Department of the Environment and Local Government Public Private Partnership Assessment

Public Private Partnership Assessment

Public Private Partnership Guidance Note 4

14 April 2000

Guidance Note 4 14 April 2000

Department of the Environment and Local Government Public Private Partnership Assessment

Contents
Section Page

I. INTRODUCTION ................................................................................................................................................1
PURPOSE AND SCOPE OF GUIDANCE NOTE................................................................................................................1
STRUCTURE OF GUIDANCE NOTE ..............................................................................................................................1
PUBLIC PRIVATE PARTNERSHIP ROUTE MAP ............................................................................................................2
II. PUBLIC PRIVATE PARTNERSHIP ASSESSMENT ......................................................................................4
INTRODUCTION ...........................................................................................................................................................4
SCOPE OF THE OPTION APPRAISAL STAGE ................................................................................................................4
PURPOSE OF THE PPP ASSESSMENT...........................................................................................................................7
MANAGING THE PPP ASSESSMENT............................................................................................................................9
III. INITIAL OUTPUT SPECIFICATION..............................................................................................................12
INTRODUCTION .........................................................................................................................................................12
INITIAL OUTPUT SPECIFICATION..............................................................................................................................12
IV. VALUE FOR MONEY ASSESSMENT ...........................................................................................................14
INTRODUCTION .........................................................................................................................................................14
FACTORS THAT DETERMINE VALUE FOR MONEY ...................................................................................................15
ASSESSING VALUE FOR MONEY POTENTIAL ...........................................................................................................16
CONCLUSIONS...........................................................................................................................................................19
V. PRELIMINARY RISK ASSESSMENT............................................................................................................21
INTRODUCTION .........................................................................................................................................................21
PRELIMINARY RISK ASSESSMENT ............................................................................................................................22
STATUTORY PROCESS RISK......................................................................................................................................23
CONTRACTUAL CONSIDERATIONS ...........................................................................................................................24
VI. BANKABILITY ASSESSMENT......................................................................................................................25
INTRODUCTION .........................................................................................................................................................25
VII. LEGAL VIABILITY ASSESSMENT..........................................................................................................27
INTRODUCTION .........................................................................................................................................................27
VIII. PPP OPTION SELECTION..........................................................................................................................28
INTRODUCTION .........................................................................................................................................................28
SELECTING THE MOST APPROPRIATE FORM............................................................................................................28
IDENTIFYING THE OPTIMUM SCOPE .........................................................................................................................29
IX. PARAMETERS FOR THE FINAL VFM ASSESSMENT..............................................................................30
INTRODUCTION .........................................................................................................................................................30
NATURE OF THE FINAL VALUE FOR MONEY ASSESSMENT .....................................................................................30
ELEMENTS OF THE VALUE FOR MONEY ASSESSMENT ............................................................................................31
PARAMETERS REQUIRED FOR THE MONETARY COMPARISON ................................................................................32
PARAMETERS REQUIRED FOR THE NON-MONETARY COMPARISON .......................................................................34
RESULTS OF THE VALUE FOR MONEY ASSESSMENT ...............................................................................................34
X. INDICATIVE IMPLEMENTATION PLAN ....................................................................................................36
INTRODUCTION .........................................................................................................................................................36
XI. ISSUES AND RECOMMENDATIONS...........................................................................................................37
INTRODUCTION .........................................................................................................................................................37
REQUIREMENT TO ASSESS VALUE FOR MONEY POTENTIAL...................................................................................37
ASSESSING VALUE FOR MONEY POTENTIAL ...........................................................................................................37

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Department of the Environment and Local Government Public Private Partnership Assessment

SELECTING THE MOST APPROPRIATE FORM OF PPP...............................................................................................38

