Introductory Guide to Value for Money Analysis in PPPs

Value for Money in the context of a Public-Private Partnerships means securing the best long-term outcome for the public sector by comparing a PPP solution against traditional public procurement. In practice, VfM is “the optimal combination of life-cycle costs and quality (or fitness for purpose) of a good or service to meet the user’s requirement”.¹ It is assessed relatively – i.e. by comparing the value and cost of the PPP option versus the conventional alternative. In other words, a PPP is judged to provide VfM if its risk‐adjusted whole‐life cost (present value) is lower than that of the traditional delivery route for the same service or asset. World Bank guidance explains that, for a project to be suitable as a PPP, “it needs to demonstrate that it can achieve higher value for money for the public over the life of the project when compared to other procurement structures, especially traditional public procurement”. In short, VfM isn’t just about lowest construction cost – it is about delivering service quality, risk transfer and innovation in relation to the total cost.²

VfM is thus a decision‐making criterion rather than a fixed target. EPEC (the European PPP Expertise Centre) describes VfM as the “relative balance between the value and the cost of the different delivery options”. Value means the performance or service levels (quality, innovation, asset utilization, etc.) delivered by the project, and cost is the expense borne by government and/or users over the same period. A VfM assessment seeks the option that maximizes performance for a given cost (or equivalently minimizes cost for a given service level). Importantly, VfM is a comparative concept – on its own a single alternative has no absolute VfM score; only the difference (or ratio) between the PPP and the public‐sector costs is meaningful.³

Why VfM Analysis is Essential

VfM analysis is essential for sound public decision-making about PPPs. It forces a transparent comparison between the PPP option and the “business-as-usual” public procurement route. By building a Public Sector Comparator (PSC) model of the traditional approach and comparing it to the PPP model, governments can see whether the PPP offers any genuine cost savings or service improvements. As one guide notes, PPPs “need to demonstrate higher value for money when compared to traditional public procurement”. In practice, a PPP is said to provide VfM when the PPP option yields lower net present cost than the PSC: the difference (or percentage saving) is the VfM gain.⁴

This analysis is crucial because PPPs involve long-term contracts and often public guarantees, so governments must justify using private financing rather than direct budget funding. Many jurisdictions mandate VfM tests before approving a PPP. For example, Australia’s national PPP policy explicitly requires that “the choice between public and private provision of infrastructure will be based on a rigorous value for money assessment”.⁵ South Africa’s PPP regulations likewise make government approval conditional on three tests: affordability, adequate risk transfer, and demonstrated value for money. In effect, VfM analysis is the gate‐keeper that ensures PPPs are used only when they are expected to deliver a better deal for taxpayers. It promotes fiscal discipline and accountability, by making the private sector compete against the baseline (the PSC) and by documenting assumptions and risks.

Even in mature markets like the UK, PPP/VFM analysis remains central. During the heyday of the UK’s Private Finance Initiative (PFI), authorities used a quantitative model to compare PFI bids to a PSC. (A UK National Audit Office review notes that its PFI model compared “the estimated cost of using PFI with a public sector comparator to help determine which delivery and financing route offered best value for money.”) Although methods have evolved (and critiques have been made), VfM analysis still underpins PPP procurement in the UK.⁶

In summary, VfM analysis helps answer: “Does this PPP deliver better value (net of risk) than the conventional alternative?”. This formal check guards against choosing PPP for the sake of it, and helps justify large infrastructure commitments on public budgets.

VfM Methodologies: Qualitative vs. Quantitative

Governments typically use two complementary approaches to assess VfM:

• Qualitative VfM assessment (screening and suitability check): A qualitative analysis tests early on whether PPP is even a sensible procurement choice. This involves checklists of project suitability criteria, often used in the project identification or feasibility stage. For example, criteria may include the clarity of project scope and outputs, ability to bundle design-build-operate (so as to realize whole-life cost savings), existence of measurable performance standards, likelihood of strong market competition, technical feasibility, and robustness of revenue streams or government payments. The European PPP Guide suggests that, even with limited data, officials can “identify and test” such criteria to decide if the project “merits more detailed assessment” as a PPP. If a project scores poorly on key qualitative factors (e.g. highly uncertain demand, no risk transfer opportunities, or little value from private-sector innovation), the public sector may decide not to proceed with PPP. In essence, the qualitative VfM test is a sense-check: it flags whether a PPP can plausibly work. Many countries have formal qualitative screening tools (Australia’s “PPP Guidelines: Project Suitability Assessment”, Canada’s P3 Screening, etc.), and guidance (e.g. EPEC’s VfM guide) emphasizes using evidence-based criteria at this stage.

