VIABILITY

For PFI to be viable the investment objectives and desired outcomes need to be translated into outputs that can form the basis of a contract and a sound payment mechanism; for example, the quality and quantity of the outputs need to be ones that can be clearly defined and measured. Many service areas can be described in contractual terms, but some areas will be inherently 'non-contractible as outputs.

Issue

Question

Programme level objectives and outputs

Is the department satisfied that long-term contracts could be constructed for projects falling in this area? Can the contractual outputs be framed so that they can be objectively measured?

Is the requirement deliverable as a service and as a long-term contractual arrangement?

Could the contracts describe service requirements in clear, objective, output-based terms?

Can the quality of the service be objectively and independently assessed?

Is there a good fit between needs and contractible outcomes?

Can the contracts be drafted to avoid perverse incentives and deliver quality services?

Will there be significant levels of investment in new capital assets?

Are there fundamental issues relating to staff transfer or other workforce issues?

If there are interfaces with other projects, are they clear and manageable?

Soft services

Are there good strategic reasons to retain soft service provision in-house e.g. longer-term implications of skill transfer?

What are the relative advantages and disadvantages? Is optimal risk allocation achieved by transfer or not?

Is there a commitment that the assumed benefits can be delivered without eroding the overall terms and conditions for staff?

Operational flexibility

Is there a practical balance between the degree of operational flexibility that is desired and long term contracting based on up-front capital investment?

What is the likelihood of large contract variations being necessary during the life of the contract?

Can the service be implemented without constraining unacceptably the flexibility of the department to deliver future operational objectives?

Equity, efficiency and accountability

Are there public equity, efficiency or accountability reasons for providing the service directly, rather than through a PFI contract?

Does the scope of the service lend itself to providing the contractor with "end-to-end" control of the relevant functional processes? Does the service have clear boundaries?

Are there regulatory or legal restrictions that require services to be provided directly?

OVERALL VIABILITY

Overall, in considering PFI, is the department satisfied that suitable long term contracts with sufficient flexibility can be constructed, and that strategic and regulatory issues are appropriate for departments to proceed with PFI?

DESIRABILITY

PFI can provide better risk management and produce incentives to develop innovative approaches to output delivery. Consistent high quality services can be incentivised through performance and payment mechanisms. However, risk transfer is priced into the contract. The purpose of these questions is to consider whether the benefits of PFI are likely to outweigh any additional costs and disbenefits.

Issue

Question

Risk management

Is the private sector likely to be able to manage the generic risks associated with the programme more effectively than the procuring authority?

Bearing in mind the relevant risks that need to be managed for the programme (see Box 3.2), what is the ability of the private sector to price and manage these risks?

Can the payment mechanism and contract terms incentivise good risk management?

Innovation

Is there scope for innovation in either the design of the solution or in the provision of the services?

Does some degree of flexibility remain in the nature of the technical solution/service and/or the scope of the projects? Is the solution adequately free from the constraints of imposed by the procuring authority, legal requirements and/or technical standards?

Does a preliminary assessment indicate that there is likely to be scope for innovation in the programme?

Contract Duration & residual value

How far into the future can service demand be reasonably predicted?

What is the expected life of the assets? What are the disadvantages of a long contract length?

Are there constraints on the status of the assets after the contracts end?

Incentives and monitoring

Can the outcomes or outputs of the investment programme be described in contractual terms, which would be objective, specific and measurable?

Can the service be assessed independently against an agreed standard?

Would incentives for delivery of service levels be enhanced through a PFI payment mechanism?

Lifecycle costs

Is it possible to integrate the design, build and operation of the projects in the programme?

Are there significant ongoing operating costs and maintenance requirement? Are these likely to be sensitive to the type of construction?

OVERALL DESIRABILITY

Overall, is the accounting officer satisfied that PFI would bring sufficient benefits that would outweigh the expected higher cost of capital and any other disadvantages?

ACHIEVABILITY

While PFI may allow a more efficient and effective combination of public and private sector skills, determining the rules that will govern the relationship between the two sectors does involve significant transaction costs. In particular, the procurement process can be complex and significant resources, including senior management time, may be required for project development and the ongoing monitoring of service delivery. Authority capacity and capability, together with private sector side aspects will have direct consequences for procurement times and the level and quality of market interest. PFI needs a robust competitive process to fully deliver its benefits and so the choice of procurement route should be informed by an assessment of the likely market appetite.

Issue

Question

Market Interest

Is there evidence that the private sector is capable of delivering the required outcome?

Does a significant market with sufficient capacity for these services exist in the private sector?

Is there likely to be sufficient market appetite for the projects in the programme? Has this been tested robustly? Is there any evidence of market failure for similar projects?

Have any similar programmes been tendered to market? Has the procuring authority's commitment to a PFI solution for projects of the type covered in this programme been demonstrated?

Other Issues

Is the procurement feasible within the required timescale? Is there sufficient time for resolution of key procuring authority issues?

Is the overall value of the contract significant (sufficient for the public and private sector to justify their transaction costs?)

Does the nature of the deal and/or the strategic importance of the work and/or the prospect for further business suggest that it will be seen by the market as a potentially profitable venture?

Does the procuring authority have the skills and resources to define, deliver and support the service throughout the procurement and the subsequent delivery period?

OVERALL ACHIEVABILITY

Overall, is the accounting officer satisfied that a PFI procurement programme is achievable, given an assessment of the market, procuring authority resources and the attractiveness of the proposal to the market?