Technical Note on the compilation of a Public Sector Benchmark for a Public Private Partnership Project
January 2007
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The Public Sector Benchmark and the PPP Procurement Steps within the Capital Appraisal Guidelines framework
CONTENTS
SECTION I – POLICY OVERVIEW
1.1 Purpose of the Public Sector Benchmark (PSB)
1.2 Scope of these Guidelines
1.3 Detailed Functions of the Public Sector Benchmark
1.4 Proportionality in compiling a Public Sector Benchmark
1.5 Role of the National Development Finance Agency (NDFA)
1.6 Responsibility for the Public Sector Benchmark
1.7 “Project” in the context of a Public Sector Benchmark
1.8 Public Sector Benchmark in the PPP Procurement Process
1.8.1 On receipt of approval in principle
1.8.2 Output Specifications
1.8.3 Compilation of the Public Sector Benchmark
1.9 Finalising the Public Sector Benchmark
1.9.1 Iterative Process
1.9.2 Timing of Finalisation: General Rule
1.9.3 Exception to the General Rule: Approved programme of similar projects
1.9.4 Exception to the General Rule: Timing of Finalisation
1.9.5 Submission to Sanctioning Authority
1.9.6 Handover of a PPP Project to the Centre of Expertise
1.9.7 Communication with the Market and the PSB
1.10 Revisions to the Public Sector Benchmark
1.10.1 Revising the PSB: General Rule
1.10.2 Revising the PSB: Exceptions to the General Rule
1.11 PSB and Affordability
1.12 PSB and Value for Money
1.13 The implications of the outcome of the Value for Money Comparison
1.13.1 On equalling or beating the PSB
1.13.2 Failure to equal or beat the PSB
1.14 Taxation, Rates and Levies
1.14.1 Taxation
1.14.2 Rates and Levies
1.15 Disclosure of the Public Sector Benchmark
SECTION II – COMPILING THE PUBLIC SECTOR BENCHMARK
2. STANDARD COMPONENTS
2.1 Introduction
2.2 Capital Costs
2.3 Operating, Maintenance and Lifecycle Costs
2.4 Third Party Income
2.5 Risk
2.5.1 Introduction
2.5.2 Identification of Risks
2.5.3 Quantification of the Impact of Risks
2.5.4 Probability of Risks Materialising
2.5.5 Calculating the Price of a Risk
2.5.6 Timing of the effect of Risks
2.5.7 Allocation of Risks
2.5.8 Risk Matrix
2.5.9 Risk Database
3. PROJECT CASH FLOWS
3.1 Overview
3.2. Discount Rate and Discount Factor
3.3 Base Date
3.4 Calculating a Discounted Cash Flow (DCF)
3.5 Net Present Value
3.6 Treatment of Inflation in Cash Flows
3.7 Consistency between PSB and bids received in calculating DCFs
3.8 Methods for Analysing Cash Flows in the PSB
3.8.1 Sensitivity Analysis
3.8.2 Reasonableness Test
3.8.3 Scenario Analysis
4. ESTIMATIONS / VALUATIONS USED IN THE PSB
4.1 Estimations in the PSB
4.2 Hypothetical Public Sector Cost
4.3 Internal consultation on valuations
4.4 Engagement of external expert advisors
5. ASSUMPTIONS MADE IN COMPILING THE PSB
6. STANDARD PRESENTATION OF THE PSB DOCUMENT
6.1 Summary of high level costs
6.2 Summary of costs of each material constituent element
7. OTHER KEY ASPECTS OF THE COMPILATION OF THE PSB
7.1 Term of Contract
7.2 Accrued Liabilities
A P P E N D I C E S
Appendix I: Role of the National Development Finance Agency in the compilation of the Public Sector Benchmark
Appendix II: Calculating a Discounted Cash Flow
Appendix III: Example of a Discounted Cash Flow for a Public Sector
Benchmark
SECTION I – POLICY OVERVIEW
1.1 Purpose of the Public Sector Benchmark (PSB)
The PSB is a keytool in the PPP procurement process. It is presented as a single monetary value that represents the full estimated cost, taking income and risks into account, to the Sponsoring Agency of delivering the project using “traditional”public sector procurement[1]. This single monetary value is underpinned by a financial model[2] and other relevant supporting documentation. The PSB must comprehensively address all costs, income and risks that the private sector will be invited to tender for in the PPP contract. The compilationof the PSB will build on the Detailed Appraisal carried out under the Capital Appraisal Guidelines[3].
