The general methodology for a value for money assessment is as follows:
• Determine the full schedule of the project and, through cash flow modelling, the life cycle cost of traditional delivery of the project (including design, construction, operations, maintenance, recapitalization/renewal, service provision, and financing) to provide the "raw cost estimate." This may be a high-level order of magnitude estimate or more a detailed estimate, depending on the project profile;
• Quantify the risks (i.e. determine expected cost) to The City of traditional delivery, which when added to the life cycle cost provide the "risk-adjusted cost estimate5";
• Using the raw cost estimate as the baseline, estimate the costs to The City if delivered under the P3 model(s). This is done through cash flow modelling of the private partner's financial approach, and may consider expected private sector efficiencies in capital and operating costs, as well as the cost of private financing. The results are known as a "shadow bid"; and
• Compare the risk-adjusted cost estimate to the shadow bid to determine the value for money, if any, offered by the shadow bid.
The value for money assessment should reflect, and attempt to price, the project based on The City's expected service standards.
The main components of the value for money assessment, in addition to those that are part of the strategic assessment, are as follows:
• The preferred potential P3 model, as determined by the strategic assessment (i.e. the value for money assessment should be focused on one specific P3 model in most cases);
• A quantitative risk assessment, which builds on the qualitative risk assessment done in the strategic assessment, and:
1. Quantifies as best possible the likelihood and impact of all risks that The City faces under traditional procurement; and
2. Quantifies as best possible the likelihood and impact of all risks that The City faces under P3 delivery (the likelihood and impact will change due to risk transfer to the private partner).
• A market sounding of relevant service providers (i.e. discussion of the project characteristics, costs, schedule, etc.) to obtain direct market input on issues of risk allocation, financing, procurement concerns, and competitive interest that affect the value for money assessment and/or the overall conclusions. This may sometimes be done as part of the strategic assessment;
• Development of a cash flow model for the "raw cost estimate";
• Development of the "risk-adjusted cost estimate";
• Development of a cash flow model for the "shadow bid";
• An analysis of the difference between the risk-adjusted cost estimate and the shadow bid, resulting in an assessment of value for money; and
• A distillation of strategic factors and value for money to select the recommended delivery model, which may be traditional or a P3 model.
The final step discussed above is key in cases where important considerations identified in the strategic assessment either balance or complement the primarily financial results of the value for money analysis.
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5 The risk-adjusted cost estimate is often referred to as the public sector comparator (PSC)