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

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.

Step 2

Identify and Value Risks

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

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)

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

Step 5

Evaluate Impacts of Risk on Estimated Net Benefits

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 Patrick.DeCorla-Souza@dot.gov

P3 Website: http://www.fhwa.dot.gov/ipd/p3/