Value for Money Tool (VFM)

Value for Money Tool (VFM)

Value for Money Tool (VFM)

Public Private Partnerships (PPP) mode as a means to deliver social and economic infrastructure is being adopted by a number of governments, especially in developing countries. Governments have introduced PPPs for various reasons; to improve efficiency in service delivery of infrastructure projects, to incorporate innovations of the private sector and most importantly the potential of bringing private finance to public service delivery and thereby allowing governments to leverage on public funds for other social and economic programs.

However, PPP as a mode of implementation depends on whether or not Value for Money is achieved. i.e. whether the benefits associated with transfer of risks, private sector innovation and efficiency outweigh the benefits compared to traditional procurement models.

“Value for Money (VFM) is the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements”. Or simply put, the difference between PPP mode and the public sector comparator is referred to as the Value for Money.

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Athena Infonomics has developed a toolkit to assess Value for Money taking into account both quantitative and qualitative assessment of the costs and benefits associated with a project. This toolkit has been developed to support governments in deciding if the PPP mode of implementation provides value for money compared to the traditional mode. The toolkit incorporates cash cost and receipts and also captures risk adjustments of a PPP.

Value for Money = (Public Sector Comparator – PPP Mode)/ Public Sector Comparator (PSC)

• PSC= whole life cycle cost associated with the project + PSC risk adjustments

• PPP Mode = whole life cycle cost to the government + PPP risk adjustment

Other than whole life cycle costs associated with a project, risk adjustments needs to be accounted for while estimating Value for Money of a project. Risks are an inherent part of any project and a comprehensive and realistic pricing of all quantifiable and material risks needs to be included. Risk across the life cycle of the project are identified and quantified and then categorized into Retained, Transferable and Shared risks.

Risks are specific to sector and region. Some of the common risks that arise in any infrastructure project include; Construction risk, Design risk, Latent defect risk, Financial risk, Commissioning risk, Market Risk, Collections risk, Operating risk, Performance risk, Technology obsolescence risk, Upgrade risk, Maintenance risk, Financial risk, Renegotiation risk etc. These risks are quantified in terms of (a) probability of occurrence and (b) the cost of such risk on the project.

To Learn more about this tool, kindly contact:
sarin.p@athenainfonomics.com