A2 Examples of the criteria that could be included in the value for money appraisal at the stage the decision is made on how to procure investment projects as part of a programme are:
• outline of the objectives of an investment programme and definition of a successful outcome, financial and non-financial, including for example, social outputs and skill development;
• public equity, efficiency and accountability reasons for providing the service directly;
• whether the service is contractable on a long-term output specified basis. The outputs should take into account, inter alia, the potential need for changes and requirement for flexibility during the contract terms, including for example, whether output levels could be affected by technological change in the short to medium term;
• the experience and track record of similar projects that have demonstrated the wider value for money and costs savings that PFI can deliver. The analysis will need to consider the benefits and costs of other procurement routes compared with a PFI route such as the costs of a complex procurement process, and the scope for risk transfer;
• identification of the potential distributional implications of the various options across society and how the costs and benefits might accrue across different socio-economic groups;
• assessment of the benefits and costs in relation to employment issues under each procurement route. For example, options being considered should take into account the need for flexibility in the delivery of public services and the ability to pursue PFI, for example, without full workforce transfer (retention of soft services); and
• establishment of central departmental (or agency) management arrangements to support the procurement programme and potential transaction costs of the programme.
A3 This appraisal will be aided by appropriate quantitative analysis to ensure transparency and robustness. At the stage that decisions are taken on how to allocate capital, the analysis is likely to focus on the following:
• preliminary assessment of projected operational and capital costs for
investment programmes;
• broad transaction and financing costs of different procurement routes, where such information can be extracted from experiences to date from the sector;
• assessment of the potential tax impact for each route;
• accounting for optimum bias on the overall investment programme for capital costs, duration of works, operational costs and benefits - which in the public sector has historically been caused by both inadequate project definition and poor project management. Optimism bias within private sector bids should also be factored into the overall risk analysis, such as the level of variation claims (which impact price), using the information available from actual experience from projects. The application of optimum bias to PFI project appraisals will require further development and the Treasury will work with Departments to develop project or sector specific methodology;
• distinct from optimum bias, quantification of uncertainties surrounding the public sector's ability to estimate the cost and benefits of a public sector alternative, for example, the value in a fixed price contract offered by private sector compared with relying on internal estimates to price the contracts. This may be less of an issue where similar transactions exist for comparison but may be applicable for unique or more complex projects;
• preliminary appraisal and quantification of benefits and costs arising across the different sectors and across income groups, such as improved productivity of workers, loss of workforce and environmental improvements of each procurement route. The Green Book suggests use of multipliers or indexes to differentiate the potential impact across the different sectors or socio-economic groups; and workforce issues; and
• potential for alternative revenue streams such as third-party revenues generated or cost savings by or to other programmes based on experience from previous similar projects.