VfM: A Useful Tool for Procurement Authorities But Not a Deciding Factor
Nossaman Partners Fred Kessler and Geoffrey Yarema were quoted in the InfraAmericas article "VfM: A useful tool for procurement authorities but not a deciding factor" regarding the use of value-for-money (VfM) as a factor when deciding between design-build (DB) and P3 as the procurement method for transportation-related projects. Mr. Yarema explained that both methods are effective under the right circumstances. Other mitigating factors such as labor influence, local contractor presence, capital availability, legal constraints and politics must all be taken into consideration along with VfM.
"We're hoping more officials examine the value that all available tools create, balanced against the true but, generally, unaccounted cost of indefinite project deferment," Mr. Yarema said.
The article pointed out that greater VfM may be captured via P3 because the risk retained by the public sector is transferred to a private entity. Mr. Yarema stated, "For larger, more complex projects, giving incentive to the private sector to utilize performance and outcome-based specifications and ‘Alternative Technical Concepts' to maximize value at a cost savings to project delivery appears to be succeeding."
The article explained that projects that look better suited for P3s are not always done that way in the end. "If the goal is to maximize capital formation for construction from a given project revenue stream, the best tool is a toll concession. If the goal is to maximize lifecycle cost efficiency and retain control over project revenues, the best toll is the availability payment. More state and local officials understand that," said Mr. Yarema.
Mr. Kessler commented that treasurers and CFOs "don't take it to the next step of realizing [that financing] is only one component of the overall VfM proposition… P3s may have an incrementally higher cost of debt on an overall basis but it can be more cost-efficient over the whole life of a project."
Mr. Yarema added that agencies don't often get to the point of weighing cost of capital versus life cycle cost efficiency which is what a VfM analysis should show.
Mr. Kessler noted that when governments do VfM analysis, many are steering away from using design-bid-build (DBB) for the public sector comparator. He added that they "want to see justification for not doing DB over P3."
"It's really difficult to incubate and deliver a mega project. Government officials making these decisions must be aware of all of the factors needed to green light project delivery," said Mr. Yarema.