Question 1 (part 1): How should the cost and benefits of Private Finance projects be assessed? What discount rate should be used in comparing Private Finance with conventional public procurement?

1.1  The costs and benefits of PFI projects should be assessed under the rubric of the Green book, like other government investment decisions. Further guidance has been developed for assessing value for money (VFM) in PFI.10

1.2  The assessment of VFM requires the best efforts of procuring authorities to assess the various costs and risk factors. PFI is intended to give certainty about whole-life costs relatively early compared to conventional procurement, because after contract signature PFI involves "payment for performance": the risks of poor or expensive service delivery largely fall to the private sector. Compared to a conventional procurement11 there is more incentive to consider all costs at the outset.12

1.3  VFM is not a matter just of lowest cost but of overall value. This reflects cost but also certainty ie the extent of risk transfer, and quality. VFM involves quantitative and qualitative factors. Examples of the latter are ease of drafting output requirements sufficiently clearly, and the relevance to a particular project that PFI relieves the public sector of operational responsibilities it may not be best equipped to manage.

1.4  For the discount rate, PUK regards the use of a Social Time Preference Rate, as per the Green Book, as a reasonable approach. The Green Book applies to all types of resource allocation decision and the approach adopted for PFI is therefore consistent with other evaluations undertaken within government.

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10  See www.hm-treasury.gov.uk/ppp_vfm_index.htm.

11  Which we take to mean separate arrangements for the design, construction, and then operations of an asset for the delivery of public services eg hospital. Much of the work underneath these separate arrangements (eg construction) will likely be performed by the private sector in either scenario.

12  "Unitary charge" payments are determined using the contracted "payment mechanism". See appendix for further explanation of these terms, if required.