Introduction

5.1 Within this section of the guidance, we review the approach to the VfM assessment during Stage 3 from the final approval of the Outline Business Case and OJEU issue through to financial close / contract award. The requirements at this stage are based on the assumption that a revenue financed solution is being undertaken to deliver the project. Key to delivering VfM at this stage is a robust bid competition in procurement.

5.2 Before proceeding to OJEU, Procuring Authorities, Agencies and Directorates in Scotland must complete the following checklist:

5.3 In Scotland within procurement (post OBC) it is a requirement that Procuring Authorities, Agencies and Directorates demonstrate the VfM of NPD on both a qualitative and quantitative. They should therefore:

• continue to confirm that the project in procurement is Viable, Desirable and Achievable (reaffirming previous workshop outputs as applicable);

• utilise a Shadow Bid Model as an initial VfM comparison against actual bids (to ensure the bids reflect defined project scope, current market conditions and structures etc); and

• where applicable utilise market information and research databases of other NPD outturns to compare and assist with VfM calculations and benchmarks.

5.4 After taking account of supporting qualitative factors, should this assessment against a shadow bid affordability model suggest that the bids do not offer VfM, then the NPD procurement process should be halted and further analysis undertaken. The Procuring Authority should assess the underlying reasons for the shift in VfM and should consider alternative options which address these issues, such as re-scoping the project and putting it to the market at a later date, or if capital budget becomes available, reconsideration of conventional procurement. The Procuring Authority and its advisers should consider the financial and wider implications of the alternative options put forward at this stage. The full consequences of re-scoping the project or changing procurement route should be considered, taking into account factors such as:

• impact on timetable;

• impact of delay on cost;

• sunk costs already invested;

• the ability to maintain market confidence; and

• availability of alternative sources of finance.

Procuring Authorities, Agencies and Directorates must consult with the SFT, SGHD Capital and Facilities Division as appropriate when making these decisions.

5.5 Throughout Stage 3, Procuring Authorities, Agencies and Directorates must monitor their projects to:

• identify and be aware of any or potential market failure (lack of competition and lack of bidders). If at any stage the procurement team identifies market failure (e.g. absence of competition), they should consider the implications for the project. Market fFailure or lack of competition occurs where there is only a single bidder for a project or perhaps where there are two or more bidders but only one is considered to be credible. The concern is that in the absence of competitive tension the bidder may not be appropriately incentivised to offer its best price, terms and conditions to the public sector. In this case market abuse might arise (see below). However, procurement should not automatically be stopped as a result of market failure and the Procuring Authority should undertake a thorough review of the market failure circumstances affecting the particular project in reaching their view on the way forward. If it is not possible to take appropriate additional action that satisfy the Accounting Officer then the procurement should be halted. In considering whether the procurement should continue, the reason for the market failure should be examined closely. The team should establish whether the failure of competition is due to systemic problems in the market, in which case the failure should equally affect alternative procurement routes. It is recommended that internal / external auditors have due sighting of the procurement process. Also see Appendix G.

• ensure a robust competition is maintained in procurement. A competitive procurement is one of the ways in which the public sector aims to achieve VfM in its procurement activities. Procuring Authorities should be confident that the procurement will receive an adequate competitive response and that competition can be maintained throughout the resulting procurement process. The Procuring Authority should regularly review the quality and extent of competition throughout the procurement phase until the selection of preferred bidder. A robust competition requires a number of well-qualified bidders who have expressed strong interest in bidding for the project.

• ensure minimisation of transaction costs to both the public and private sectors. It is key in achieving VfM for an NPD transaction that a realistic competition is maintained, but this is only likely to be the case if the public sector keeps tight control of transaction costs and completes a realistic assessment of what will be necessary to ensure a competitive market for their project that minimises these costs for both public and private sector.

• identify market abuse (inappropriate pricing and bidding, typically at the preferred bidder stage when competitive pressure may be reduced). Market abuse can be defined as a situation where the bid offered is out of the market, that is to say above the market price for similar projects, or where the risk profile has been substantially eroded relative to other similar recent NPD projects at this price. It is also important for the Procuring Authority to understand how bid submissions relate and reconcile to the detailed costings carried out by the Project Team's own technical advisers. It is important to understand the driver of cost creep to ensure that it is not a means by which the bidder can replace or recover the equity returns foregone in the NPD model.

• ensure risk allocation is still deliverable and risk sharing is appropriate. All NPD projects should be based on standardised contract approach. The overall aim of this approach is to establish the use of SoPC4 (or equivalent) and sector specific contracts in order to frame a risk profile for the NPD procurement which provides proper incentives for the private sector to perform efficiently. VfM judgements should be made on the basis that the risk allocation is given in this context.

• regularly assess that bidders are financially robust with capacity to deliver and invest (for example through regularly checking financial PQQ tests in accord with financial PQQ methodology).

• monitor cost stability. If cost estimates at OBC differ significantly from the price at Full Business Case (FBC) or financial close, questions should be asked as to whether there are legitimate external reasons which could not be foreseen and, if not, why this escalation was not captured by the Optimism Bias estimates. The level of cost variation may be subject to directorate review / directorate limits.

• financial flexibility and financial structures. It is important that the assessment of the impact that the use of different financial structures will have on the flexibility of the project to accommodate changes to the project requirements is considered.

• assess alternatives, for example assess VfM delivered by any variant bids received or changes to scoping and risk transfer implemented during a competitive dialogue process.

• feed back appropriate information (e.g., risk uplift quanta, cost per square metre of accommodation and services etc) and market intelligence to the SFT and relevant Directorates and Agencies.

5.6 These requirements have previously been met by Procuring Authorities, Agencies and Directorates in Scotland by applying relevant standardised guidance to the appropriate stage of the NPD procurement process model and through the consultation and direction provided by their appointed advisers. Further guidance on the CPAM is available in the Quantitative VfM Assessment guidance note. The KSR process will also address these areas.

5.7 In procurement, market sounding, market promotion and market launch of projects should be done on a "cross directorate basis" particularly at the initial stages of procurements.

5.8 Note, in Scotland, it is not considered appropriate to conduct an NPD competition with fewer than two robust bidders. Any circumstances where this is not the case must be immediately referred to the SFT / SGHD Capital and Facilities or relevant Agency or Directorate. If competition drops to one bidder after the receipt of bids, the procurement will be reviewed (separately from Gateway / KSR review if necessary) in order to allow for SFT / SGHD Capital and Facilities/ Scottish Procurement and Commercial Directorate assessment of the situation, the available options (including halting the procurement) and Value for Money implications.

5.9 Once a preferred bidder has been selected (and subject to Competitive Dialogue requirements) it is essential that the ProcuringAuthority ensures that VfM is maintained in the absence of competitive tension. The impact on changes in costs and risk profile and the corresponding impact on VfM must be carefully controlled. A protocol to deal with these changes must be agreed as part of the preferred bidder appointment process. When reporting these changes or movements from guidance / SoPC 4 for approval (for example in the FBC or to the SFT / SGHD Capital and Facilities) during procurement (throughout Stage 3) the following areas must be covered by Procuring Authorities in a VfM report:

The Stage 3 Procurement Level assessment reporting requirements are detailed in the table at Appendix D.