Is your lunch delivering the Value for Money?

Value for Money (VfM) is a concept much older than PPP. You might find yourself, asking this very question, after an expensive lunch “was this value for money?”. Indeed if you can buy the same quality lunch for half of price, you can easily conclude, that this lunch was not value for your money. However the question also is; did you consider the risks? The risks you undertake in perhaps less reputable restaurant or risks related to commuting to a cheaper place or less convenient venue. Did you think about the risk that you shall not get served quickly enough and that you shall find yourself ill with food poisoning? Yeas all these factors have to be considered. On the other hand you can have the same risks in a very expensive restaurant as well –, but perhaps with a different probability.

As you can see, in order to evaluate Value for Money, you have to consider all risks and also the probability related to them. You have to consider the price and compare the quality and find some formula of how to evaluate this. Value for Money measurement in PPPs is no different. UK government started to use as a method to measure Value for Money a reference “lunch”. Reference lunch in this case is a project which delivers public infrastructure or service. This project is examined if being delivered traditionally by public sector and used as a reference. Than the reference project is being compared to options in using different forms of PPP and in the end of the day, comparing the private sector bids. UK Treasury Guidance on VfM has defined VfM “as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement”.

The concept had some pedigree and good rational and so number of other countries has adopted Public Sector Comparator (PSC) as a way to ensure Value for Money in all procured PPP projects. One of such countries has been Australia. According to the Technical note of Partnerships Victoria “ The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned and implemented by government. The PSC is developed in accordance with the required output specification; the proposed risk allocation reflected in the contract released with the Project Brief, and is based on the most efficient form and means of government delivery.”

However to compare one lunch with another is rather easy – you can actually get both and taste, but with infrastructure projects you can only build the project once, and sometimes you can only procure the project once so all your comparisons are theoretical and leave an open space for questions. Number of issues in PSC has been reported by UK National Audit office and the issues around PSC have been extensively discussed since. PPIAF have discussed this and the relevance of PSC for the developing countries in the article “Is the public sector comparator right for developing countries?”. The conclusion that “the PSC method, particularly as used in some industrial countries, may not be the best way to do all this in developing countries…”

Dutch way of looking at this was a little bit different. Dutch did realize, that there is need, to asses if private sector can actually deliver value, before going in to procurement and focused on cost benefit analyses of the options that are really available prior the procurement and the Public Private Comparator (PPC) has been born. Actually two of them have been born; one focusing of financial aspect and impact to government and the second one focusing on broader economic aspects and impact. For example building the bridge has financial cost to government and financial benefit is the toll charged on the bridge. But the economic impact of the traffic, shorter commuting way or establishment of connection to a remote location is not captured in financial PPC but in the economical PPC. Many critics do find however PPC even more tricky and see PPC even less reliable than PSC (Kramer). Dutch did therefore added also reference lunch for the private sector option and do use PPC early in the process and PSC in the procurement phase to compare public reference with private bids. National Treasury of South Africa in its PPP manual also describes how PSC model and PPP model are to be developed, so that VfM assumption can be made regarding the project. Capital Assets management Framework of British Columbia also in its guidance state that “Agencies should develop and use a Public Sector Comparator (PSC) to assess the financial aspects of value for money – and as a benchmark against which to measure the net value of alternative procurement options.”

Value for Money, PSC and PPC are a way to quantify the potential benefits when considering your options in infrastructure. But in the end of the day, despite all the analyses, it is up people responsible for individual project, to consider all the modalities and make the decision. And concerning the lunch – my advice is; whatever the value for money is, don’t forget to enjoy it.