56. Table 2 provides a stylised example of PFI bids received for a procurement project. It also illustrates how a project team might approach the standardisation, for comparative purposes, of the costings of these private sector bids. There are three bidders (A, B and C) who have each made a standard bid, with two bidders (B and C) making variant bids. For example, the standard bid by bidder A is for £429m. This price covers the basic procurement costs and also two transferred risks.
57. In this example, all of the three standard bids accept the transfer of the same risks (Design, Build, Finance and Operate (DBFO) and maintenance). The PFI bid prices for the procurement specification therefore include costs associated with these transferred risks. The project team has estimated the value of the transferred risks for each bid (£35m, being the sum of DBFO's £25m and maintenance's £10m).
58. The values of the other four risks (health and safety legislation, technology, client changes and discriminatory legislation) in the example have also been estimated by the project team. These contribute to the overall real present cost of the procurement to the client. For instance, the standard bid by bidder A will cost the public sector client £499m, being the sum of the bid price (£429m) and the retained risks (£70m).
59. The two variant bids have different risk allocations which calls for careful risk accounting to determine which bid represents best value. This is not obvious from examination of the top line in the table, containing the prices of the bids. It might appear that the standard bid of bidder A is the cheapest but it is not in fact the best value for money.
60. Consider the risk adjusted NPV figures in Table 2. The variant bid by bidder B, which, unlike the standard bids, does not accept the transfer of maintenance risk, but does accept the transfer of the health and safety legislation and client changes risks, can be clearly seen to represent the best value for money at £480m, i.e. after the fact that an additional risk (client changes risk, valued at £25m) is to be transferred in this variant bid.
Table 2: Risk Allocation Accounting Amongst PFI Bids
|
| Standard PFI Bids |
| Variant PFI Bids |
|
| ||||||
|
| A | B | C | A |
| B | C |
| |||
| Basic NPV (£m) | 429 | 430 | 440 | na |
| 450 | 450 |
| |||
| [including transferred risks] | 35 | 35 | 35 | na |
| 75 | 50 |
| |||
| Retained risks (£m) |
|
|
|
|
|
|
|
| |||
| transfer | transfer | transfer | na | transfer | transfer |
|
| ||||
| Maintenance | transfer | transfer | transfer | na |
| 10 | transfer |
| |||
| Assigned as negotiable Health and Safety | 10 | 10 | 10 | na | transfer |
| 10 |
| |||
| Legislation |
|
|
|
|
|
|
|
| |||
| Technology | 15 | 15 | 15 | na | transfer | transfer |
|
| |||
| Assigned as retainable Client changes | 25 | 25 | 25 | na | transfer | 25 |
|
| |||
| DiscriminatoryLegislation | 20 | 20 | 20 | na |
| 20 | 20 |
| |||
| Risk adjusted NPV | 499m | 500m | 510m | na |
| 480m | 505m |
| |||
| Notes 1. The expected cost of the DBFO risk is 25 2. "na" means no bid 3. The allocation of risks identified in this simple example owes as much to neatness and convenience as to advised direction or usual experience. For example, it would generally be expected that technology risk would be transferable, and would in fact be transferred (although there may be circumstances, such as security, where this
| |||||||||||
61. Note that the cost of each risk added to each bid is at the public sector valuation of each risk, not at the private sector valuation of the cost of the risk (which in any case is unlikely to be known by the client team as it will of course be implicit in the total price of the private sector bid). These costs therefore have to be evaluated a priori, without reference to the private sector's valuation which may be very different.
62. The example in Table 2 above illustrates the key point that the comparison of bids should be done at the total or risk adjusted cost line, which includes costs reflecting all the risks which are taken by the private sector under any admissible bid. The only risks which may be excluded are risks not taken by the private sector under any admissible bid. For example, discriminatory legislative risk might be excluded from the VFM comparison.