM analysis,
PPP suitability checks and
internal clearances to proceed
with PPP
Does PPP Policy provide General guideline only The policy outlines the general Limited to the process of
detailed guidance for process selecting and engaging a private
government agencies? contractor
Does the policy require PSC required PSC required No

preparation of a
comparative benchmark
or a public sector
comparator (PSC)?
If a PSC is required, how Reference made to net present Risk weighted lifecycle costed Not known
is it defined or what needs value model of traditional procurement
to be done? (only want
reference to the definition
and instruction)
Transaction threshold in $40M is threshold but some PPP Not stated Not stated
local currency or USD? have been as little as $10M
Is a VFM test required for No differentiation No differentiation No. The law defined broadly
specific industry groups defined infrastructure
such as water, electricity,
public transport, public
buildings, roads and toll
roads, health or education
projects? What are the
exemptions?
Oversight or governance? Governance protocols Governance protocols Not known
Does VFM take into Yes Yes No

account risk transfer?
Any mention in the policy No No No

of competitive neutrality?
Does policy mention an Yes Yes No

output specification?
Does policy mention a Yes - PPP Canada (Crown Yes, PPP Cell in the Department No specific reference
PPP unit (of experienced Corporation) of Economics Affairs
practitioners)?
76
Ireland Kenya Kosovo
Name of policy reviewed Guidelines for the Provision of PPP Bill 2012 Law on PPP and Concessions in
Infrastructure and capital http://www.kenyalaw.org/klr/filea Infrastructure
investments through PPP 2006 dmin/pdfdownloads/bills/2012/Th
http://www.environ.ie/en/Publicat e_Public_Private_Partnership
ions/DevelopmentandHousing/P
PP/FileDownLoad,17003,en.doc
How is VFM defined The objective of the VfM is to The undertaking of a public VfM is calculated on basis of
ensure that using a PPP function of the contracting actual net value expected from
compares favourably with the authority by a private party under the project related to
alternative cost of using a PPP results in a net benefit comparative public sector
traditional procurement accruing to that contracting procurement. VfM shall refer to
authority defined in terms of the price/cost of goods and
cost, price, quality, quantity, services and the quality,
timeliness or risk transfer effectiveness and timeliness of
delivery
When in the VFM Investment and procurement Early stage feasibility study Procurement stage
determination take place stages
in the project initiation
process
Does PPP Policy provide Yes No Yes

detailed guidance for
government agencies?
Does the policy require Public sector benchmark No Yes
preparation of a
or a public sector
comparator (PSC)?
If a PSC is required, how Four VfM tests required at Not stated Defined for VFM purposes
is it defined or what needs various stages of the project
and instruction)
Transaction threshold in Applies to projects in excess of No threshold stated No threshold stated

local currency or USD? €20 million (2006)
Is a VFM test required for All infrastructure Infrastructure No

specific industry groups
exemptions?
Oversight or governance? Not Stated Governance Not stated

Does VFM take into Yes No details provided Yes
Any mention in the policy Yes No No

Does policy mention an Yes No No
Does policy mention a Central PPP Unit A dedicated PPP Committee PPP Unit operating under the
PPP unit (of experienced PPP Inter-Ministerial Steering
practitioners)? Committee
77
Malawi Malta Mauritius
Name of policy reviewed PPP Bill 2010 A guide to PPP Procurement PPP Act 2004
http://www.malawilii.org/files/mw/ 2005 http://www.commonlii.org/mu/legi
legislation/bill/2010/3/public_priv http://finance.gov.mt/image.aspx s/num_act/ppa2004295.doc
ate_partnership_bill_2010_final_ ?site=MFIN&ref=PPP Info
copy__84896.pdf Booklet
How is VFM defined No definition but reference to Does the best bid propose a Net benefit to the consumers in
VfM better financial outcome for the terms of cost, delivery, price,
public sector for the services at quality, quantity or risk transfer,
the contracted standard than or a combination thereof.
would have been achievable
under more traditional
procurement methods?
When in the VFM Investment stage Investment stage Investment stage

determination take place
process
Does PPP Policy provide No Yes No it outlines the process

