Cao Fuguo, Central University of Finance and Economics: Connotation and Development of the Theory of Value for Money


Note:English version for reference only,Chinese version shall prevail.

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Cao Fuguo, professor and doctoral tutor of the Law School of Central University of Finance and Economics and head of China Public Procurement Research Institute

I. Introduction

Value for money (VFM) evaluation is a core system of the current public-private partnerships (PPP) policy and the base for deciding whether to adopt PPP model. It is not, however, an isolated system; on the contrary, by reference to VFM in traditional government procurement and rooted in the inherent requirements of public finance and public expenditure management, it is a core value and principle in modern state governance. Certainly, the connotation and extension of VFM also vary with the times. This article briefly traces the origin of VFM, and discusses the connotation and development of VFM by focusing on the issues concerning VFM in traditional government procurement as a reference for VFM in PPP, so as to enlighten people about the development of the theory and practice of VFM in PPP.

II. Origin of VFM and Its Position in Modern Finance

In ordinary language, VFM is easy to understand. It means that the goods or services are worth buying for their quality. Accordingly, VFM is often related to money spending, which is common in both Chinese and English contexts. Therefore, when this concept is used for the public sector, it is often related to public expenditure. Many papers point out that the Britain was the first to formally use the concept of VFM in the public sector. In fact, Britain began to use this concept in local government reforms under the pressure of financial expenditures. At that time, Britain was undergoing a new public management reform with far-reaching impact, in which market mechanisms were introduced in the reform of the public sector, to build a procurement-type public sector. In this context, in order to win votes and get legitimacy and impetus for reform, politicians began to use the popular VFM to tell voters that every penny of taxpayers would be well spent, to bring the maximum benefits to the people.

According to the study of some researchers, from the legal perspective, the concept of VFM can be traced back to the Local Government Finance Act 1982. Of course, this Act does not specifically define it. It is said to be a political deliberate obfuscation aimed to avoid opposition from local governments. Instead, this Act intends to find out the exact connotation of VFM through pilot programs. Over ten years later, it has been enriched by 3Es, namely efficiency (maximum output), economy (minimum costs) and effectiveness (all expected results have been achieved), which have gradually become mutually logical components of the connotation of VFM and major aspects in VFM evaluations. Afterwards, in order to assess the fairness and impartiality of the expenditure of public funds, equality, the fourth E, has become a new aspect in VFM evaluations.

Subsequently, Britain further deepened the reform of the public sector by implementing a compulsory biding system in public service sectors and introducing the concept of "best value" in the Local Government Act 1999, to perfect the concept of VFM. Best value can be deemed as the further enrichment of the connotation of VFM. In particular, as compared to the previous "3Es", this concept adds an obligation that stakeholders, especially the service users, must be consulted to the concept of VFM. VFM, originally a user-oriented concept, can better release the effects of VFM evaluations by adding the obligation to consult service users in the legal perspective and stressing the important role of such users in the decision-making as to VFM evaluations.

Today, to achieve VFM is the responsibility of central and local governments, national health service and all other public sectors. In the central government, one of the duties of the Cabinet Office is to ensure the effective operation of the government and to reform governmental services, so that users can obtain efficient and effective governmental services. The Efficiency and Reform Group under the Cabinet Office, in close cooperation with the Ministry of Finance and other government departments, is responsible for achieving efficiency, cost saving and reform on behalf of taxpayers.

Therefore, it is believed that the concept of VFM and a series of systems constructed in relation thereto do not just appear when we are discussing PPP today. Actually, VFM, originating from the public finance law, is the inherent requirement of modern public sector management, in particular, public financial management. The political legitimacy and economic rationality of VFM lie in the fact that the organizational forms of government and ways of providing public services vary but are all subject to the basic inspection for VFM. Today, VFM, as a basic concept in public financial management, has been globally established and deeply embedded in government activities and the specific areas of public financial management, including government procurement and PPP which is an innovative public procurement system.

III. Issues Concerning VFM in Government Procurement

PPP is relative to traditional government procurement; therefore, the VFM evaluations for traditional government procurement should also be taken as a reference for those for PPP. The public sector comparator (PSC) is just an intermediary between the VFM evaluations for PPP and traditional government procurement, which should reflect the VFM in traditional government procurement. Therefore, from the logic of theory, to determine the theory and methods for the VFM of PPP, we must first clarify the issues concerning the VFM of traditional government procurement.

