6.2  Common problems in PSC development

Some problems are commonly experienced in the construction and use of PSCs. These have included:

∙ introducing inappropriate and spurious detail in risk analysis. It is appropriate to focus on the important risks. For value for money comparison, it is the risk that is transferred under Partnerships Victoria which is the significant factor to be quantified.

∙ failure to properly and systematically record the construction of the PSC, including failure to record assumptions, reality checks and validations, and sources of information. This should not be an expensive process, and should not require additional resources. It simply requires discipline in recording material as one goes. There are clear and important benefits from a methodical and rational PSC construction process.

∙ errors and confusion from poor financial models. It is worth investing in spreadsheet and financial modelling skills, specifying good style so that coherent and clear spreadsheets are routinely developed, and documenting the spreadsheet properly.

∙ changes of personnel in the project team constructing the PSC can create difficulties, but such changes are sometimes unavoidable. Problems can be minimised by being meticulous in maintaining appropriate documentation.

∙ invalid bases for estimating economic costs of occupying property e.g. utility costs etc.

∙ ignoring real price movements. No one can forecast real price changes perfectly for the long time periods involved in Partnerships Victoria procurement projects, but some facts, information and advice may be readily available for real price movements of component costs of the PSC, e.g. for building material over the immediate construction period.

∙ underestimation of the impact of foreign exchange movements where a project requires the importation of capital equipment.

∙ underestimation of costs, especially third-party fees and performance monitoring costs to government.

∙ underestimation of maintenance costs due to the omission of lifecycle costs required to maintain the asset in the required condition to supply the specified service. Historically the public sector has tended to under-maintain assets, especially buildings, allowing their condition to run down rather than keeping them up to defined standards.

∙ inclusion of contingency items in the Raw PSC. Contingency items should be excluded from the Raw PSC costs and included as part of the project risks.

∙ inconsistent output specifications between the reference project/PSC and the private sector bids. Make sure that the private sector bids are not requested with a different (higher or lower) quality of service than that in the reference project and PSC.

∙ making unverifiable assumptions about the timing of availability of public funds e.g. phasing capital investment over 15 years on the basis that public capital would be available in that timescale. The PSC generally assumes availability of upfront funding.

∙ failure to disclose the Raw PSC. This removes an important means of providing bidders with information about government's objectives and scope of the project.

∙ inadequate quality assurance review of the PSC. The PSC must be evidence based and reviewed prior to final approval to ensure that it represents a robust costing and to minimise revisions to the PSC during the procurement process.