REQUIREMENTS OF THE FINAL VFM ASSESSMENT ................................................................................................38
MANAGING THE PPP ASSESSMENT..........................................................................................................................39
APPENDICES ..............................................................................................................................................................40
A. PUBLIC PRIVATE PARTNERSHIP POLICY GUIDANCE .....................................................................................40
B. TYPICAL CONTENTS PAGE FOR A PUBLIC PRIVATE PARTNERSHIP ASSESSMENT.........................................42
C. TIPS ON MARKET SOUNDING .........................................................................................................................44
D. FINANCIAL COMPARATOR..............................................................................................................................47

Guidance Note 4 14 April 2000

Department of the Environment and Local Government Public Private Partnership Assessment

I. Introduction
Purpose and Scope of Guidance Note

1.1 This Guidance Note provides guidance for Central and Contracting Authorities on the
preparation of a Public Private Partnership Assessment for an individual project. The
purpose of the Guidance Note is:

to explain the role of the Public Private Partnership Assessment within the
context of the Public Private Partnership Route Map;

to introduce the main elements of the Public Private Partnership Assessment

and to provide guidance on the steps involved in completing each element; and

to set out the roles and responsibilities of Central and Contracting Authorities
in undertaking the Public Private Partnership Assessment.

1.2 This Guidance Note is one of a series of Guidance Notes which provide contextual
information on Public Private Partnerships and procedural guidance for Central and
Contracting Authorities covering each stage in the development and implementation
of infrastructure projects using the Public Private Partnership approach. The titles of
all of the other Guidance Notes are set out in Appendix A to this Guidance Note.

1.3 The Guidance Notes are designed to be informative rather than prescriptive and the
aim is to reflect good practice. They are generic in that they provide guidance on the
use of Public Private Partnerships across a range of projects in the roads, water and
waste sectors. However, different projects will give rise to different issues and the
guidance provided will have to be reviewed in the context of each individual project.
For this reason it is important that Central and Contracting Authorities obtain expert
advice in order to help them to make best use of the Guidance Notes and to complete
a successful Public Private Partnership procurement.

Structure of Guidance Note

1.4 The Guidance Note is structured as follows:

Section Two - sets out the Public Private Partnership Assessment within the
context of the Public Private Partnership Route Map. It then provides an
overview of the key components of the Public Private Partnership Assessment
and concludes by describing how such an assessment should be managed;

Section Three provides guidance on the preparation of an initial Output

Specification, which is based on the outcomes of the Project Appraisal and
provides a high level definition of what is required in terms of service
delivery;

Section Four sets out the recommended approach to assess the potential for
a Public Private Partnership to deliver improved value for money;

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Department of the Environment and Local Government Public Private Partnership Assessment

Section Five provides guidance on the preliminary risk assessment, which

involves the identification and quantification of significant project risks and a
preliminary assessment of the most cost effective allocation of risk between
the Contracting Authority and the Contractor;

Section Six sets out the issues that should be considered by an assessment of
the bankability of any project that may be part or wholly financed by the
private sector;

Section Seven sets out the issues that should be considered by an assessment
of the legal ability of a Contracting Authority to enter into a Public Private
Partnership contract;

Section Eight provides guidance on the selection of the most appropriate

contractual form and scope of Public Private Partnership for a project;

Section Nine describes the parameters that should be established to test at

the end of the procurement process whether the preferred Public Private
Partnership tender represents value for money; and

Section Ten describes how the main findings and conclusions of the PPP
Assessment should be presented.

1.5 The final Section provides a summary of the main issues and recommendations that
are identified and discussed within this Guidance Note.

Public Private Partnership Route Map

1.6 The process of project development and implementation changes significantly when a
project is taken forward as a Public Private Partnership. For this reason a Public
Private Partnership Route Map has been developed.

1.7 The Public Private Partnership Route Map sets out the main stages in the development
and implementation of a Public Private Partnership project that must be undertaken by
the Central Authority or the Contracting Authority. The Route Map is presented in
the diagram shown overleaf.