The PSBis not a prediction ofthe actual outturn cost of the project. For this reason, Sensitivity and Scenario Analyses, as outlined in section3.8, are important aspects of the compilation of the PSB. The valuations used in the PSB should represent the best estimate available, at the time of compilation, of all of the costs, income and risks associated with a given PPP project.
The ultimate purpose of the PSB is to act as a reference throughout the PPP procurement process. It will alsoplay an important role in the assessment of whether the highest ranking bid received[4]has the potential to offer value for money.
1.2 Scope of these Guidelines
These guidelines apply to all PPP projects, regardless of whether they are to be funded by direct Exchequer funding, by deferred annual payments from the Exchequer (in respect of projects funded by the private sector and/or the National Development Finance Agency (NDFA)), by user charges, by local authority own resources, or by any other means.
1.3 Detailed Functions of the Public Sector Benchmark
(a)To provide a structured approach to the costing of a PPP project at an early stage, before invitations to tender are issued.
(b)Tore-assess[5], at an early stage,prior to the initiation of the tendering process, whether the project and the procurement method chosen has the potential to offer value for money.
(c)To inform any discussions and negotiations, as appropriate, held with private sector bidders, particularly through the prior identification, quantification and initial allocation of the risks associated with the project in the PSB. (NB: Under current policy, the PSB itself is not disclosed to bidders – see section 1.15.)
(d)To be used as a quantitative benchmark against which the highest ranking bid can be evaluatedin the formal Value for MoneyComparison[6] (see section 1.13).
1.4 Proportionality in compiling a Public Sector Benchmark
The investment of time and resources in developing a PSB should be proportionate to the monetary value of the project. However, care must be taken to ensure that the work done on the PSB is not so cursory as to diminish the credibility of the exercise.
1.5 Role of the National Development Finance Agency (NDFA)
The advice of the NDFA must be sought on all financial, risk and insurance aspects of compiling a PSB for: (i) major PPP projects and grouped PPP projects having a capital cost in excess of the limit set by the Department of Finance (currently €20 million, but under review); or (ii) PPP projects and grouped PPP projects having a capital cost less than this limit, where the Sponsoring Agency is of the opinion that it does not have sufficient internal expertise to compile the PSB; or (iii) PPP projects and grouped PPP projects that are being procured by the Centre of Expertise on behalf of the Sponsoring Agency[7].
As set out in circular letter S430/10/03, where a Department, State authority or Agency employed financial/risk/insurance advisors to provide advice for an individual project or a programme of projects prior to 14th February 2003, these arrangements will be honoured. References to the role of the NDFA throughout these Guidelines should be read in this context.
NB: Notwithstanding what has been stated earlier in this section, the NDFA must always be consulted regarding the appropriate discount rate (see section 3.2) and inflation rate(s) (see section 3.6) to use in compilingeach PSB.
1.6 Responsibility for the Public Sector Benchmark
Overall responsibility for developing the PSB lies with the Sponsoring Agency. The NDFA will be responsible for compiling the structure and content of the financial model underpinning the PSB and for entering data into this model. While the NDFA will provide advice on the appropriate values to use in the model, responsibility for the actual values used remains with the Sponsoring Agency.
1.7 “Project” in the context of a Public Sector Benchmark
There may be elements of a project that are procured independently of the PPP arrangement. For example, the Department of Education and Science may purchase a site for a school, secure outline planning permission, etc., and then invite the private sector to tender to design, build, maintainand finance a school on that site.
