5  VALUE FOR MONEY

The detailed Green Book VFM assessment for any PPP type project should take place at the OBC stage.

The objectives at the OBC stage are to:

•  Demonstrate that the decision to use PPP/strategic partnering is valid at the project level

•  Verify whether appropriate risk transfer arrangements are achievable

•  Where issues emerge that a PPP is not likely to offer VFM, to direct the authority to using other procurement routes

•  Feed information to the programme level to improve the evidence base

•  Provide improved cost estimates to confirm that the project is affordable

•  Test whether the PPP solution has market interest

•  Ensure that an efficient bid process is planned in a realistic timeframe

•  Provide the procuring team with a framework where they can take decisions if the assessment shows that market conditions are unfavourable

A competitive procurement is one way to achieve VFM.  An authority should in the early stages of planning ensure that a competitive market exists.  A market sounding exercise should be undertaken by talking directly to potential players.  If the service or asset is specialist then there may only be one supplier but this guidance should still be applied to ensure VFM.

Further evidence that a partnering arrangement is likely to be a suitable procurement route and represent VFM are:

•  The service(s) can be defined in terms of outputs

•  The assets and services can be costed on a long term basis

•  Procurement costs are not disproportionate to the project cost

•  Technology or other changes in the sector are relatively stable

•  The assets and services can be used over a long period of time

•  The private sector can deliver the service

Quantitative Assessment

Authorities are advised to complete a quantitative assessment of VFM for its preferred option and during the options appraisal process.  This should in effect compare the cost of the different options, including a partnering arrangement, with the cost of driving change "in house" - the public sector comparator (PSC).

The revised (2003) Treasury Green Book provides the basis for the investment appraisal of public sector procurements.  The methodology recognises the differing risk profiles of the publicly and privately funded options, in particular the degree of 'optimism bias' which is typically built-in to the expected lifecycle.

Optimism bias is the term used to describe the demonstrated, systematic tendency for project appraisers to be overly optimistic about project costs, duration and benefits (outputs and receipts/income).  In other words it is the systematic tendency to view things in an overly positive light.  It can arise in relation to any aspect of a project but it particularly applies to:

o  Costs (capital, lifecycle and revenue); and

o  Project duration.

The OBC is likely to require an assessment of optimism bias for the public sector comparator and this should be detailed in this section of the document and in the appendices.

Qualitative Assessment

Authorities are advised to undertake a qualitative VFM assessment with reference to Treasury guidance and in particular the Green Book.  This requires the three factors of viability, desirability and achievability to be considered.  All of these factors should be discussed in the narrative of the main body of the text and further analysis should also be included in the form of appendices.