1.2  Evaluation Fundamentals

In the evaluation of the cash flows of the PSC and the PPP all key factors relevant to the decision need to be considered for a practitioner to be able to make a rational decision. The practitioner will be concerned with the following:

•  If the PSC and the PPP cash flow provide the same level of service, quality, project scope, risk etc. then the lowest cost option will be preferred; and

•  If the PSC and the PPP cash flow have the same level of costs and benefits, then the lowest risk option will be preferred.

In simple terms evaluation needs to take into account matters including, scope, quality, service, cost and risk.  Consider the following:

•  The PSC cash flow has a cost of $100.  In developing this cost no allowance has been made for the impact of demand risk

•  A PPP cash flow has a cost of $105.  Under the Project Agreement some demand risk has been transferred to the PPP provider and, as a result, is reflected in the Service Fee payable to the private sector.

In this evaluation the practitioner will need to consider the value the government places on demand risk and whether the additional cost of the PPP is a price worth paying for the transfer of this risk.  The concept of creating a like-for-like comparison in the evaluation of the PSC and the PPP cash flows is the central principal on which this Guidance is based.