Does the policy require No PSC No, general outline only

preparation of a
or a public sector
comparator (PSC)?
If a PSC is required, how It is assessed and used

is it defined or what needs throughout the procurement
to be done? (only want process
and instruction)
Transaction threshold in No threshold stated No threshold stated No threshold stated

local currency or USD?
Is a VFM test required for VfM applies to all PPPs and is VfM to be used in all PPP No differentiation
specific industry groups required for economic and social projects.
such as water, electricity, infrastructure projects
exemptions?
Oversight or governance? Not stated Not stated Not stated
Does VFM take into Yes Yes Not stated


Does policy mention an No Yes No

Does policy mention a Yes, PPP Commission Yes, PPP unit within the Ministry Yes, PPP Unit within the Ministry
PPP unit (of experienced of Finance
practitioners)?
78
Northern Ireland Ontario Papua New Guinea
Name of policy reviewed Northern Ireland Treasury's VfM Assessing Value for Money - A National Public Private
Assessment for PFI (Private Guide to Infrastructure Ontario's Partnership Policy 2008
Finance Initiative) 2008 Methodology 2007 http://www.ipbc.com.pg/PDF_file
http://www.dh.gov.uk/prod_cons www.infrastructureontario.ca/Wo s/PPP%20Policy%20Final%20-
um_dh/groups/dh_digitalassets/ rkArea/DownloadAsset.aspx %2009%20Dec%2008.pdf
@dh/@en/documents/digitalass
et/dh_091228.pdf
How is VFM defined An assessment of whether PFI is VfM is the process of developing Four Principles - allocation of
likely to provide VFM compared and comparing the difference risk; maximised benefits of
with conventional procurement, between the estimated total private sector enterprise, risk
a test of the competitive interest project costs under each model management, capital, flexibility
in the project and the market (PSC and the adjusted shadow and innovation; whole-of-life
capacity to bid and deliver the bid). If the ASB is less than the costs
project effectively PSC there is positive VfM and
procurement of projects using
AFP
When in the VFM Investment stage Procurement stage (RfP and bid Investment stage
determination take place evaluation)
process
Does PPP Policy provide Yes Yes Outlines only

Does the policy require Yes PSC required Yes

preparation of a
or a public sector
comparator (PSC)?
If a PSC is required, how VFM analysis between shadow Comparison to a tradition model Not known
is it defined or what needs PPP bid and PSC of procurement
and instruction)
Transaction threshold in £20m Not stated. Ancillary costs Minimum PGK 50m
local currency or USD? C$14m, under ASB C$2m
Is a VFM test required for All social and economic All infrastructure Applies to all infrastructure
specific industry groups infrastructure projects with a cost of minimum
such as water, electricity, PGK 50 M
exemptions?
Does VFM take into Yes Yes Yes

Any mention in the policy No Yes No

Does policy mention an Yes No Yes

Does policy mention a Treasury Department Infrastructure Ontario PPP Taskforce led by
PPP unit (of experienced Department of National Planning
practitioners)? & Monitoring
79
Pakistan Philippines Local Government Singapore
Name of policy reviewed Policy on Public Private Developing Public-Private PPP Handbook 2012
Partnerships Private Partnerships in Local http://app.mof.gov.sg/data/cmsr
Participation in Providing More Infrastructure and Development esource/PPP/Public%20Private
and Better Public Services Projects 2012 %20Partnership%20Handbook
through Improved Infrastructure http://ppp.gov.ph/?page_id=577 %20.pdf
2007 9
How is VFM defined No definition No definition provided No definition given. Refers to
making optimal use of the public
and private sectors expertise,
resources and innovation to
meet public needs effectively
and efficiently
expertise, resources and
innovation to meet public needs
effectively and efficiently
When in the VFM Investment stage Not known Investment stage
determination take place in
the project initiation
process
Does PPP Policy provide No, it outlines the process and Yes but the document needs to It provides guidelines on how to
detailed guidance for the purpose of the policy be read in conjunction with the manage the process and
government agencies? Philippine BOT Law R.A.7718 relationship both during the
and its Implementing Rules & tender process and once the
Regulations contract is underway
Does the policy require No Not stated Not stated
preparation of a
comparative benchmark or
a public sector comparator
(PSC)?
If a PSC is required, how