1.8 The Public Private Partnership Route Map shows how the traditional processes of
project development, procurement and implementation change for a Public Private
Partnership project. A more detailed description of the Public Private Partnership
Route Map is provided in the separate Guidance Note entitled Introduction to Public
Private Partnerships.

1.9 The Public Private Partnership Assessment is undertaken at an early stage in the life
of a project and its role in the context of the Public Private Partnership Route Map is
discussed in detail in the next section of this Guidance Note.

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Department of the Environment and Local Government Public Private Partnership Assessment

Figure 1: Public Private Partnership Route Map

Key
Project Identification
No change to
Assessment of PPP Suitability existing process

Changes to
Project Appraisal existing process

New stage for

PPP Assessment PPP projects

Statutory Process Procurement

Assessment Procedure Selection

If PPP recommended

Project Management

Stakeholder Consultation

Statutory process risk with Statutory process risk with

contracting authority private sector

Statutory Process Elements of Statutory Process

Retained by Public Sector

Preparation of Contract Preparation of Contract

Documentation Documentation

Tendering Process Tendering Process

Contract and Performance Contract Management of

Management of Construction Planning Phase
and Operation

Elements of Statutory Process

Transferred to Private Sector

Contract and Performance

Management of Construction
and Operation

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Department of the Environment and Local Government Public Private Partnership Assessment

II. Public Private Partnership Assessment

Introduction

2.1 This section of the Guidance Note commences by describing the four activities that
comprise the Option Appraisal stage for projects identified as having the potential to
be procured as Public Private Partnerships. The four activities are the Project
Appraisal, Public Private Partnership Assessment, Statutory Process Assessment and
Procurement Procedure Selection. It then provides an overview of the key elements
of the PPP Assessment, which are described in detail in subsequent sections of this
Guidance Note, and concludes by discussing the management and scope of the PPP
Assessment.

Scope of the Option Appraisal Stage

2.2 New roads, water and waste projects are identified by National Development Plans,
needs studies or other strategy studies and plans. The projects are then included in
operational programmes and annual investment programmes that determine the list of
projects to be funded.

2.3 It is during this Project Identification stage that the potential for procuring an
infrastructure project as a Public Private Partnership is first considered by the Central
Authority. If a project is considered to be suitable and desirable for procurement as a
Public Private Partnership, then the project will be identified as a possible PPP project
in the appropriate operational programmes and annual investment programmes. The
criteria for reviewing the suitability and desirability of procuring a project as a Public
Private Partnership are described in the separate Guidance Note entitled Introduction
to Public Private Partnerships.

2.4 The Project Identification stage concludes with the issue of an approval from the
Central Authority to the Contracting Authority to initiate the project and to commence
the Option Appraisal stage.

2.5 For those infrastructure projects that have been identified as having the potential to be
procured as Public Private Partnerships, the Option Appraisal stage will involve:

Project Appraisal;

PPP Assessment;

Statutory Process Assessment; and

Procurement Procedure Selection.

2.6 The above activities are described in the paragraphs that follow.

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Department of the Environment and Local Government Public Private Partnership Assessment

Project Appraisal

2.7 For traditional projects in the roads, water and waste sectors, the key outputs
associated with the Project Appraisal process are set out in the diagram below:

Roads Water Waste

Corridors and Constraints Study Preliminary Report Constraints Study

Route Selection Study Site selection Site selection
NRA Tolling and Viability Study Preliminary Design Preliminary Report
(if appropriate)

2.8 In simple terms, Project Appraisal involves the identification of suitable options to
meet service objectives, and the selection of a preferred option. Options are appraised
through constraints studies and preliminary reports, which provide economic
evaluations, cost estimates, outline requirements and site or route selection.
Environmental Impact Statements may also be prepared as part of the Project
Appraisal process.

2.9 The process of undertaking Project Appraisals for Public Private Partnership projects
will be the same as for traditional projects, unless statutory process risk is to be
transferred to the private sector (see below). In such circumstances, the Project
Appraisal will still be required, but possibly at a higher level of detail.

