VfM in PPP projects: Introduction to the concept Owain Ellis 12 June 2008

Contents Introduction to the concepts of VfM and Affordability Measuring VfM: Drivers of good VfM Merits of UK’s previous and current guidance A phased approach Conclusions

Introduction What is VfM? “The optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements. VfM is not the choice of goods and services based on the lowest cost bid.” VfM is a comparative concept VfM and Affordability What is its importance?

Why Assess VfM ? Starting Point: –Major capital investment Desired End point: –Optimum and enforceable risk allocation to the private sector partner

Drivers of Good VfM - Enablers Definable and contractible outputs Balance of assets and non-asset based services Whole life costing Adequate size and duration Competition

Drivers of Good VfM - Necessary Stable requirement/ long term use/flexibility Stable delivery – technology Private sector can manage risks and deliver Procurement costs are proportionate

Previous UK Approach PSC ‘risked’ & cashflows compared with PFI Shortcomings: –Reliant on a single-point, cost-based test –Uses (limited) empirical data –Timing of decisions –Manipulability

Measuring VfM – Public Sector Comparator Experience Availability of empirical data Policy / legislative / political issues Public perception

Measuring VfM - Public Sector Comparator (PSC) Same outputs specified under PFI PSC helps to determine: –indicative costs (as benchmark) –risk transfer –VfM of private sector bidders’ solutions

UK’s Revised Approach – phased assessment The assessment is conducted in 3 stages: Programme level –Suitability of using private finance Project level – pre market launch –Important decision point Procurement level –Check that procurement will deliver the forecast VfM benefits

UK’s Revised Approach Balance between qualitative and quantitative assessment Considers project and market features Embeds an evidence-based approach Uses a generic quantitative VfM model Includes technical adjustments

Conclusions VfM compares options Affordability is a constraint Assessment of VfM for PPPs is a balance between qualitative and quantitative assessment Uses an evidence-based approach Qualitative factors are very important Assessment undertaken in phases Quantitative VfM model includes technical adjustments