is it defined or what needs
and instruction)
Transaction threshold in not stated Not stated $500 million or projects that are
local currency or USD? more complex in nature and
subject to staged approvals for
concept, design and
implementation
Is a VFM test required for Applied to PPP transport and Not stated VfM is discussed in the context
specific industry groups logistics, urban transport, of risk transfer and proceeding
such as water, electricity, municipal services and small with a PPP if it can deliver better
public transport, public scale energy projects VfM than conventional
buildings, roads and toll procurement
exemptions?
Does VFM take into Not stated Not stated Yes

Any mention in the policy No No Refers once to fair and

of competitive neutrality? transparent manner removing
competitive advantage
Does policy mention an No No Yes
Does policy mention a Infrastructure Project Public-Private Partnerships Yes, Centre for Public Project
PPP unit (of experienced Development Facility (IPDF) Centre Management (CP2M)
practitioners)? under Ministry of Finance and a
Taskforce to advise on overall
PPP policy reform
80
South Africa Tanzania Zambia
Name of policy reviewed Treasury Regulation 16 PPP Act regulations 2011 The PPP Act 2009
http://www.tanzania.go.tz/pdf/12 http://www.zambialii.org/files/zm/
3456.pdf legislation/act/2009/14/ppa2009
295.pdf
How is VFM defined How much it will cost for the No definition provided Net benefit to agency or
institution to provide consumer in terms of cost, price,
infrastructure and services quality, quantity and risk transfer
compared to the costs of a PPP.
If the comparison shows that a
PPP is more cost-effective, the
difference in cost between the
two scenarios is known as VFM
When in the VFM Investment stage Investment stage Investment stage
determination take place in
the project initiation
process
Does PPP Policy provide No, it outlines the key issues for Yes Yes
detailed guidance for justifying as a PPP
Does the policy require Not stated Yes Not stated

preparation of a
comparative benchmark or
a public sector comparator
(PSC)?
If a PSC is required, how Contained in the feasibility Not stated

is it defined or what needs report
and instruction)
Transaction threshold in Not stated Not stated Not stated

local currency or USD?
Is a VFM test required for VfM required for all PPPs All industries VFM test applied to all PPP
specific industry groups transactions
exemptions?
Oversight or governance? Not stated Agency monitoring and reporting Not stated
Does VFM take into Not stated Not stated Yes


Does policy mention an Yes No No

Does policy mention a National Treasury PPP Unit Coordination and Finance Units PPP unit and Council and
PPP unit (of experienced provide this role Technical Committee
practitioners)?
81
Appendix D
Figure 10 - Procurement Procedures
A procurement method for generic and homogenous goods and service with
minimal complexity
Open 1. All interested parties submit a bid without pre-qualification
Method 2. The contracting principal has discretion to select the successful bidder
3. Negotiations between the principal and contractors is not permitted
A bidding process used to select a contractor that generally precludes

negotiations
Restricted 1. An open invitation for an expression of interest (effectively a pre-qualification
Method procedure)
2. A short-list of bidders prepared and invited to submit a bid
3. No opportunity to negotiate prior to bidder selection
A bidding process used to select a contractor that optimises competitive tension

1. An open invitation for an expression of interest (effectively a pre-qualification
Unrestricted
procedure)
Competitive
2. A short-list of bidders prepared and invited to submit a bid
Bid Method
3. Initial assessment than a call to the short-list for best and final offers
4. Final assessment, selection and negotiations with successful contractor
A method commonly used with complex projects and BOT/PPP transactions. It

permits direct negotiations while maintaining competitive tension. Suitable for
technically challenging projects
1. Interested bidders are invited to an expression of interest/pre-qualification
procedure
Competitive 2. Short-listed pre-qualified bidders are invited to submit a bid
Dialogue 3. A structured program of meetings during which bidders are invited to meet
with the principal to develop a procurement solution that best meets the
project requirements
4. Short-listing of bidders for a best and final offer procedure based on the
negotiated solution
5. Principal selects the bid that best meets its service requirements
A bid process used when a limited number of bidders or a single company

