2.2 Model Outputs - Interpretation of Results

In order to run the Model, a pre-tax IRR target switch in the 'Output - Indifference' spreadsheet should be selected. For the majority of waste projects, a pre-tax IRR target of 18% will be assumed. This corresponds to a post tax IRR of around 15%.

The principal Model output is the Indicative PFI VfM. This represents the percentage difference in NPV costs between the PFI Option and the PSC Option. If the value is positive then, based on the input assumptions, the PFI Option is likely to offer better VfM than the PSC Option. The higher the value the greater the certainty VfM will be delivered by using PFI. Conversely if the value is negative, then conventional procurement will offer better VfM.

Waste projects which have been assessed using the Mandatory Guidance have been found to have a higher Indicative PFI VfM value (circa 17%) than projects in other sectors9. This is partially because certain waste specific aspects are not taken into account in the Model. For example:-

The Model's maximum pre-tax IRR target is 18%. However given the risks assumed by the private sector for waste transactions, the projected pre-tax IRR target may actually exceed 18%. The Model will accordingly overstate, for any given project, the PFI VfM position;

The level of third party income for waste transactions sometimes represents a relatively high proportion of total income. This may fetter the ability of the Authority to voluntarily terminate the contract. This is because under the market value approach, the Authority underwrites the third party income for the remaining contract period. However the Authority is not able to retrieve this income.

However this is not expected to undermine the decision making process, as:-

the impact on the Indicative VfM when the waste specific variables are factored in is likely to be negligible and not effect the overall assessment10;

VfM assessment entails not only a quantitative but also a qualitative assessment (see section 3);

there is no single pass/fail estimate. Whilst the VfM Guidance suggests that as a rule, the indicative VfM value should exceed 5%, should a project or programme of projects generate an indicative VfM output of less than 5%, this does not necessarily mean that project procurement using PFI will not deliver VfM. Equally, should the Indicative VfM exceed 5% this does not automatically mean that VfM will be achieved by using PFI

As a result, comparing outputs for one waste project with values achieved for other waste projects may be more informative, than a comparison with outputs for non waste projects.

Sensitivity tests should be run in order to determine the robustness of the Indicative PFI VfM value. The indifference switches in the Output-Indifference spreadsheet should be used to determine by how much costs must fall under the PSC Option (assuming a positive indicative VfM value) before being indifferent between the two options.

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9 Based on a review of 4 waste projects

10 Further to sensitivity testing of previous projects it has been determined that for each 1% change in the equity IRR there is broadly a 0.5% impact on the Indicative VfM factor. Authorities should take this into account when interpreting the results for any waste project where the pre tax IRR exceeds 18%.