• Quantitative VfM assessment (financial modeling): If the project passes the qualitative filter, a detailed quantitative comparison is made. This usually involves constructing a Public Sector Comparator (PSC) – the present-value cost of delivering, financing and operating the asset by the traditional public sector route – and comparing it against the PPP alternative. The PPP side can be represented by a private bid (if one is available) or a hypothetical “shadow bid” prepared by the public authority. The costs modeled should be “whole-life”, including construction, financing costs, maintenance, operation and asset disposal (or handback) costs over the contract term. Crucially, both the PSC and PPP scenarios must include risk-cost adjustments: the expected costs of risks that each party bears. For example, the PSC would add the estimated value of risks retained by government (e.g. construction overruns, demand shortfalls), while the PPP side accounts for risks transferred to the private partner. The PSC may also include “competitive neutrality” adjustments (e.g. to offset the public sector’s lower financing or tax advantages).

Once both cost streams are assembled, the final step is discounting to Net Present Value (NPV). The discounted sum of expected payments under the PPP model (to the public sector or users) is compared to the PSC’s NPV. Whichever option has the lower NPV is the cheaper option. If the PPP’s NPV is less than the PSC’s, the PPP is said to have positive VfM (i.e. it saves money). The difference in NPV is often expressed as an absolute saving or a percentage of the PSC. US guidance explains: “When a P3 presents overall savings, it is said to provide ‘value for money.’ This value is usually expressed as the percent difference by which the PSC cost exceeds the P3 cost”.

In practice, qualitative and quantitative approaches are combined. For example, guidelines often call for an initial qualitative screening (Phase 1) to decide whether to develop the project as a PPP at all, followed by detailed quantitative and qualitative analysis (Phase 2) during the business case and procurement preparation. The World Bank notes that both methods are used to “inform, justify and communicate the decision to use a PPP approach”. Quantitative VfM (the PSC analysis) provides a numeric test, while qualitative analysis ensures non-monetary benefits (like earlier completion or innovation) and project-fit considerations are not ignored. Together they aim to present a full picture of whether the PPP yields net benefits for the public.

Steps to Perform a VfM Analysis

A typical VfM calculation follows these steps:

1. Define the project scope and specifications in terms of required outputs and performance standards. This is common to both PSC and PPP.

2. Build the Public Sector Comparator (PSC): estimate the total government cost of delivering the project through conventional procurement. This includes:

   • Capital costs (construction/land) and financing costs (based on public borrowing rates).

   • Lifecycle operating & maintenance (O&M) costs, and (if applicable) rehabilitation or replacement costs.

   • Risk costs: quantify the value of major risks that the public sector would retain. For example, use a risk workshop or Monte Carlo simulation to estimate the expected cost of overruns, demand shortfalls, etc., under traditional delivery. Add these expected risk values to the PSC.

   • Other adjustments: account for tax differences or overhead (sometimes called “competitive neutrality” adjustments) so that the PSC reflects a true apples-to-apples cost baseline.

3. Estimate the PPP alternative costs: determine the whole-life cost under the PPP. This could be derived from:

   • Actual bids: if a competitive PPP tender has occurred, use the winning bidder’s proposed financial schedule (availability payments or user fees) plus any equity / capital contributions.

   • Shadow bid: in early analysis, a hypothetical private sector bid is modeled by the authority. This assumes certain efficiencies, risk pricing and financing terms that a competitive consortium might achieve.
     The PPP cost should likewise include O&M, lifecycle, and any costs to government (e.g. subsidies or guarantees). Retained risks on the public side should also be added to this scenario’s cost to make it comparable.

4. Discount to present value: choose an appropriate discount rate (often the government’s cost of funds or weighted average cost of capital). Compute the NPV of each alternative’s cash flows (over the same time horizon). World Bank practice is to compare the NPVs of risk-adjusted whole-life costs. (Different countries have different conventions: some use a single public discount rate for both sides, others vary by project risk.)

5. Compare NPVs and calculate VfM: Subtract the PPP NPV from the PSC NPV.

   • If PSC > PPP, the PPP yields savings = (PSC – PPP) > 0, indicating positive VfM (PPP is cheaper).