possesses exclusive technology or engineering know-how that best meets the
Direct
principal‟s requirements
Negotiation
1. Optional expression of interest/pre-qualification of the bid
2. Direct negotiation with the best pre-qualified contractor to agree to a contract
82
Appendix E
PSC Calculation Year 0 1 2 Table314 – Public4Sector Comparator
5 6 7 8 9 10 11 12
Currency Unit 000s
Base or Raw PSC
A. Direct Capital Costs
Project design 500
Land acquisition and development 5,500
D&C contract price 22,500 53,813 55,158 24,230
Payment to consultants 333 342 350
Acquisition of plant and equipment 5,000 15,375 31,519
Capital improvements 16,971
Whole life capital expenditure 15,085 16,245 17,494
Forward sale of surplus land
33,333 69,529 87,027 24,230 32,057 16,245 17,494
B. Maintenance and repairs
Maintenance and repairs 4,435 4,590 4,751 4,917 5,089 5,267 5,452 5,642 5,840 6,044
Subtotal 4,435 4,590 4,751 4,917 5,089 5,267 5,452 5,642 5,840 6,044
C. Direct Operating Costs

Materials 1,615 1,656 1,697 1,740 1,783 1,828 1,873 1,920 1,968 2,017
Wages and salaries 5,544 5,738 5,938 6,146 6,361 6,584 6,814 7,053 7,300 7,555
Other employee costs 1,109 1,148 1,188 1,229 1,272 1,317 1,363 1,411 1,460 1,511
Energy 2,154 2,208 2,263 2,319 2,377 2,437 2,498 2,560 2,624 2,690
Direct maintenance 1,077 1,104 1,131 1,160 1,189 1,218 1,249 1,280 1,312 1,345
Insurance 1,346 1,380 1,414 1,450 1,486 1,523 1,561 1,600 1,640 1,681
12,844 13,232 13,632 14,044 14,469 14,907 15,358 15,824 16,304 16,800
D. Indirect Costs
Construction overheads 1,000 1,025 1,051
Operating overheads 215 221 226 232 238 244 250 256 262 269
Administrative overheads 554 574 594 615 636 658 681 705 730 756
Indirect cost allocation 108 110 113 116 119 122 125 128 131 134
Subtotal 1,000 1,025 1,051 877 905 933 963 993 1,024 1,056 1,089 1,124 1,159
Less Anticipated Third Party Revenue 5,384 5,519 5,657 5,798 5,943 6,092 6,244 6,400 6,560 6,724
Total Base or Raw PSC (A+B+C+D) 34,333 70,554 88,077 37,002 13,208 45,715 14,125 14,607 31,351 15,622 16,155 34,202 17,278
Source Partnerships Victoria 2001, Public Sector Comparator, Government of Victoria, Melbourne, Table C114, pp. 96-97.
83
PSC Calculation Year 0 1 2 3 4 5 6 7 8 9 10 11 12
Land tax 10 10 10 11 11 11 11 12 12 12 13 13
Local government rates 1,386 1,421 1,456 1,493 1,530 1,568 1,608 1,648 1,689 1,731 1`774 1,819
Stamp duty 284
Payroll tax exemption 388 402 416 430 445 461 477 494 511 529
Subtotal 284 1,396 1,431 1,855 1,905 1,957 2,010 2,064 2,120 2,178 2,237 2,298 2,361
Risk Allocated to Contractor