2.10 Contracting Authorities commonly appoint technical consultants to undertake the

Project Appraisal. The precise requirements of the Project Appraisal are different for
projects in the roads, water and waste sectors, and sector specific guidance is
available from the relevant Central Authority.

2.11 The selection of a preferred option is approved by the relevant Central Authority.
Approval will depend on the Project Appraisal clearly demonstrating that the
preferred option meets strategic objectives in terms of delivering the required service
outputs at an affordable cost. It must also show that the project is sound in economic
terms and that the preferred option represents value for money.

2.12 It is following the completion of the Project Appraisal that the Contracting Authority
should undertake the PPP Assessment, Statutory Process Assessment and
Procurement Procedure Selection for those infrastructure projects previously
identified as having the potential for procurement as Public Private Partnerships.

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Department of the Environment and Local Government Public Private Partnership Assessment

Public Private Partnership Assessment

2.13 The PPP Assessment is a detailed assessment of the potential for a Public Private
Partnership to deliver improved value for money compared with traditional
procurement. It involves a preliminary assessment of project risks, a value for money
assessment, a bankability review and a legal viability assessment. Further details are
provided in this Guidance Note.

2.14 The Statutory Process Assessment is an assessment of the potential to transfer

statutory process risk to the private sector under a PPP arrangement. The decision as
to whether to transfer statutory process risk will depend on a range of factors,
including the Public Private Partnership option that is recommended, the specific
characteristics of the project concerned, the procurement procedure selected, and the
value for money that may be gained or lost as a result of risk transfer. Further details
are provided in the separate Guidance Note entitled Statutory Process Assessment.

2.15 Coincidental to the assessment of the potential to transfer statutory process risk should
be the selection of the preferred procurement procedure. The decision will be
between the negotiated and restricted procedures, and will depend on European Union
procurement law, the Public Private Partnership option that is recommended, the
specific characteristics of the project, the potential to transfer statutory process risk,
and the value for money that may be gained or lost as a result of the procurement
procedure adopted. Further details are provided in the separate Guidance Note
entitled Procurement Procedure Selection.

2.16 The PPP Assessment, Statutory Process Assessment, and Procurement Procedure
Selection are closely related, and it will be important to establish mechanisms to
facilitate iteration between these three important activities. For example, the
decisions to be taken during the Statutory Process Assessment and Procurement
Procedure Selection will be informed by the outcomes of the PPP Assessment.
Similarly, the outcomes of the Statutory Process Assessment and the Procurement
Procedure Selection might also further inform the PPP Assessment. It is strongly
recommended therefore that the Guidance Notes for all three activities are read before
the PPP Assessment is undertaken.

Approval from Central Authority

2.17 Once the Public Private Partnership Assessment, Statutory Process Assessment and
Procurement Procedure Selection have been completed, the Central Authority will
decide whether to approve the Contracting Authority to proceed with a Public Private
Partnership procurement. The approval would outline:

the preferred option arising from the Project Appraisal;

the form and scope of Public Private Partnership to be adopted;

the allocation of responsibility for undertaking the statutory process; and

the procurement procedure to be followed.

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Department of the Environment and Local Government Public Private Partnership Assessment

2.18 The Central Authority will be required to consult with the Department of Finance
before giving approval for a Contracting Authority to proceed with the procurement
of a Public Private Partnership project that involves private finance and has long term
implications for the Exchequer.

2.19 Once the necessary approval has been received, the Contracting Authority will
establish appropriate project management structures to deliver the project, and make
suitable arrangements for stakeholder consultation. Further guidance in relation to
these matters is provided in the Guidance Notes entitled Project Management and
Stakeholder Consultation.

