Difference between Quantitative and Qualitative VfM Criteria Owain Ellis 12 June 2008

Contents Pros and Cons Qualitative VfM Criteria Quantitative VfM Criteria Challenges

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

When is the VfM assessment made? 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

Qualitative assessment - Viability Measurable and definable outputs, clear scope Operational flexibility Inclusion of soft services Equity/efficiency reasons for private sector service provision Strategic/ regulatory issues

Qualitative assessment - Desirability Risk Management Innovation Duration, requirement and asset life Lifecycle costs Do the benefits outweigh the costs?

Qualitative assessment - Achievability Market capacity and interest Timing Procurement time scales Value Procuring authority skills and resources

Balanced Approach Balanced qualitative and quantitative assessment Evidence-based approach Generic VfM model

VfM Quantitative analysis Identify cost inputs Adjust costs for Optimism Bias Factor in finance cost assumptions Adjust for: Flexibility Tax Life cycle investment

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

Public Sector Comparator PSCPFI NPV of PFI cash flows Risk retained by Authority NPV of PSC cash flows NPV of PSC risk transfer Risk retained by Authority NPV of PFI Typical Profile of Net Present Cost of PSC vs. PFI Risks retained, that are transferred under PFI Total value of public sector delivering same outputs over life of contract –Design and build costs –Operating costs Total net present value of PFI Co’s unitary charges, over life of contract

Measuring VfM - Public Sector Comparator (PSC) Key considerations:- –sensible costing –proper use of advice –benchmarking with similar schemes –recognition of risk and uncertainty –optimism bias –established public sector discount rate

Technical Adjustments Unbundled discount rate - time preference rate of 3.5% Optimism Bias factored in to investment appraisal Monetisation of non financial benefits and costs Material tax differentials recognised and monetised

VfM Analysis – Input Sheet

VfM Model - Challenges Timing: Decision making tool or demonstrator? Optimism Bias: availability of a reliable evidence base (PFI & PSC) Data management - double counting Limitations of a standardised approach Care over presenting numbers

Conclusions Qualitative VfM Assessment assists with decision at Programme and Project levels Quantitative VfM Assessment assists with demonstration of VfM at Procurement level Limitations - Part of Business Case approach