Budget Refinement

Before a proposal call is issued, the project team needs to determine or refine the project's budget. In many cases, this is completed by determining what the project would cost if it were built strictly by the local government. This process is used for a number of reasons:

• It will determine if a public private partnership will actually save money for the local government. Unless a proponent's solution is innovative and would result in a significant improvement in service or cost savings, it is unlikely that a local government will participate in a public private partnership arrangement.

• It will provide potential partners with a "benchmark" on which they need to improve in their proposals. Again, if the proposal comes in at a higher cost than proposed by the local government, the expectation is that the private partner will provide an improvement in quality of infrastructure or service for users.

• It will determine if the local government can afford to be involved. If the local government cannot build a much-needed project on its own, assistance from the private sector may be required.

The preparation of benchmark costs would build on the preliminary benchmarking of costs described in the previous section. In preparing a "shadow bid," the project team may wish to undertake additional work to provide a sound cost estimate for the project or servicing initiative. This may mean undertaking some preliminary design work, valuation of property (where land is required), research on recent construction costs and operating costs for similar facilities in other communities, or other activities depending on the nature of the service.

A clear delineation should be made between what are considered capital costs and operating/maintenance costs to avoid confusion later in the process.

Costs are not the only consideration. The local government must also benchmark quality of service, technology and implementation time.

The preparation of a "shadow bid" will allow the project team to evaluate and compare proposals from potential private partners on a fair and equitable basis. More often than not, local governments do not make a full accounting of the cost involved in providing a service. Administration, overhead and maintenance costs can often be separate budget items. These costs are then not directly attributed to the services that create them.

When the true or actual cost of an infrastructure project or a service is being analyzed for benchmarking, the following components need to be examined in detail:

• program-associated capital costs

• salaries and benefits of all employees directly involved in the provision of the service

• allocation of the salaries and benefits paid to administrators, accountants and human resources employees who deal with the specific service

• proportion of overhead incurred by the service through space needed in the local government building, use of a central accounting system, payroll, engineering department, procurement, clerical staff

• telephone, fax, courier, Internet, computer network costs

• training

• utilities

• office equipment

• postal costs/courier expenses

• cost of office supplies used

• advertising and promotion costs

• public relations costs

• travel, meals and accommodation allowances

• cost of outside consulting contracts

In infrastructure projects, both capital and operating costs must be considered in developing a benchmark cost. These costs are presented in the following table.

(Fig. 6.2.1) Infrastructure Capital and Operating Costs Required for Benchmarking