   • If PPP ≥ PSC, the PPP does not save money compared to traditional procurement (no positive VfM).
     Often the saving is expressed as a percentage: e.g. “PPP is 20% cheaper than PSC.”

6. Sensitivity and scenario analysis: Because the results can be sensitive to assumptions (discount rate, risk valuations, cost estimates), it is standard to run sensitivity tests. For example, vary the discount rate or risk cost estimates to see if the VfM conclusion holds. US guidance warns that “small changes in assumptions…can tip the balance,” so sensitivity analysis is essential. If the VfM outcome is borderline, decision-makers must be cautious.

7. Qualitative factors and judgment: Finally, review any qualitative considerations. A quantitative model may not capture all benefits. For instance, if the PPP delivers the project years earlier (accelerated completion), there may be user benefits not captured in the cash flows. Conversely, consider any public-interest issues (e.g. equity, strategic control). The analysis should report these issues alongside the numeric VfM result.

In summary, a VfM analysis involves careful data gathering, financial modeling (often with a spreadsheet model), and rigorous review. All assumptions and sources should be documented for transparency. In some countries (e.g. UK Treasury, Canadian federal PPP unit), the VfM model itself is subject to independent technical review and must be disclosed in outline to auditors.

VfM Approaches in the UK, Australia, and South Africa

United Kingdom: The UK pioneered PPP (PFI) usage and has a well-developed VfM framework. Historically, HM Treasury issued detailed guidance and even published a standard VfM model (the “Spreadsheet Model”) that compared PFI bids to a PSC. This model calculated the NPV of a “public sector comparator” baseline and compared it to the PFI cash flows. In the UK, a successful VfM test (PSC – PFI > 0) was a central condition before a project could proceed. In recent years the UK has updated its guidance (for example PF2 regime) and responded to audit critiques. A 2013 NAO review noted that UK authorities continued to “need to justify their choice of contracting approach for new projects” and recommended clearer assumptions and transparency in the VfM model. Overall, the UK approach remains strong on quantitative PSC analysis, supplemented by detailed business case stages (Strategic, Outline, Final Business Cases) that incorporate qualitative case arguments.

Australia: Australian governments (national and states) also emphasize VfM through risk allocation and whole-life costing. The Commonwealth’s PPP policy framework (and state guidelines like Partnerships Victoria) enshrines VfM as the driver for choosing PPP. For example, Australia’s National PPP Policy Framework states that the aim of PPPs is “improved services and better value for money, primarily through appropriate risk transfer, encouraging innovation, greater asset utilisation and integrated whole-of-life management”. In practice, Australian PPP teams build a sophisticated PSC that explicitly quantifies risks (often using probability distributions). They then compare the “risk-adjusted PSC” to bids. Infrastructure Australia’s guidelines even include Monte Carlo simulations to capture uncertainty, so that the PSC becomes a distribution of costs against which bid NPVs are evaluated. States like Victoria, New South Wales and Western Australia each have their own PPP offices and PSC templates, but all require a formal VfM assessment. In summary, Australia’s mature PPP market pairs a formal PSC/NPV test with strong emphasis on competitive tender and national “gate” approvals based on VfM.

South Africa: South Africa has a highly regulated PPP program governed by Treasury Regulation 16 (PFMA). This regulation makes VfM one of three core criteria for PPP approval (along with affordability and risk transfer). In practical terms, no PPP can proceed to procurement unless the National Treasury (or relevant provincial treasury) is satisfied that it offers sufficient VfM and that key risks are being allocated to the private party. The South African Treasury PPP Manual (supported by the Government Technical Advisory Centre) instructs departments to prepare a VfM report as part of the PPP feasibility stage. This report follows the PSC approach: it models the public and private options and compares NPVs. The South African approach is notable for its stringent oversight – the PPP Unit in National Treasury centrally reviews all calculations – and for requiring that PPPs “comply with PFMA requirements of affordability and value for money”.⁷ Over the years, South Africa’s PPP practice has been lauded as a model in the region, but it also heeds caution: regulators insist on conservative cost estimates and full disclosure of contingent liabilities to ensure VfM results are not overstated.⁸

These three countries illustrate different flavors of VfM practice, but all use the PSC+NPV framework combined with qualitative judgment. The UK emphasizes detailed upfront modelling, Australia focuses on advanced risk-adjusted PSCs, and South Africa embeds VfM as a formal legal test. Each also stresses competitive procurement and ongoing contract management to safeguard the projected VfM gains.