2.20 The remaining sections of this Guidance Note provide advice on the preparation of a
PPP Assessment.

Purpose of the PPP Assessment

2.21 A key driver of the PPP programme in Ireland is the desire to increase value for
money in infrastructure procurement. To ensure that value for money is achieved,
there must be clear justification for the project, a competitive procurement and the
Contracting Authority should be able to demonstrate that the option selected offered
better value for money than the alternatives. Whilst post procurement reviews will
ultimately show whether value for money is being achieved through PPP, procedures
must be in place to ensure that the options being developed are likely to deliver value
for money.

2.22 The purpose of the PPP Assessment is to assess at the Option Appraisal stage the
potential for a Public Private Partnership to deliver improved value for money
compared with a traditional procurement. The PPP Assessment addresses two key
issues in detail:

Does the project have the potential to be procured as a Public Private

Partnership?

Which form of Public Private Partnership provides the greatest potential for
improved value for money?

2.23 The PPP Assessment is therefore the fundamental tool in deciding whether or not to
proceed with a Public Private Partnership procurement. The outcomes of the PPP
Assessment will determine whether or not the Central Authority authorises the
Contracting Authority to proceed with a Public Private Partnership procurement.

2.24 The key elements of the Public Private Partnership Assessment are summarised in
Figure 2 overleaf and are described in detail in subsequent sections of this Guidance
Note. The main outcomes arising from the PPP Assessment are summarised in Figure
3 that follows.

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Department of the Environment and Local Government Public Private Partnership Assessment

Figure 2: Key Elements of the Public Private Partnership Assessment

An initial output specification, which is based on the conclusions of

Initial
the Project Appraisal and provides a high level definition of what is
output
required in terms of service delivery.
specification

A value for money assessment, involving the identification of

Value factors that will determine whether a project is likely to represent
for money value for money, and a qualitative assessment of the potential of the
assessment project to deliver those factors, using tools such as precedent review
and market sounding.

A preliminary risk assessment, including the identification and

Preliminary quantification of key risks, initial allocation of risk between the
risk public and private sectors, and an assessment of whether sufficient
assessment risk transfer is possible to merit a PPP approach. Preliminary views
on the key contractual issues should also be included.

A bankability assessment of any project that may be part or wholly

Bankability financed by the private sector. The bankability assessment should
assessment establish the financing issues that need to be addressed prior to a
procurement proceeding as well as those that will need to be reflected
in contract documentation.

A legal viability assessment, to assess whether the Contracting

Legal Authority has the legal ability to enter into a Public Private
viability Partnership contract. The legal viability assessment should also
assessment consider the legal implications of the project in relation to existing
employees, assets and contracts.

A PPP option selection, involving the selection of the contractual

PPP option form and scope of Public Private Partnership that most closely meets
selection the strategic objectives of the project and offers greatest scope for
value for money.

Identification of the parameters to be used at the end of the

Parameters for procurement process to test whether the preferred PPP tender
final VFM represents value for money. In some cases this will involve the
assessment preparation of a Financial Comparator.

An indicative implementation plan describing the organisational

Indicative
structures required to manage the procurement, and setting out an
Implementation
indicative timetable with target completion dates for the main
plan
activities involved in the procurement of the project.

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Department of the Environment and Local Government Public Private Partnership Assessment

2.25 The main outcomes of the PPP Assessment can be summarised as follows:

Figure 3: Outcomes of PPP Assessment

Elements Outcomes

Initial Output Specification

VFM Assessment Assessment of the potential to
Preliminary Risk Assessment achieve improved VFM using
Bankability Assessment PPP approach
Legal Viability Assessment

Indication of the suitability of the

PPP Option Selection different PPP forms

Risk adjusted project cost More robust assessment of cost

(based on outcomes of and affordability of project
Preliminary Risk Assessment)

Preparation of Financial
Comparator (if required)

2.26 Guidance on the completion of each element of the PPP Assessment is provided in the
sections that follow.

Managing the PPP Assessment

Project Management

2.27 The preparation of a PPP Assessment for a large infrastructure project requires
detailed consideration of a wide range of issues. In deciding how the PPP Assessment
should be managed the following points are relevant:

some elements of the PPP Assessment relate to public policy and public
expenditure impacts that can only be addressed by the Central Authority. The
Central Authority will also be best placed to ensure consistency of approach
and to collate and evaluate national and international data on project
experience and costs;

many of the project specific issues are best assessed by the Contracting
Authority; and

given the complexity of PPP projects, expert technical, legal and financial
advice will be required. The level of input of such experts will depend on the
scale of the project and whether private finance is involved.