When I focus on the issues concerning VFM in government procurement, the scene appearing in my mind is different from that appearing in the current PPP vision. The several keywords in our discussion today about the issues concerning VFM in PPP are PSC, qualitative analysis, and quantitative analysis, while the vision of VFM is much wider in the government procurement scenario.

First of all, let's discuss the goal of the government procurement system, namely the "value" in VFM. Literally, the word "value" in the term "Value for Money" can be deemed as the value that we pursue in public expenditure, including the direct results arising from the expenditure of public funds and the impact thereof. In this sense, VFM can be considered as the value goal that the public procurement law pursues.

The value goals in the government procurement law are usually divided into two categories. One category emphasizes the economic value of government procurement. This means that there are only economic considerations rather than non-economic considerations of government procurement in the decision-making systems for government procurement. Cost saving, economic efficiency, economic feasibility, international trade liberalization, open market and so on can be included in this category. The other category is called public policy goals. In other words, government procurement shall achieve broader political, social, environmental and other public policy goals, in addition to economic goals. For example, the domestic procurement policy, policy on promoting small and medium-sized enterprises, and other policies on social and environmental sustainability in China's government procurement law fall into this category. So does the "value" in VFM live up to its meaning? It may refer to something of purely economic nature to measure output or the broader possible impact of such output, As if some dress clothes to keep out the cold while others give more value connotation to them. Therefore, VFM in government procurement is not only inclusive but also modern. For example, with the development of the times, the public policy goals to be promoted by government procurement become particularly broad, and may include social equity and justice, innovation, environmental protection, response to climate change, and other connotations. Of course, the richer the value's connotations are, the more problems, such as the conflict between such connotations and decision-making difficulties in practice, will be brought. For example, the international public procurement law often resists the second category of goals as its primary goal is trade liberalization. Therefore, the EU public procurement law just recently accepted the concept of VFM after decades of development. In the newly revised UNCITRAL Model Law on Public Procurement, VFM is finally not accepted in legal instruments, although there is a lot of discussion in its legislative guide. The WTO Agreement on Government Procurement does not adopt the concept of VFM, although it does incorporate some elements of VFM, such as the discussion about the efficient utilization of public resources in its legislative aim. It is worth emphasizing that the World Bank recently conducted a revolutionary reform of its procurement rules, determining for the first time the purpose orientation as well as the VFM goal and principle.

China began to advocate the concept of VFM within the fields of government procurement in recent years; however, to determine the value of VFM in the procurement law, a profound reform of the public procurement law is required. Our current PPP decision-making system is just an economic decision-making model, although it also begins to include a number of other considerations.

Therefore, the VFM goal in government procurement is consistent with that in government administration and public financial management. It's natural that the value goals of government procurement, whether traditional or PPP procurement, are the same as those of the government and of public finance.

So, how to achieve the VFM goal? In government procurement, the main assumptions to achieve the VFM goal are market mechanism and open competition. The government procurement law determines competitive procurement methods with tendering being a representative and defines strict conditions for exceptions of competition. In the government procurement law, the provisions on government procurement methods and the application thereof also form a major part of the text.

The government procurement practice also suggests, however, that sometimes relying solely on the competition in the link of awarding a contract cannot achieve VFM. Consequently, the government procurement system emphasizes the concept of purchasing life cycle. The purchasing life cycle begins with the generation of demands and ends when the demands for planning, budget arrangements, bidding, and contract performance guidance are fully satisfied. Therefore, the phases before and after contract awarding are also important links to achieve VFM. In the PPP context, these links are of particular importance to the achievement of VFM.

Evaluation criteria and whether alternative bids are allowed are other important aspects to achieve the VFM goal. Overemphasizing the minimum price standard and sole consideration of acquisition costs (rather than the costs during a life cycle) is not conducive to the realization of VFM. Alternative bids can provide valuable solutions, which may be more conducive to innovation and the realization of VFM.

To achieve VFM is also related to the rules and theories under the government procurement law. The anti-corruption-oriented procurement law will lead to the phenomenon that procurement will be carried out for procedures rather than value. Accordingly, competent authorities of government procurement put forward the transition of procurement law in recent years, to change the procedures orientation to results orientation. That is, the government procurement law should take VFM as its vale goal and accordingly examine the reform of the entire system.

