4.1  Introduction

In many cases affordability is the key factor in determining if or not a project can proceed to full procurement and it is therefore important that this assessment is as detailed and robust as possible.  It is vital that procuring authorities are realistic about what is affordable and the variables which combine to determine affordability.  It is also important that the Authority and all relevant stakeholders fully understand the answers to the following questions:

1.  What is the absolute level of funding that the Authority is willing to invest in the project - ideally this figure should be slightly above the expected cost of the project;

2.  What are the "must have" or "fundamental" objectives of the project which need to be delivered within the constraints of the available funding;

3.  Which objectives, if any, can be sacrificed or compromised in the event that bids from the private sector are unaffordable?  How are these prioritised?

While the above questions may appear more relevant elsewhere in the OBC, the answers to them are often driven by affordability.  It is therefore vital that the Authority is able to answer all three of these questions before it embarks on procurement and alongside the affordability analysis at OBC stage.

Scoping the Project - Affordability

There are some projects within the PFI / PPP sector which are relatively straightforward to produce a "shadow price" for.  For example, the cost of a school for a known number of students, to be delivered through PFI on a "green field" site can be estimated easily and the associated funding structure which is likely to be delivered by the market can easily be modelled.  CATS services can be significantly more difficult to estimate and Authorities need to know the answers to the following questions which needs to be reflected in the OBC:

1.  How much scope is there for efficiencies from the perspective of the private sector?  This can vary on a range of factors (e.g. geographical - revs and bens, quality of existing service)

2.  To what extent are redundancies palatable to stakeholders which are likely to drive efficiencies in "people driven" services?

3.  What is the existing level of performance?  Is there scope for improvement?

4.  How much technology is required to drive efficiencies and what will is cost - this can be difficult to estimate?

All of these questions can be difficult to answer and Authorities should be aware that it is difficult to achieve all of the following:

•  Improved performance;

•  A strict performance monitoring and payment regime;

•  Reduced cost;

•  Investment from the private sector; and

•  Avoidance of redundancies.

The OBC must be as realistic and prudent and possible in assessing what the key objectives may cost.  A procurement based on an aspirational service level while existing service levels are constrained by existing budget availability is unlikely to be achievable without a significant amount of additional funding.  The business case must make clear how any affordability gap will be bridged.

Additional questions include:

•  What is the organisation's financial position and can it commit to a substantial fixed payment commitment over a substantial period of time?  Will a large fixed payment jeopardise the financial stability of the Authority?

•  How sensitive is the affordability position to fluctuations in levels of increases in the Council's main revenue streams?

•  What resources are available for the project?

•  Are there any Revenue or Capital constraints that may affect the investment?

•  Are there Statements of support from key stakeholders?

To estimate the cost of the project solution to be delivered by the private sector, it is necessary to construct a Shadow bid financial model using appropriate private sector funding and tax structures.  The purpose of this is to provide a comparison against which to judge likely VFM and also to assess affordability.  The Shadow bid model should provide a potential private sector Contractor with a potentially profitable solution allowing for a reasonable, market intelligence based return and the parameters may be reflected in the Invitation to Submit Outline (and Detailed) Solutions (ISOS and ISDS).  For the purposes of modelling, it is assumed that performance deductions are nil.  

The additional cost to the Authority in meeting the unitary charge, over and above these resources, is referred to as the 'affordability gap' between existing budget provision and the unitary payments.  The importance of making an indicative assessment of this cost, both in total and over the life of the project, early in the business planning process for approval by Members, must be recognised.

The principle elements of this model are as follows:

•  The capital investment required;

•  Ongoing revenue budgets;

•  The extent of any efficiency savings over the contract period which may be deliverable by the private sector;

•  The likely private sector margin / profit;

•  Existing Authority budgets which will be released due to service provision being taken over by the private sector; and

•  Additional Authority budgets which will be made available for the project (if any).