Cost overrun 4,331 10,359 10,618 4,664
Time overrun 2,191 5,240 5,371 2,359
Service maintenance 846 1,734 2,369 911
Upgrade cost 7,893
Contingency factor 465 1,112 1,140 501
Subtotal 4,796 22,400 18,731 12,905 3,270
Operating risk 2,043 2,094 2,146 2,200 2,255 2,311 2,369 2,428 2,489 2,551
Contingency factor 438 449 460 471 483 495 508 520 533 547
Third-party revenue risk 135 138 141 145 149 152 156 160 164 168
Performance risk 1,615 1,656 1,697 1,740 1,783 1,828 1,873 1,920 1,968 2,017
Maintenance risk 877 899 921 944 968 992 1,017 1,042 1,068 1,095
Maintenance contingency factor 178 182 187 191 196 201 206 211 216 222
Industrial relations risk 1,077 1,104 1,131 1,160 1,189 1,218 1,249 1,280 1,312 1,345
Technology risk 2,261 3,477 5,940 2,435 3,744 6,397 2,623 4,032 6,888 2,824
Subtotal 4,796 22,400 18,731 21,528 13,268 12,624 9,286 10,767 13,594 10,000 11,594 14,640 10,769
Retained Risk
Regulatory risk 171 350 718 1,104 1,131 1,160 1,189 1,218 1,249 1,280 1,312 1,345
Maintenance risk 601 616 632 647 664 680 697 715 732 751
Subtotal 171 350 1,319 1,720 1,763 1,807 1,852 1,899 1,946 19,958 2,045 2,096
Total PSC Cash Flows 39,413 94,521 108,590 61,705 30,101 62,059 27,228 29,290 48,964 29,746 31,982 53,184 32,504
Discount factor (annual) 1.00 1.09 1.18 1.28 1.39 1.51 1.65 1.79 1.94 2.11 2.29 2.49 2.71
Discounted cash flows 39,413 86,996 91,988 48,109 21,600 40,988 16,551 16,388 25,214 14,098 13,951 21,353 12,011
NPV 448,661
Source Partnerships Victoria 2001, Public Sector Comparator, Government of Victoria, Melbourne, Table C114, pp. 96-97.
84
Endnotes
1
In contemporary practice, the term PPP has no precise meaning and is used to describe a number of
procurement forms including operations and maintenance contracts, management or service contracts (outsourcing
contracts), the BOT family of contracts, franchises, concessions and partnering arrangements (World Bank 2007, p.
2; Hodge and Greve 2005, pp. 5-8). PPP is a generic description for long-term contracts between government and
a private firm for the provision of economic and social services to, or on behalf of government. In a number of
jurisdictions, PPPs are also called the PFI or Private Finance Initiative (United Kingdom and several
Commonwealth member countries), PFP or Privately Financed Projects (New South Wales), PPI or Private
Participation in Infrastructure (World Bank), BOT, concessions and franchises
2
See Burger and Hawkesworth 2011, p. 3; Hodge and Greve 2005, p. 4; Delmon 2009, pp. 93-121; Regan, Smith
and Love 2011, p. 364.
3
Traditional procurement techniques have been used from earliest times and accounts for most public
infrastructure procurement in the world today. The buyer of the goods or services (“the principal”) prepares a
comprehensive input specification of what it needs, prepares a contract, and invites prospective vendors
(“contractors”) to bid for the supply of goods and services. A tender process encourages competition and lowers
prices. A bidder is selected and commences performance under the contract for delivery of goods or services to
specification. Central to traditional procurement are the detailed input specification and selection of the contractor
using lowest price criterion. The principal pays for the goods and services on delivery. For long-term contracts, it
may be agreed that the principal make progress payments for work completed over the term of the contract.
4
NAO 2009; HM Treasury 2006, p.7; Audit Commission 2010; ANAO 2012, p.5, n.8.
5
The survey included 19 national governments (Austria, Canada, Denmark, France, Germany, Hungary,
Netherlands, Norway, Spain, Czech Republic, Greece, Ireland, Italy, Slovak Republic, South Africa, United
Kingdom, Australia, Korea, Chile and Mexico, and 1 provincial government New South Wales, Australia (Burger
and Hawkesworth 2011, p. 11).
6
Qualitative benefits may take several forms including non-conforming bids that accompany a conforming PPP
proposal. Examples of qualitative benefits include additional works for a toll road project that increased the total
distance by several kilometers (VAGO 2007), creative design work for a new transport interchange complex that
improved visual and community amenity in its precinct (VAGO 2007); new school buildings that improved
operational flexibility, air quality and sustainability in PFI schools (NAO 2005); contractor use of automated toll
collection for a PPP motorway which improved traffic flow and trip times for users compared with conventional
manual toll collection (VAGO 2006).
7
An examination of the history of risk throughout human history is provided by Bernstein 1998. The distinction
between risk and uncertainty is made out in Knight 2006 (a reprint of the original 1921 treatise) and Keynes (1921).
8
Government Regulation 8/2007 does require risk analysis for infrastructure project planning to improve its
efficiency and effectiveness. Presidential Regulation 13/2010 provides that PPP contracts should take into account
risk allocation although as a matter of practice, this applies to the residual risk borne by government in the
infrastructure planning process (Husnullah, Suryanto and Susilawati 2010).
85