The PSB does not include any costs / incomes / risks that will be retained by the Sponsoring Agency itself, irrespective of the procurement method used, and which are not part of the PPP contract. In this way, the PSB can serve as a direct like-with-like comparator against the highest ranking bid received. (However, a record will be kept of all aspects of the overall project retained by the Sponsoring Agency and this will be updated, as appropriate, throughout the PPP procurement process.)
In the example above, the PSB would include the cost to the Department of Education and Science of designing, building, maintainingand financing the school using traditional procurement but would not include the costs associated with acquiring the site and securing outline planning permission. (These costs would be included in the overall project budget.)
1.8 Public Sector Benchmarkin the PPP Procurement Process[8]
The Capital Appraisal Guidelinesset out the major stages thatmust be undertaken inthe appraisal and procurement of all public infrastructure projects. However, some of the steps followed in PPP procurement, following appraisal of the project and approval in principle (i.e. after completion of Stage 1 of the Capital Appraisal Guidelines) differ from those set out in Stage 2 Planning Stage of the Capital Appraisal Guidelines. One such step is the requirement that a PSB be compiled for all PPP projects.
1.8.1 On receipt of approval in principle
On completion of Stage 1 of the Capital Appraisal Guidelines and having received approval in principle from the Sanctioning Authority to proceed with the project using a PPP arrangement, the Sponsoring Agency establishes an appropriate project management structure and a Process Auditor[9] is appointed. The Sponsoring Agencywill then draw up detailed Output Specifications for the project.
1.8.2 Output Specifications
Output specifications focus on what the Sponsoring Agency seeks to achieve in undertaking aPPP project rather than on the specifics of how the project is to be delivered. Output specifications are used in PPP projects to give the private sector a range of flexibility in how to deliver the required outputs. They are similar to the “Project Brief” envisaged for traditionally procured projects in the Capital Appraisal Guidelines, but the focus is on outputs rather than inputs. For example, an output specification might state that the windows in a building should meet current building regulations and keep the window opening wind- and weather-tight. However, an input specification might detail how many windows there are to be, where they are to be situated, what the dimensions are to be, how they are to be glazed, what materials are to be used in window frames, etc.
When drawing up output specifications, due regard must be had to sectoral norms and public health and safety requirements. The Sponsoring Agency should not assume that a different (i.e. higher or lower) level of specification will be achieved through the use of PPP procurement. While end users may be consulted on the specifications, responsibility for the determination of specifications and standards rests with the Sponsoring Agency.
1.8.3 Compilation of the Public Sector Benchmark
Once the output specifications for a project havebeen completed,the PSBcan be compiled; it isderived from the outputsspecified. The Sponsoring Agency decideshow it would achieve what has been requested of the private sector if it used traditional procurement approaches instead of a PPP arrangement, i.e. it identifies the“inputs” necessary to deliver the project traditionally. These inputs are then costed and included in the calculation of the PSB.
1.9 Finalising the Public Sector Benchmark
1.9.1 Iterative Process
Finalising the output specifications and the associated PSB will commonly involve an iterative process, as the costing associated with the first draft of the output specifications may prove to be higher than the Sponsoring Agency had originally budgeted for. This may require a downward assessment of requirements (output specifications) and a consequential reduction in the estimated value of the PSB.
1.9.2 Timing of Finalisation: General Rule
As a general rule, the output specifications and associated PSB should be finalised, agreed and up to datebefore any tender invitations are issued. This is important in order to ensure that, when costed, the final output specifications being issued with the tender invitations can be delivered within the available budget for the project. Output specifications should not be issued to the tenderers until they have been finalised, otherwise tenderers could submit bids based on inaccurate or out of date output specifications. Significantly changing the output specifications after tenderers have started preparing their bids can result in additional costs for all tenderers and may infringe EU procurement procedures.