The VFM-oriented procurement law and system further highlight the role of competency factors in achieving VFM. Meanwhile, the combination of centralized procurement and decentralized procurement and other organization issues are also important variables that affect VFM.

Of course, we can also extend the variables that affect the achievement of VFM in government procurement; however, what the author would like to emphasize herein is that the VFM evaluation theories and techniques may require a broader perspective.

IV. Conclusion

VFM is a theory, method or evaluation technique employed by modern governments when carrying out activities or providing public services by use of various forms. The political legitimacy and economic rationality of VFM lie in the fact that the organizational forms of government and ways of providing public services vary but are all subject to the basic inspection for VFM. Of course, VFM is also the inherent requirement of modern public financial management.

The VFM theory attempts to answer a question: whether taxpayers' money is well spent. In answering this question, the expenditure value of public funds embraces the interest demands of citizens, including their demands as taxpayers and demands as public service users. In this regard, VFM should, in principle, be taken as a value goal or basic principle in acquiring public services by either traditional procurement methods or PPP method. Therefore, discussing only the VFM issues in relation to the VFM theory of PPP will rend the internal relations between the VFM theory and the general public procurement management and government procurement management, so that we will be overshadowed in theory and misguided in practice.

PPP is relative to traditional government procurement; therefore, the VFM evaluations for traditional government procurement should also be taken as a reference for those for PPP. The public sector comparator (PSC) is just an intermediary between the VFM evaluations for PPP and traditional government procurement, which should reflect the VFM in traditional government procurement. Therefore, from the logic of theory, to determine the theory and methods for the VFM of PPP, we must first clarify the issues concerning the VFM of traditional government procurement.

The inspiration drawn from the research on issues concerning VFM in government procurement is that the realization of VFM is not just the result of the algorithm for a series of economic or financial indicators. As we enter the era of "procurement government", is VFM considered in our government administration and public financial management from the perspective of taxpayers and public service users? To assess the VFM in PPP and realize the potential VFM in PPP projects, a complete system shall be built, and the core status shall be given to VFM in the entire public sector management, especially in public financial management.

Since PPP is relative to traditional government procurement, it has more VFM as compared with the latter for its legitimacy. So in essence, it is VFM in traditional government procurement and that in PPP that should be compared. PSC is just an intermediary for comparative analysis purpose invented for the convenience of algorithm. Whether the evaluation analysis of VFM on such base is appropriate depends not only on the availability of the data upon which this technique relies and the algorithm thereof, but also on whether this base indicator itself can reflect and embrace the rich connotation of VFM. Otherwise, the VFM evaluations made are one-sided. For example, as a person in the industry said, assuming that local authorities lack the understanding of PPP and the VFM thereof and the ability to implement VFM, even if the VFM is figured out, it is impossible to achieve it.

This paper argues that the VFM theories in public finance, traditional government procurement, and PPP are consistent. In view of this, the application of the theories and techniques for the VFM evaluations of PPP should not just focus on the PSC algorithm. Even if it is assumed that this algorithm is rational, unless PSC is sufficiently accurate and inclusive, the VFM evaluations made based on the PSC algorithm should not become the sole standard for making decisions on PPP projects.

We may consider that when we introduce the theory of VFM in PPP and its evaluation methods, we do not simultaneously introduce the soil and climate applicable to such theory and methods. When discussing the theory and techniques of VFM in PPP, people may just care about and compare the difference between PPP and traditional procurement and design the comparative methods and techniques. Given the consistency as to the VFM theory among public finance, traditional government procurement, and PPP, when they are discussing PPP with us, they probably eliminate the comparison of the same aspects between PPP and traditional procurement. And we may take their PPP VFM analysis methods as the complete VFM evaluations.

With the advent of the PPP era in China, state governance has entered a new era of "procurement government". The VFM theory and techniques in PPP are not isolated, as they are the core concept and methods in public financial management during the transition of state governance. We should introduce such theory and methods while acquiring the soil that nurtures their growth and the climate for the improvement of their operation.

Now it is time for us to establish the status of the VFM theory in public financial management.