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Value for money in project procurement

Follow this and additional works at: http://epublications.bond.edu.au/fsd_papers

DRAFT RESEARCH PAPER

Value for Money in Project Procurement

Research Manuscript WP107

Faculty of Society and Design

Unlike traditional procurement, which is predominantly based on lowest cost to government,

VFM enables government to measure two key dimensions of infrastructure procurement.

Among non-member Organisations for Economic Co-operation and Development (OECD)

VFM is gaining traction as a measure of public procurement performance because of the

1.2 What is Infrastructure?

Infrastructure is an important national asset class contributing to an economy‟s output

As an asset class, infrastructure assets and services possesses a number of distinguishing

 Investment is long-term, involves high sunk costs and is capital intensive

1.3 What are the Infrastructure Procurement Options?

 The contract is based on an input specification

 Contractor selected on qualitative criteria including track record, expertise, previous

Procurement methods should be selected on a case-by-case basis and no single method is

1.4 What is a Public Private Partnership?

The characteristics of a typical PPP include the following:

In OECD member countries, a PPP is generally understood to mean a long-term contractual

Figure 1 - Value for Money Procurement Process

Project Selection Project Procurement Project Implementation

Needs analysis technical Project development Commissioning

VFM determination 1 VFM determination 2

VFM for money can be viewed from two perspectives:

A further requirement to enhance VFM outcomes is a competitive bid process, which

2.1 Formal Assessment

The Public Sector Comparator

Elements of Public Sector Comparator

The base PSC includes the following elements:

 An output specification and scope of works

Table 1 - Public Sector Comparator Components

Partnerships Victoria 2001c, Practitioners Guidance, Guidance Material, Department of Treasury

In a competitive market, government holds a number of advantages when bidding against

Figure 5 - Public Sector Comparator

Public Sector Winning Under-bidder

Source: Regan 2009.

Life Cycle Costing

Case studies demonstrating VFM can be viewed at the following websites:

South Korea http://www.adb.org/publications/public-private-partnership-infrastructure-

2.2 Qualitative Analysis

Qualitative Risk Factors Case Study Examples

Unquantifiable risk transfer to contractor Berlin Wasser, Germany

Service sustainability without subsidy ASA and Rethmann PPP, Hungary

Complies with a public interest test Eastlink Toll Road, Victoria

Compliance with new environmental laws Apa Nova Water, Romania

Improved community access Southern Cross Railway Station, Melbourne

Apa Novo Water Project, Romania

Berlin Wasser, Germany

Noise abatement at airports Hamburg International Airport

Service performance Darent Valley Hospital, United Kingdom

The adoption of PSC measurement also introduced significant change to conventional

Disadvantages of the Public Sector Comparator Method

2.3 The Role of Risk in Value for Money

Table 3 - Typical Public Private Partnership Project Risks

Risk weighted cost = $100 + ($10 x 15%) = $100 + $5 = $105

2.4 Informal VFM Assessment

In jurisdictions where a formal VFM process is not required, a comprehensive procurement

Table 4 - Typical Public Private Partnership Risk Allocation Schedule

Risk Category Description Responsibility

Existing Structures Suitability of existing buildings for use in Government

The procurement measures commonly used to improve VFM outcomes include: