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Value for Money Analysis
Value for Money (VfM) framework is relevant in making the decision between the PPP procurement route or conventional procurement options.
The assessment of Value for Money usually involves both a quantitative and a qualitative assessment.
In quantitative terms, the analysis is done with the objective to determine whether the value of risks transferred to private capital under a PPP arrangement is justified by the cost that private capital will charge to assume those risks. The analysis compares the life cycle cost of the PPP alternative which will include the cost of private finance alongside other costs, with the life cycle cost of providing the service conventionally (sometimes to referred to as the Public Sector Comparator).
There are some qualitative VfM tests that should be used in the overall VfM analysis of the PPP option. The reason is that quantitative analysis may not capture all the factors relevant to VfM which may be based on assumptions for which data may not always be complete of reliable. These qualitative factors may include viability, desirability and achievability.
Viability - e.g. are there measurable and definable outputs, is there a clear projects scope, is the flexibility of requirement appropriate, are there clear efficiency reasons for private sector service provision?
Desirability - e.g. do the benefits of the PPP procurement option outweigh the costs?
Achievability - e.g. is there a high level of market interest, are the timescales realistic?
In practice, a rapid initial application of the qualitative tests can often quickly and effectively eliminate the PPP option that will clearly not deliver VfM and avoid time and cost wasted on any detailed quantitative analysis.
For the quantitative assessment, a financial model is used in with in-built assumptions, when helps to ensure consistency of approach and ease of application. A qualitative framework for VfM analysis, to check how likely the project is to provide value for money to the public sector has been prepared by Department of Economic Affairs and is available on http://toolkit.pppinindia.com .
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