Optimism bias (OB) represents the systematic tendency for project appraisers to be optimistic. This is taken into account in the model by the inclusion of optimism bias factor inputs. OB pre -FBC is the optimism bias between OBC stage and FBC. OB post-FBC is the period from FBC through to outturn cost stage. Whilst OB pre-FBC is applicable to both the procurement options, OB Post-FBC is relevant for the PSC Option only. The OB Pre-FBC value is assumed to be the same for both procurement options, and the spreadsheet automatically generates the same OB pre-FBC value for the PFI Option as the PSC Option.
OB values should to a large extent be derived using evidence-based data. DEFRA is in the process of establishing a database to collect relevant waste project data which will assist Local Authorities in the determination of optimism bias values. In the meantime Local Authorities should continue to rely significantly on the technical advisor to determine the OB vales. ethodThe mology for establishing the level of optimism bias on a specific project is set out in the Optimism Bias supplementary Green Book guidance paper 6
In summary, an upper bound value is established for each whole life cost, transaction costs and third party income. The upper bound values are then lowered to the extent that project specific mitigants exist. This methodology is also set out in a report dated July 2002 by Mott MacDonald7, which involved an assessment of large public procurement in the UK. In the absence of available evidenced based data8 the Local Authority should rely significantly on the findings in the Mott MacDonald report to determine the total CapEx OB factor. A template is included in Appendix B to assist with this. These workings should be included in the OBC.
As an example the tabulated values/ ranges below reflect the OB values for waste projects submitted to PRG in 2004/5, having taken into account all project specific mitigating factors. These have been computed using, in part, the information in the Mott MacDonald report. These values are supplied for indicative purposes only, and may be appropriate to use, however each project should undertake its own analysis and justify the values used for the assessment. The Model is likely to be particularly sensitive to the Initial CapEx OB Post-FBC value. This figure should be considered using all appropriate available data and a number of sensitivities run to determine the impact of varying its value.
| Variables | Observations | Indicative Historic Project Values/Range | ||
| Whole Life Costs | Stage 2 | Stage 1 | ||
| 14. Initial CapEx | See section 2.1.3.1 above and the template in Appendix B. | OB Pre-FBC {15-30}% OB Post-FBC {20-90}% | OB Pre-FBC {20}% OB Post-FBC {40}% | |
| 15. Lifecycle costs at each LC date | See section 2.1.3.1 above | OB Pre-FBC {10-15}% OB Post-FBC {30-40}% | OB Pre-FBC {10}% OB Post-FBC {40}% | |
| 16. OpEx | See section 2.1.3.1 above | OB Pre-FBC {5-10}% OB Post-FBC {5-20}% | OB Pre-FBC {10}% OB Post-FBC {10}% | |
| 17. Transaction Costs (PSC | See section 2.1.3.1 above | OB Pre-FBC {10}% | OB Pre-FBC {10}% | |
| Option) | OB Post-FBC {20}% | OB Post-FBC {20}% | ||
| 18. Third Party Income (PSC Option) | See section 2.1.3.1 above | OB Pre-FBC {10}% OB Post-FBC {10}% | OB Pre-FBC {10}% OB Post-FBC {10}% | |
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6 This may be accessed from the HMT website at the following address: http://www.hm-treasury.gov.uk./media/885/68/GreenBook_optimism_bias.pdf
7 Available from the following website: http://www.hm- treasury.gov.uk/mediastore/otherfiles/greenbk_mottsrep02.pdf#search='mott%20macdonald%20report%20optimism%20bias'
8 Given the provisions of the EPA none of the waste projects in the UK have been conventionally procured. Accordingly there is no waste specific evidenced-base data for the OB Post values.