When making decisions on the allocation of resources, governments are primarily focused on enabling the delivery of services to the community. Although governments are very interested in whether the capital assets that an agency submits are needed to deliver a required community service, they do not focus on the desirability or otherwise of these capital assets in isolation of the service benefit.
The government's decision on whether to support or not support a specific investment proposal is made on the basis of a balanced judgement regarding the VfM proposition (i.e., the service benefits to the community balanced against the costs/risks of the investment proposal), and the opportunity cost of capital.
| The opportunity cost of capital: This concept recognises that the government has finite resources which need to be rationed. The government's budgetary decision making process targets its highest priority areas and aims to provide the community with the optimal service outcomes within its resource constraints. Therefore, a decision to fund one project, means that other projects will fail to attract funding. This means that the service benefits associated with these projects will not be delivered to the community. The government will seek to achieve the best service outcomes for the available pool when rationing public funds. For example, consider a scenario where the government has confirmed its support of Investment Proposal A with a capital budget of $200 m. If the government was aware that the capital budget was to subsequently increase to (say) $250 m, it may not have approved the funding. Instead, the government may have switched its support to an alternative investment proposal that presented a more attractive VfM proposition compared to Investment Proposal A with a $250 m capital cost. In short, funding one project means that another project is not funded. Where 'one dollar more' is expended on one project, this means 'one dollar less' for another project. |
Where an agency fails to provide a robust and comprehensive Business Case, this is problematic for government decision-making processes. It is also problematic for the Owner, as without a Business Case which adequately analyses and dimensions the costs, risks, scope and benefits of the project, the Owner is not in a position to benchmark the project deliverables that it tenders for and for which the alliance has been engaged to deliver.
Moreover, the Business Case is used as an anchor point for the Owner to ensure that cost, time and quality constraints are managed. If an appropriately detailed Business Case has not been prepared, this creates a greater risk that scope creep and budget drift (which are not supported by government) may occur. It will be a significant issue for both the government and Owner if the Business Case project budget, the Target Outturn Cost (TOC), the Actual Outturn Cost (AOC) and all other costs associated with the project delivery do not align.15
In its Guidelines for Managing Risks in Direct Negotiations, published in May 2006, the NSW Independent Commission Against Corruption (ICAC), mirrored these concerns when it wrote in relation to both joint ventures and relationship contracting (page 18):
The Commission advises that prior to conducting the process of finding a joint venture partner, agencies should complete a separate business case for the project. If the business case is not prepared until after the joint venture has been formed, the agency may be locked into an undesirable relationship or be otherwise handicapped in its ability to pursue its preferred course of action.
The ICAC also commented in relation to some of the probity risks associated with alliance contracting and the absence of an acceptable Business Case (Appendix 2):
• reliance on a non-adversarial approach to conflict resolution and a 'best-for-project' approach … may lead to the parties forming too close a relationship. This may in turn lead to 'capture' by the private sector proponent/s and a failure to consider the overall public interest. Capture can also be a problem if the 'partnership' is lopsided to the extent that the agency develops a dependence on the proponent/s for information and advice.
• Alliancing is designed for complex projects with unpredictable risks, and this does not align well with any loose and sloppy practices; nor with taking the line of least resistance.
In short, it is important to articulate the VfM proposition in a robust and comprehensive Business Case that clearly analyses and benchmarks all the material costs, risks and benefits. These benchmarks will provide the external standards against which the achievements of the alliance will be measured in the VfM Report.
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15 The principles used in the development of a Public Sector Comparator for Public Private Partnerships can be applied to develop the cost estimates in a Business Case for an alliance project. (However, it should be noted that the Public Sector Comparator is used to decide whether a project should proceed as a PPP, whereas the Owner's Comparative TOC is used as a check on tendered TOCs following the government decision for a project to proceed as an alliance.) The option of developing an Owner's Comparative TOC (OCT) is discussed in National Alliance Contracting Guidance Note No 5, Developing the TOC in Alliance Contracting; Department of Infrastructure and Regional Development, Commonwealth of Australia, March 2011.