Exploring Value for Money analysis in Low-Income Countries

The World Bank has identified 34 countries that qualify as Low-Income Countries (LICs) for 2015. LICs have a per capita income less than US$1,045 per year, while the world average is US$14,307. These countries face important infrastructure gaps that need to be addressed in order to support economic growth and reduce extreme poverty.
 

Public-Private Partnerships (PPPs) have been an important option to develop infrastructure and services.

However, challenges for preparing, procuring and monitoring PPP projects in LICs are huge. Challenges include weak institutional capacity, constraints in fiscal space, shallow capital markets, and lack of access to long-term financing.

Despite these challenges, LICs have made important efforts to implement PPP policies, laws and regulations. As a result, these countries closed 377 PPP deals between 1987 and 2013. Even with this considerable effort, LICs still have important infrastructure needs. This is a good start, but hardly enough to tackle the problem.

During the project selection stage, LIC governments have to discuss whether a particular project should be implemented under a PPP scheme or through traditional procurement. There are several reasons why governments decide to implement a PPP: to accelerate public investment programs, maximize the fiscal space or to try to avoid fiscal controls, for example.

At this key decision point, various options can be considered by governments, including a Value for Money (VfM) analysis.

A PPP project yields VfM if the government derives a net positive gain when compared to any alternative procurement route, in terms of risk allocation, affordability and sustainability. It is similar, to an extent, to a cost-benefit analysis, but encompasses a stronger qualitative and risk analysis component.  

Traditional international VfM analysis standards are very complex and demand lots of information and training. This is often an obstacle for LICs, which face lack of data on overrun, over costs and risks of the projects. As well as, staff turnover, weak human capital and a limited track record on traditional procurement and PPP deals can affect project selection.
 

 

We serve as part of a World Bank team that’s tackling this issue. We’ve been working with our colleagues Marcelo Perez and Bernardo Weaver to develop a user-friendly simplified version of VfM analysis, preserving its key principles: comparability, efficiency and transferring risk. This tool has a qualitative-quantitative (dual) approach in order to avoid many of the existing complex calculations, and the model’s main advantage is its simplicity. More complexity can be added modularly as needed.
 
We flew to Tanzania in October 2014 to test the approach and tool with the support of the PPP Unit at the Tanzania’s Ministry of Finance. After we arrived, we analyzed the Dar es Salaam Bus Rapid Transit (BRT) project, a 21-kilometer-long corridor where most of the infrastructure was brownfield (property previously used for industrial purposes).

This is a world-class, high capacity system, expected to move more than 400,000 passengers/day (phase I) by the operation of 177 articulated buses and 128 feeder buses. The BRT is almost completed, but technical complexities on the procurement of a Service Provider have prevented the start of the operational phase.  

This was a really interesting exercise where we validated the tool and learned valuable lessons. One of these lessons was that our systematic analytical tool can help organize thoughts and assist in generating information — including whether a project can be implemented as a PPP and if there is any value added. This analysis helps lead to an informed decision. Our findings and lessons show that this tool is valid also for low- and middle-income countries, as well as subnational governments with weak institutional capacity in middle-income countries.

Here is where you can learn more about the model and try it yourself:

• Exploring Value for Money Analysis in Low-Income Countries (report)
• Tool for exploring VfM analysis (Excel)
• Presentation

However, more research efforts and discussions are needed to continue improving VfM approaches and tools to select the right PPP project. This is a work in progress, and we’d love to hear your feedback.