2.24 When assessing a projects suitability for private finance (typically via NPD), the following factors should be considered, at each stage, by Procuring Authorities, Agencies and Directorates:
1. Affordability - fundamental to any procurement decision will be a realistic affordability calculation, which refers to what is affordable across a programme or for individual projects based on spending allocations, budgets and future settlements. Programmes and projects will not be able to proceed or be presented to the market unless they are signed off as affordable at appropriate board and stakeholder level. This sign off will be reviewed as part of the KSR process.
• The Scottish Government expects Procuring Authorities, Agencies and Directorates to undertake a thorough assessment of the likely project costs (inclusive of risk and Optimism Bias). This should be based upon the expected delivery specification, balance sheet treatment and take into account current/future market pricing and conditions.
• It is recommended that on a project basis, a robust view of affordability is derived from a shadow bid affordability model.
• The key affordability driver for Procuring Authorities, Agencies and Directorates will be the estimate and reliability of sources of funding available to meet conventional or privately financed procurement cost over the associated timescales.
• The affordability analysis must include appropriate sensitivity testing to take account of likely changes in key assumptions ( for example, inflation and interest rates) should be assessed.
It is vital that in drawing up specifications Procuring Authorities are mindful of their affordability envelope, and the future resource implications. For long term investment decisions Procuring Authorities will need to demonstrate that the effects of long term inflation projections and potential future budget allocations have been considered.
2. Design Quality - Relevant Directorate guidance should be applied (e.g. SG Design Quality in Building Procurement section of Construction Procurement Manual, SG Architecture Policy Unit, Directorate Design Development Protocols, NHSScotland Design Quality Policy, CABE etc) as well as best practice in respect of sustainability
3. Sustainability - The Scottish Government is committed to promoting sustainability through procurement both directly and indirectly. Therefore all business cases for major infrastructure projects should include consideration of the use of sustainability measures in the project. This should include a statement of what will be sought through the specification (for example, low carbon footprint building, maximum energy use ceiling, etc). Procuring Authorities, Directorates and Agencies should also confirm that they are applying relevant Public Procurement Guidance and incorporating the requirement for the use of a minimum of 10% recycled materials in construction projects, where appropriate.
4. Workers Terms and Conditions - consideration of the benefits and disadvantages of transferring staff and the corresponding impact on risk allocation should be considered when assessing the appropriateness of revenue financed solutions. Note, the STUC Staffing Protocol must be addressed and applied at Stage 2 by Procuring Authorities, Agencies and Directorates.
5. Scope of Services Provision - the range of services being procured should be subject to achieving improved standards of service delivery. Due consideration of the impact of long term and. short term service provision must be undertaken.
• As noted above, the SG/STUC Staffing Protocol must be applied by Directorates and Procuring Authorities
• An assessment pro-forma has been developed by the Scottish Government and is included in Appendix F.
6. Wider factors that impact upon the VfM of different procurement routes - Procuring Authorities, Agencies and Directorates should take account of any differentials in the benefits or risks arising from alternative procurement options, for example in terms of the timing of or the quality of service delivered (see Quantitative VfM Assessment guidance Appendix C). Specialist assistance maybe required here. Where the relevant risks and benefits of different procurement strategies are noted, reference should be made to the Scottish Government Construction Procurement Manual that refers to alternative procurement options.
7. Uniqueness of Project - in the case of "unique" or potential pathfinder projects, it is recommended that Procuring Authorities, Agencies and Directorates consult with the SFT (NHSScotland Bodies with the SGHD Capital and Facilities Division) to establish how the VfM assessment should be taken forward.
8. Market related factors - circumstances may exist in a constrained bidder market for example, where there is a strong supply of projects where certain risk transfer scenarios (for example, refurbishment scope and related risk transfer position) may not encourage competitive bidding. This needs to be monitored and the implications for individual projects assessed. Specific VfM testing should be undertaken in circumstances when there is a single supplier - See Appendix G.
9. Disclosure of VfM information to the wider public - it is expected that Project and Procurement level VfM information will remain confidential to public sector bodies (subject to FOI and Full Business Case disclosure). However, Evidence Bases detailing cost input information and containing details on risk assessments should be retained centrally for experience, understanding and information sharing in the public sector.
10. Balance sheet treatment - as well as ensuring that projects are affordable, Procuring Authorities, Agencies and Directorates should also undertake a realistic assessment of the likely balance sheet treatment. Recognising that private finance should only be pursued where it delivers VfM and not to secure any particular balance sheet treatment Procuring Authorities, Agencies and Directorates should discuss likely accounting issues with their external auditor during the procurement process and sponsoring Directorates as appropriate. The accounting treatment of a programme or project does not form part of the direct VfM assessment. Whether the investment is on or off-balance sheet is a decision taken by independent auditors and is not relevant to the VfM of the procurement route. To ensure integrated and informed decisions on application of private finance are made Procuring Authorities should consider the consequences of the privately financed transaction being treated as a capital asset for accounting purposes.
11. Taxation - where a choice of procurement routes lead to different outcomes in terms of tax receipts, these should be taken into account in the VfM assessment. Procuring Authorities, Directorates and Agencies should refer to the Revised Green Book and supporting documentation. Taxation Adjustments will also be required when using the Conventional Procurement Assessment Models.
12. Best Value - the duty of best value allows Local Authorities flexibility to judge the most appropriate approach to procurement, including NPD solutions. It encourages approaches to procurement that challenge the economy, efficiency and effectiveness in the provision of better and more responsive public services. VfM is central to Best Value but it should not be regarded purely in terms of balancing quality and cost. In considering the most viable, desirable and achievable method of procurement VfM must also take due regard to the other elements of Best Value, including sustainable development, equalities and the capacity for continuous improvement
13. Externalities: As set out in the Green Book, the assessment of externalities - negative or positive - is necessary in making an investment decision. For example, the undertaking of a procurement may have an impact on the supply side capacity of a particular part of the private sector. While this should be undertaken as part of the Green Book investment assessment, should different externalities exist for different procurement routes then these also must be taken into account in making the VfM assessment.
14. Long-term certainty and flexibility: Most privately financed projects are procured under long-term contracts. The process of procuring long-term infrastructure and services funded by private finance can often provide greater certainty of the whole-of-life costs and standards of service compared to conventional procurement. This certainty may reduce absolute flexibility but, provided the procuring authority carefully considers the scale and scope of the service needed over the long-term and structures the contract for a commensurate term, the long term contract may still generate a better VfM outcome. Upfront consideration at Programme Level of the long-term policy strategy should, therefore, also feed into the VfM assessment.
15. State of project and programme readiness: It is important that Procuring Authorities allocate sufficient resource to adequately prepare and develop the project before formal engagement with the market. Excessive bid costs and delays in the procurement process resulting from poorly developed projects often erode the VfM in procurement. This is prevented through strong project management and setting realistic timetables to ensure that projects are well developed before release to market.
2.25 These factors must be considered at the Programme Level and Project Level Stages. They should also be reconsidered as appropriate in the Procurement Level Stage. In particular in the procurement stage, other VfM assessment guidance will be applied to decision making, for example assessing the competitiveness of Private Sector funding. The following generic factors which drive VfM must also be considered:-