3.2.13.1 Value for money-qualitative assessment

The purpose of the qualitative assessment is to subjectively test whether the objectives, service requirement and proposed structure of the project are likely to provide the private sector with sufficient scope to access the value drivers.

As a guide, qualitative assessment should address the following issues:

• Risk allocation:

Have risks been allocated to the party best able to manage and control the risks?

Is there a genuine transfer of risk to the private sector?

Does the market have sufficient management quality to control the transferred risks?

Does the market have the appetite to take the risks being transferred?

Is there sufficient credit quality in the market?

Can the contract be developed to enforce the risk allocation?

Can the risk allocation be relied upon even under extreme circumstances, such as private sector default?

Have design, planning, completion and operational risks been allocated to the private sector?

To what extent is residual value risk transferred to the private sector?

Is payment at risk to service performance?

• Whole of life costing:

Is the private sector free to determine the operating and maintenance requirements to meet the output specification?

Is the private sector responsible for all refurbishment requirements?

Is the private sector responsible for performance of the asset throughout the contract period?

• Innovation:

Is the private sector free to determine how to deliver the services?

Is the manner of the design and construction of the asset a decision under the control of the private sector?

Is there scope for innovation either in asset design or service delivery?

Is the scope of service delivery sufficient to provide incentive for innovative design solutions?

Is the private sector responsible for all or only part of the services required to be delivered from the asset?

To what extent is the public sector responsible for service delivery utilising the asset?

• Improved asset utilisation:

Is the private sector service provider able to generate additional third party income from the asset?

Can the private sector provide additional services to third parties?

Is third party revenue generation likely to reduce the overall cost of the service to government?

• Economies of scale:

Is the market for the service large enough to access significant economies of scale, either in construction or operations?

The business case (stage 3) should incorporate a broad discussion of the qualitative assessment of the project's value for money, with reference to each of the value drivers. As a minimum, all of the issues identified above should be addressed as part of this assessment.

A useful tool for summarising the qualitative assessment is to adopt a scoring mechanism against each of the value drivers. For example:

•

represents no scope for value generation

represents some scope for value generation

represents reasonable scope for value generation

represents excellent scope for value generation

To illustrate how this scoring mechanism, or one similar, can assist with the qualitative assessment of value for money, consider the following hypothetical examples. Note that, in practice, there would of course be much more information available for analysis during the qualitative assessment of such projects.

FIBRE OPTIC COMMUNICATION PROJECT- EXAMPLE 1 To support the communication and signalling requirements, of a rail corridor, Government is seeking Private Sector participation in the provision of fibre optic cable infrastructure. The infrastructure is to be installed via a 'design, construct, own and maintain' Project Deliver/ Option, with the following key features:
	Objective		•	provide rail signalling services on a defined rail corridor
	Service Requirement		•	provide current and future rail communication needs along a defined rail corridor
	Scope for Private Sector involvement		•	Provision, operation and maintenance of the fibre optic cable, i.e., dark fibre
	Public Sector involvement		•	Transmission, i.e., lit fibre,
	Transferred Risk		•	Design, Installation, Operation and Maintenance Costs, Third Party Revenue
	Retained Risk		•	Transmission of signalling service
	The following table summarises he qualitative assessment of value for money for this project:
	Value Driver	value Score		Rational
	Risk allocation	X		The proposed risk allocation is very similar to that under the traditional Project Delivery Option
	Whole of life costing	X		Operation and maintenance costs of dark fibre optic cable is relatively small in comparison to installation costs
	Innovation	X		Little scope to innovate in what is essentially the design and roll out of fibre optic cable
	Asset Utilisation			Scope to exploit additional fibre optic capacity for third party revenue generation However, given the current market saturation in fibre optic capacity, the scope for generating additional revenue to deliver value back to the Government seems limited
	Economies of Scale			Some scope to incorporate the rail corridor into a much bigger fibre optic network
This qualitative assessment indicates that there is little value for money opportunity in the PPP Project Delivery Option for provision of the dark fibre services to Government (i.e., within risk allocation, whole of life costing and innovation). In this example it may be possible to improve on this value by widening the service provision to include transmission services. The only realistic source of value in the current project structure lies in the generation of third party revenue from spare communications capacity, and in the potential to incorporate the rail corridor into a bigger fibre optic network. However, given the current oversupply in the telecommunications market and the significant markdown of the industry worldwide, it is unlikely that these value drivers alone will provide sufficient scope to generate value for money for Government. Overall, the qualitative assessment indicates that there is little to no scope for generating value for money from the project, (as currently structured) and as such, a quantitative assessment would not be required.

LOCAL LEISURE CENTRE - EXAMPLE 2 To support its health and fitness policy Government is seeking Private Sector participation in the provision of a leisure centre facility. The facility will incorporate international playing services for a number of defined sports. The project will possess the following key features:
	Objective		•	To increase the community participation in health and fitness and to encourage involvement in certain international sports
	Service Requirement		•	To provide leisure facilities to a defined standard
	Scope for Private Sector involvement		•	Design, construction, maintain, operate and finance the leisure facility that is to be funded by a combination of user charges and Government subsidy
	Public Sector involvement		•	Definition of output requirements, monitoring of service delivery and payment of fixed subsidy (tendered)
	Transferred Risk		•	Design, planning, construction, operation and maintenance costs, residual value, volume of usage
	Retained Risk		•	None, other than meeting the subsidy payments as bid and contracted
	The following table summarises the qualitative assessment of value for money for this project:
	Value driver	Value Score		Rational
	Risk allocation			The proposed risk allocation appears optimal and transfers significant volume/ usage risk to the Private Sector
	Whole of life costing			Operation and maintenance costs of the leisure centre are significant when compared to the design and construction costs
	Innovation			There is reasonable scope to be innovative in service delivery, for example incorporating flexible playing services capable of supporting different sports
	Asset Utilisation			Significant scope to exploit the leisure and sports market and even to expand into related services such as catering and sports injuries
	Economies of Scale			Some scope to incorporate the development into an existing network of sports services
This qualitative assessment indicates that there seems to be significant scope for the Private Sector to access and exploit the value drivers. Whilst Government has recognised that a subsidy may be required to maintain the sports facilities to international standards, there is significant transfer of volume or usage risk to the Private Sector. There also appears to be significant scope for innovation in service delivery and increased asset utilisation by incorporating complementary services. Overall, the qualitative assessment indicates that there is significant scope for generating a value for money outcome from the project as structured. Therefore, a quantitative assessment of the project would be required.

Though these examples are necessarily simplistic, they do illustrate the type of analysis required for the qualitative assessment. The fibre optic example also demonstrates how the qualitative assessment can be sufficient to demonstrate that the project is unlikely to represent a 'value for money' option for government. In this example, the next step would be to explore the options for restructuring the project and/or expanding the services provided by the private sector to see if such actions improve the qualitative assessment. If, after carrying out this exercise, the qualitative assessment demonstrates that there is still little scope for generating value for money via a public private partnership project delivery option, then the business case (stage 3) recommendation would be to pursue the traditional delivery option. This example further illustrates that by carrying out a robust and defensible qualitative assessment, the additional costs and time required to develop a quantitative assessment can be avoided.