VALUE FOR MONEY

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 Value for Money

Outlines
 What is Value of Money
 What is Value for Money

 Value for money refers to the usefulness of money. In other words, it is called the value or
worthiness of the money.
 It is also called the return for the money spent. Value for Money is also used as Quality to
Price Ratio.
 The utility of money is the efficient and effective use of productive forces.
 What is Value for Money

 Value for money has been defined as a utility derived from every purchase or every sum
of money spent.
 Value for money is based not only on the minimum purchase price (economy) but also on
the maximum efficiency and effectiveness of the purchase.
 The 4 Es in Value for Money

 They also answered that value for money depends on the 3Es;
 Value for Money

 It is said that beauty is in the eyes of the beholder! The same could be said of value. What
is value to me may be meaningless to you, depending on where you sit, and what your
expectations are. Measuring value is therefore a big dilemma.

 Public Spending must also be consistent with the Economy or Cost minimization with the
lowest cost, Efficiency or output maximization and most effective or Effectiveness or Full
attainment of the intended results.
 What is Value for Money

Value for money is used interchangeably with synonyms such as: 

 Optimal (optimization)

 Return on Investment (ROI)

 Things sold at a good price

 Where quality meets the price

 Quality to price ratio

 Win-win
 The 4 Es in Value for Money

In an attempt to provide a standard for defining and measuring value for money, 3 E’s –
economy, efficiency and effectiveness, were initially introduced and later a fourth E (equity).
It is not the intention of this article to define the 4 E’s, but to explore how the 4 E’s can be
deployed in the public sector.
 The 4 Es in Value for Money

Economy : refers to the costs of the inputs needed for the project

Efficiency : refers to the cost of achieving each unit indicator at the output level.

Effectiveness : refers to whether the project’s outputs will translate into the project’s
outcomes and at what cost. It requires a project’s Theory of Change to be
evidence-based.

Equity : refers to whether the project is addressing social or economic

disparity. It is a cross-cutting principle to consider throughout a VFM
analysis.
 What is Value for Money

The three types of Value for Money are; Utility Value, Status Value, Sentimental Value;

Utility Value
This kind of value is probably the easiest to understand and quantify. If what you sell has
some useful aspect, meaning it solves a tangible problem, then people buy it for utility.

Most products and services in the marketplace are sold on the premise of utility. Buy this, and
it will do this. Pretty simple to understand, and simple to market.
 What is Value for Money

Status Value
A more subtle, but more powerful type of value is status. The feeling that a product or service
will raise the social status of a person is a big reason why we buy. All luxury brands basically
trade on status value. If you can find a way to create some level of social status attached to
your products or services, then you can create a much higher price tag.
 What is Value for Money

Sentimental Value
The most intangible, yet powerful form of value is sentimental. This is when someone has
developed a personal relationship with a product or service. This doesn’t just count for family
heirlooms, it counts for everyday products, clothing brands, airlines and almost anything you
can think of.
 The Concept of Value For Money

• Value for money has been defined as the optimum combination of whole life cost and
quality to meet the user’s requirement.
• six main determinants of value for money (Arthur Andersen, 2000); namely,
(1) risk transfer;
(2) the long-term nature of contracts;
(3) the use of an output specification;
(4) competition;
(5) performance measurement and incentives;
(6) private sector management skills.
• competition and risk are the most important.
 The value for money test

• The value for money test in the context of public-private partnerships (PPP) is a process
used to evaluate whether a proposed PPP project offers good value for the money spent by
the public sector.
• The Value for money test involves comparing the proposed PPP project to alternative
procurement options, such as traditional public procurement or doing nothing at all.
• The test considers various factors, including the cost of the PPP project, the quality of
services to be provided, and the level of risk transfer to the private sector.
 The value for money test

• The Value for money test aims to ensure that the public sector is getting the best possible
deal for taxpayers‘ money while also ensuring that the private sector is being incentivized
to deliver high-quality services efficiently.
• By conducting a Value for money test, governments can evaluate whether a PPP project is
financially and
• economically viable and make informed decisions about whether to proceed with the
project.
• While the Value for money test has some strength, it also has some weakness.
 Strength of value for money test in PPP

1. Provides a comprehensive evaluation: The Value for money test considers multiple
factors, such as cost, quality, and risk transfer, to provide a comprehensive evaluation of
the PPP project.
2. Ensures transparency: The Value for money test is a transparent process that allows
stakeholders to understand the rationale behind the selection of the PPP project and
ensures that the procurement process is fair and unbiased.
3. Helps to manage risks: The Value for money test helps to identify potential risks
associated with the PPP project, which can be mitigated or managed effectively to ensure
the success of the project.
4. Facilitates decision-making: The Value for money test provides decision-makers with
the information they need to make informed decisions about whether to proceed with a
proposed PPP project.
 Weakness of value for money test in PPP

1. Subjectivity: The Value for money test is often subjective, and different evaluators may
reach different conclusions based on their interpretation of the data.
2. Limited data availability: It may be challenging to obtain accurate data on the costs and
benefits of the proposed PPP project, which can make it difficult to conduct a thorough
Value for money assessment.
3. May lead to delays: The Value for money test is a rigorous process that requires time
and resources, which can lead to delays in the procurement process.
4. May be too narrow: The Value for money test focuses primarily on financial
considerations and may not take into account broader social or environmental benefits
associated with the PPP project.
 Table 4.3 Construction performance of Private Finance
Initiative (PFI) and conventional projects

PFI Government
Projects
Projects Procurement
2002 NAO census 1999 survey
Percent
on time 76 30
on budget 78 27

Source : National Audit Office (2003)

 Summary

In sum, the VfM test is a useful tool in the PPP procurement process that
can help to ensure that the public sector gets the best possible value for its money
while also promoting efficiency and innovation in service delivery. Nevertheless,
it is important to recognize the weakness of the VfM test and to use it in
conjunction with other evaluation tools to make informed decisions about PPP
projects.
Thanks for all