Illustrative Example (Highway PPP)

Note: numbers below are hypothetical and for illustration only. Consider a simplified highway project where both the public sector and a PPP concession are options.

• Public (PSC) scenario: Government builds the road with public funds. Construction costs $100 million today (Year 0). Annual O&M costs are $5 million per year for 30 years. Suppose the discount rate is 5%. The PSC NPV = $100M + $\displaystyle \sum_{t=1}^{30} \frac{5\text{M}}{(1+0.05)^t}$ ≈ $176.9 million. (We assume here, for simplicity, no extra risk premium is added.)

• PPP scenario: A private concessionaire builds and operates the road. The government agrees to make availability payments of $8 million per year for 30 years (starting at year 1). These payments are structured to cover the concessionaire’s costs of financing, construction and O&M. Discounted at 5%, the PPP NPV = $\displaystyle \sum_{t=1}^{30} \frac{8\text{M}}{(1+0.05)^t}$ ≈ $123.0 million.

Comparing NPVs: PSC = $176.9M, PPP = $123.0M. The PPP is cheaper by $53.9M in present-value terms, meaning it yields positive VfM. As a percentage, the public procurement would cost about 43.8% more than the PPP (i.e. $(176.9-123.0)/176.9\approx30\%$). In other words, the PPP route offers a 30% value-for-money saving over conventional delivery.

In practice, one would refine this analysis by adding risk adjustments (e.g. construction risk in PSC, availability penalties in PPP), verifying cost estimates with engineering studies, and testing sensitivities (e.g. what if O&M is $6M/year or discount rate is 6%). But even this simple example shows how VfM is calculated as the NPV difference. If the opposite had been true (PSC ≤ PPP), the PPP would not have a cost advantage and might be rejected unless there are strong non-monetary reasons to proceed.

Challenges, Limitations, and Safeguards

VfM analysis, while powerful, has known pitfalls. Some common challenges include:

• Forecast and estimation uncertainty: All cost estimates and risk valuations are based on assumptions. Traffic forecasts, construction costs, and interest rates may prove wrong. A VfM model can be misleading if its assumptions are overly optimistic. US guidance warns that “small changes in the assumptions underlying the analysis can tip the balance,” so careful sensitivity analysis is needed. Likewise, the choice of discount rate (public sector cost of funds vs. project-specific rate) can greatly affect results.

• Incomplete valuation of benefits/costs: The standard VfM (PSC) method focuses on government costs and contract payments. It often excludes wider benefits (e.g. value of earlier road opening to drivers) and intangible factors (innovation, service quality). For example, accelerating a highway by a few years can save motorists time and fuel, but these benefits are usually not in the PSC calculation. To address this, analysts may carry out a separate cost-benefit analysis (BCA) or describe these benefits qualitatively alongside the VfM result, rather than ignoring them.

• Optimism bias and gaming: There is a risk that public authorities or private bidders may manipulate the VfM exercise. For instance, undervaluing PSC costs or using aggressive traffic forecasts could make PPPs look better than they are. Recognizing this, some reviewers (like the UK NAO) have criticized VFM models that did not account for the true cost of private finance or that relied on soft assumptions. Safeguards include independent review of the model, use of realistic “shadow bids”, and adherence to standardized accounting of risk.

• Overemphasis on cheapest cost: As an EIB report notes, “the cheapest option may not necessarily be the best option”. A narrow VfM focus could lead to accepting a low-cost bid that skimped on quality or took on undue risk. Therefore, most guidelines require a dual focus on both cost and service standards.⁹ Contracts often include performance requirements, and value-for-money assessments typically assume that all options meet a minimum quality threshold.

• Institutional capacity: Conducting a robust VfM analysis requires expertise (finance, economics, engineering, law). Governments without strong PPP units may struggle. The World Bank PPP Guide cautions that “poor project preparation can significantly undermine value for money”. If officials lack experience, they may (a) accept poor risk allocation in negotiations, (b) skip competitive bidding in favor of direct awards, or (c) fail to account for contingent liabilities. Each of these can erode VfM.

