using benefit-cost analysis to understand the costs and ...p3-value demonstrates value for money...
TRANSCRIPT
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Using Benefit-Cost Analysis to Understand the Costs and Benefits of
Public-Private Partnership Projects
Presentation at the International Transportation Economic Development Conference
April 9-11, 2014 Dallas, Texas
Patrick DeCorla-Souza, P3 Program Manager
Federal Highway Adminstration
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Outline
Study background Findings from literature review Proposed BCA methodology Example application of methodology Next steps
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Study Background
FHWA has developed a P3 evaluation toolkit, including an analytical tool – P3-VALUE
P3-VALUE demonstrates Value for Money analysis • Evaluates only financial impacts • From perspective of procuring agency’s balance sheet
FHWA is developing a Benefit-Cost Analysis (BCA) approach to address: • Non-financial impacts (e.g., user benefits) • Take a broader perspective
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Findings from Literature Review
A true BCA approach has not been used by public agencies to evaluate P3s
Key impacts of P3 to be assessed relate to: • Cost efficiencies • Risk transfer • Earlier delivery • Service quality
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Proposed BCA Framework
1.Define Procurement Alternatives
2. Identify and Value Risks
3. Estimate Financial Costs
4. Estimate Benefits and Net Benefits
5. Evaluate Impact of Risks/ Uncertainty on Net Benefits
Ass
umpt
ions
Preferred Alternative
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Illustrative Example
Existing 10-mile 4-lane highway segment Add one lane per direction Toll all lanes 50-year analysis period
We will now go through the five BCA steps using the example
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Step 1
Define Alternatives
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1a. Define Procurement Alternatives
Conventional Design-Bid-Build, with
O&M by public agency
Toll revenues (and revenue risk) retained by public agency
P3 Design-Build-Finance-
Operate-Maintain Toll revenues retained by
P3 concession, with transfer of revenue risk to the concessionaire
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1b. Define Costs and Benefits of P3
Impact Category
Public Sector and User Cost Impact Impacts on Benefits Decreased Increased
Cost Some costs decrease because of greater private-sector innovation and efficiency.
Some costs increase because of greater transaction costs and additional skill and effort required to reach an agreement – not addressed.
Reduced social cost of project
Risk Transfer Risk costs reduced because of better risk management.
Public sector risk could increase if contract terms are not adequately designed – not addressed.
Expected cost of risks reduced because of risk transfers to concessionaire.
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1b. Costs and Benefits of P3 (contd.)
Impact Category
Public Sector and User Cost Impact Impact on Benefits Decreased Increased
Schedule Costs reduced due to shorter construction duration because of better schedule management and earlier financing.
Earlier delivery shortens the time in initiating benefits from service.
Service Quality User costs reduced because of better pavement quality and better tolling and active traffic management service.
Benefits greater because of improved service.
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Step 2
Identify and Value Risks
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Identify and Value Risks for Each Alternative
Risk Type Design/ Const. Phase
Operations Phase
“Pure” risks (i.e. event risks)
Estimate contingency
Estimate contingency
Parameter uncertainties
Estimate allowance
Estimate allowance
Systematic, long-term performance and project coordination risks
Estimate virtual risk premium
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Step 3
Estimate Costs
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3a. Real Risk-Adjusted Costs for Base Case
Total cost = $699 M (real dollars)
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3b. Real Risk-Adjusted Costs for P3
Total cost = $629 M (real dollars)
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3c. PV of Risk-Adjusted Costs for Base Case
Total cost = $334 M (discounted dollars)
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3d. PV of Risk-Adjusted Costs for P3
Total cost = $356 M (discounted dollars)
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Step 4
Estimate Benefits and Net Benefits
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4a. Real Base Case Benefits
Total benefits = $1,091 M (real dollars, not adjusted for risk)
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4b. Real P3 Benefits
Total benefits = $1,337 M (real dollars, not adjusted for risk or earlier economic development)
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4c. PV of Base Case Benefits
Total benefits = $404 M (real dollars, not adjusted for risk)
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4d. PV of P3 Benefits
Total benefits = $553 M (real dollars, not adjusted for risk or earlier economic development)
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4e. NPV of Difference Between Options
PV of Net Benefits of P3 option = $126 M (not adjusted for risk)
Base Case (million $)
P3 Option (million $)
Difference (million $)
Real Costs $699 $629 Benefits $1,091 $1,337 Net Benefits $392 $708 $416
Present Value Costs $334 $356 Benefits $404 $553 Net Benefits $70 $197 $126
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Step 5
Evaluate Impacts of Risk on Estimated Net Benefits
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5. Identify and Assess Impact of Risks on Benefits for Each Alternative
Risk Type Design/ Const. Phase
Operations Phase
“Pure” risks (i.e. event risks)
Sensitivity of NPV difference
to delivery schedule risk
Sensitivity of NPV difference
to long-term performance
risk
Parameter uncertainties N.A.
Sensitivity of NPV difference to parameter assumptions
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Example of Sensitivity Analysis
Fuel price assumption has very small impact on difference in NPV of net benefits
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Next Steps
Refine BCA methodology in response to review comments
Develop primer on P3 evaluation using BCA Develop Guidebook for practitioners Enhance P3-VALUE tool to include a BCA option
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Contact Information
Patrick DeCorla-Souza P3 Program Manager Office of Innovative Program Delivery Federal Highway Administration (202) 366-4076 [email protected]
P3 Website: http://www.fhwa.dot.gov/ipd/p3/