1.9.3 Exception to the General Rule: Approved programme of similar projects
In the case of an approved programme of similar projects, involving similar output specifications, it may be agreed with the Sanctioning Authority and/or the Department of Finance that the Sponsoring Agency may commence the early stages of the tenderingprocess for the second and subsequent projects in the programme in parallel with the compilation of eachproject-specific PSB. This approach is workable in these circumstances because, while a project-specific PSB will be required for each individual project in the programme, the projects will be similar and therefore the resultant PSBs should also be similar. In addition, experience gained in compiling and finalising the PSB for the first project should speed up the process of compiling subsequent PSBs.
Parallel processes for the second and subsequent projects in a programme are only permitted after the tender responses for the initial project have been received, and only if the costings used in these tenders justify the use of the initial PSB as a base. If the difference between the costings used by the public and the private sector calls into question the use of the initial PSB as a base, the tendering process for the second and subsequent projects in the programme should not commence until the specific PSB for the second project has been finalised and agreed. In other words, parallel processes cannot be implemented until the Sponsoring Agency is satisfied that an appropriate “base PSB” has been identified.
In any event, the PSB for each project in the programme must be finalised before the tenders for each project are received.
1.9.4Exception to the General Rule: Timing of Finalisation
Notwithstanding the above, there may be exceptional circumstances where some information[10] critical to the finalisation of the PSB may not be available before the issue of tender invitations, with the result that it is not possible to produce a final, robust PSB at this stage, in accordance with normal practice. In these exceptional circumstances, subject to the Accountable Officer being satisfied that there are clear and substantial grounds to depart from the general rule,the PSB may be finalised, agreed and supplied to the Sanctioning Authority, after invitations to tender are issued butprior to receipt of the tenders. The agreement of the Accountable Officer to depart from the general rule in this regard, and the rationale for so doing, must be recorded in writing and maintained on file.This is imperative because the key test of value for money in PPP procurement is the comparison of highest ranking bidreceived with the PSB and this comparison should be carried out in the most objective manner possible.
1.9.5 Submission to Sanctioning Authority
The finalisation of the output specifications and associated PSB for PPP projects will be a matter for the Sponsoring Agency, within the approval / delegated sanction granted to them by the Sanctioning Authority. Provided that the terms of the approval / delegated sanction are not breachedor are not likely to be breached, it will not be necessary to seek specific approval from the Sanctioning Authority for the detailed output specifications or the PSB for individual projects. However, before any tender invitations are issued (subject to the exceptions set out in section 1.9.3 and section 1.9.4 above), the Sponsoring Agency shouldsubmit the agreed PSB to the Sanctioning Authority for information. The Sponsoring Agency’s submission to the Sanctioning Authority should be accompanied by:(a) the PSB documentation; and(b) a statement from the Sponsoring Agency endorsing the PSB and confirming that ithas beencompiledin compliance with these Guidelines.
If the terms of the Sponsoring Agency’s approval / delegated sanction are breached or are likely to be breached, the Sponsoring Agency will have to seek the specific approval of the relevant Sanctioning Authority for the PSB. The submission seeking sanction should be accompanied by (a) and (b) above.
Ifthe PSB is not wholly consistent with the advice of the NDFA, the NDFA should supply a statement to the Sanctioning Authority outlining the aspects of its advice that have not been followed and the effect this has had on the value of the PSB[11].
1.9.6 Handover of a PPP Project to the Centre of Expertise
When the Centre of Expertise is procuring a PPP project on behalf of the Sponsoring Agency, the project should not be handed over to the Centre of Expertise until the PSB has been finalised and agreed.
If the exceptions regarding an approved programme of similar projects (section 1.9.3) or the timing of finalisation of the PSB (section 1.9.4) apply, the PSB should be progressed as far as possible prior to handover of the project to the Centre of Expertise. In such circumstances, the Sponsoring Agency should ensure that appropriate liaison procedures are in place with regard to the finalisation of the PSB.
1.9.7 Communication with the Market and the PSB
The PSB should be finalised before any communications with the private sector specific to a published invitation to tender are commenced[12] (referred to in section 2.8.2 of the Main PPP Guidelines as “tender-related communications”).