Key findings of the Committee: 7.1 Value for money includes whole-of-life cost and quality, cost effectiveness, risk transfer, innovation, and asset use to meet the customer's needs. 7.2 To ensure a competitive process, it is essential that there is a sufficient number of private sector companies, including construction and service companies and financial institutions. 7.3 The Victorian Government undertakes five tasks to evaluate potential public private partnerships (PPPs). The primary mechanism for evaluating PPPs is the philosophy of value for money and the quantitative construction of the public sector comparator (PSC). 7.4 Predictions of value for money are inherently dependent on economic projections, risk allocations and cash flows and the assumed discount rate used for long term contracts. 7.5 There is much debate on the veracity of the compilation of the PSC. Critics claim it is fundamentally flawed while proponents claim it is essential for judging value for money. 7.6 In light of the recommendations in the 2004 Fitzgerald review and a variety of international discount methodologies, the government needs to revise its current practices of risk adjustment and evaluation. 7.7 There are different methodologies for risk allocation and discounting cash flows, for example the United Kingdom Treasury uses a 3.5 per cent discount rate and makes a separate risk adjustment to the cash flows. 7.8 The government is examining ways of reducing high bid costs for both government and the private sector, which should assist the number of tenderers participating in PPP projects. 7.9 This report shows how the Victorian Government assesses value for money in PPPs. It is important the community is satisfied that PPP projects genuinely offer value for money over the alternative methods of delivering and financing public infrastructure. 7.10 In light of the variety of discounting methodologies used on PPPs and the ongoing debate in this area, the Victorian Government should ensure it adopts best practice. 7.11 One advantage of public private partnerships over traditional approaches is the more systematic and upfront analysis to risk and which party is best able to manage it and bear that responsibility. Lessons learnt from this could be applied to traditional procurement. |