• Procurement and competition: Ensuring competition is critical. Even a well-prepared VfM model cannot deliver value unless the procurement process elicits competitive bids. The World Bank notes that “competitive and transparent procurement is critical to maximizing value for money”.¹⁰ A non-competitive process (e.g. single-bid, or giving preferential terms to one bidder) often leads to higher costs or guarantees that favor the private side. Unsolicited proposals are particularly risky: if a developer is granted “Swiss challenge” rights or preferential scoring, bidders may be deterred and VfM falls.

Safeguards and best practices to address these challenges include:

• Sensitivity and risk workshops: Always test how sensitive the VfM result is to key assumptions. Explicitly model major risks and create a risk register. Use Monte Carlo or scenario analysis if possible.

• Independent review: Have the VfM model and assumptions reviewed by an external auditor or PPP unit. In many countries, VfM models must be vetted by central PPP agencies or treasuries.

• Transparency: Document all inputs (cost estimates, discount rates, risk values) and rationale. For example, the UK NAO recommends that departments disclose how public finance costs are treated in the model. Transparency deters manipulation and builds stakeholder confidence.¹¹

• Qualitative checklist: Complement the quantitative test with a structured checklist of qualitative factors (market interest, legal/regulatory clarity, project complexity, etc.). This helps catch issues that the numbers miss.

• Budget and budgetary limits: Enforce the “affordability” test alongside VfM. Even if a PPP is cheaper than PSC, governments must ensure they can fit the payments into their budget envelope.

• Life-cycle viewpoint: Evaluate performance and value throughout the contract life. Mid-term VfM reviews or renegotiation protocols can ensure that the partnership continues to serve the public interest over 20+ years.

In conclusion, VfM analysis is a powerful tool for comparing PPPs with traditional procurement, but it is not infallible. Policymakers should use it as part of a broader decision framework, combining rigorous quantitative modeling with qualitative judgment, competitive processes, and strong governance. When done well, VfM analysis helps ensure that PPPs truly deliver better value for taxpayers and users than alternative approaches.

Sources

Authoritative PPP guidelines and studies (World Bank PPP Reference Guide, EPEC Guide, OECD/ADB/IFC resources), plus national PPP policies (UK Treasury, Australian Infrastructure Guidelines, South African Treasury) and academic/practitioner primers. These are supplemented by examples and summaries of best practice, including the following sources:

1. P3 Toolkit - Value for Money Primer Dec 26, 2016. https://www.transportation.gov/buildamerica/sites/buildamerica.dot.gov/files/2019-08/p3_value_for_money_primer_122612.pdf

2. wbif.eu. https://www.wbif.eu/storage/app/media/Library/8.%20Public%20Private%20Partnership/2.%202-Value-for-Money-Assessment-Guide-FINAL-310818.pdf

3. thedocs.worldbank.org. https://thedocs.worldbank.org/en/doc/fd7f79460aa965e5f4c4c5577e0ea649-0070062023/related/PFR-5-Public-Private-Partnerships.pdf

4. FHWA - Center for Innovative Finance Support - Fact Sheets. https://www.fhwa.dot.gov/ipd/fact_sheets/p3_toolkit_08_benefitcostanalysis.aspx

5. Assessing Value for Money | The APMG Public-Private Partnerships Certification Program. https://ppp-certification.com/ppp-certification-guide/162-assessing-value-money

6. National PPP Policy Framework. https://www.infrastructure.gov.au/sites/default/files/migrated/infrastructure/ngpd/files/National-PPP-Policy-Framework-Oct-2015.pdf

7. How PPPS Fuel Economic Growth in South Africa - MOORE. https://www.moore-southafrica.com/news-views/july-2022/how-ppps-fuel-economic-growth-in-south-africa

8. gtac.gov.za. https://www.gtac.gov.za/wp-content/uploads/2022/03/GTACs-Public-Private-Partnership-Manual-Module-1-South-African-Regulations-for-PPPs.pdf

9. nao.org.uk. https://www.nao.org.uk/wp-content/uploads/2014/01/Review-of-VFM-assessment-process-for-PFI1.pdf

10. National PPP Guidelines Volume 4 Public Sector Comparator Guidance. https://www.infrastructure.gov.au/sites/default/files/migrated/infrastructure/ngpd/files/Volume-4-PSC-Guidance-Dec-2008-FA.pdf

11. Value for Money Assessment - Review of approaches and key concepts. https://www.eib.org/attachments/epec/epec_value_for_money_assessment_en.pdf