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Department of the Environment and Local Government Public Private Partnership Assessment

2.28 Thus to conduct a comprehensive PPP Assessment, a combination of Contracting

Authority, Central Authority and expert advice will be required. As outlined in the
separate Guidance Note entitled Project Management, the Contracting Authority will
procure the technical advice required to complete all aspects of the Option Appraisal
stage, including the Project Appraisal, PPP Assessment, Statutory Process Assessment
and Procurement Procedure Selection. The Central Authority will procure financial
and legal advice, which will be made available to the Contracting Authority.

2.29 As described above, one of the final elements of the PPP Assessment involves
establishing the parameters to be used at the end of the procurement process to test
whether the preferred PPP tender represents value for money compared with
traditional procurement. In some cases this will involve the preparation of a Financial
Comparator as part of the PPP Assessment.

2.30 The Financial Comparator will be prepared by the financial advisers to the Central
Authority, with relevant input from the Contracting Authority and the technical and
legal advisers. It is important that the results of the Financial Comparator remain
confidential and therefore the Central Authority will communicate the results of the
Financial Comparator to the Contracting Authority after tenders have been received.

2.31 A number of pilot projects have already been identified as being suitable for
procurement as Public Private Partnerships involving private finance. To ensure
speed of delivery of these projects, it is understood that where central financial and
legal advice is not yet available, approval has been given to Contracting Authorities to
appoint multi-disciplinary teams to act as Client Representatives. These teams will be
responsible for preparing all aspects of the Option Appraisal stage and for bringing
the projects through to procurement. For future projects, the Central Authority should
indicate its preferred method of managing the Option Appraisal stage to the
Contracting Authority once the project has been identified at the Project Identification
stage as being potentially suitable and desirable for procurement as a Public Private
Partnership.

2.32 Regardless of the choices made regarding the management of the Options Appraisal
stage, a full report including the Project Appraisal, PPP Assessment, Statutory Process
Assessment and Procurement Procedure Selection should be forwarded to the Central
Authority for review and approval. The Central Authority will be required to consult
with the Department of Finance before giving approval to proceed with the
procurement of a Public Private Partnership project that involves private finance and
has long term implications for the Exchequer.

Scope of the PPP Assessment

2.33 The PPP Assessment determines the suitability (or otherwise) of a project for
procurement through a Public Private Partnership. The level of detail included in the
PPP Assessment will vary according to the type and complexity of the project. Small,
relatively straightforward projects will not require the same level of work as large and
complex projects, and the resources allocated to complete the PPP Assessment will
need to be tailored accordingly.

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Department of the Environment and Local Government Public Private Partnership Assessment

2.34 It will be important to ensure that a thorough examination is undertaken of all the
risks associated with each project to identify the most cost-effective allocation of risk
between the public and private sectors. The allocation of risk is a key determinant in
the suitability of a project for procurement as a Public Private Partnership, in
establishing the optimum scope of the project in terms of service requirements, and in
selecting the most appropriate contractual form.

2.35 This Guidance Note is intended to provide only an indication of the structure and
content of a PPP Assessment, and it will be up to the Central Authority to determine
the specific needs for each project. A typical contents page for a PPP Assessment is
set out in Appendix B to this Guidance Note.

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Department of the Environment and Local Government Public Private Partnership Assessment

III. Initial Output Specification

Introduction

3.1 Whilst the preparation of the PPP Assessment may be prompted by a proposal for
capital investment, its focus must be on the specific services and outputs required.
This is a fundamental principle of the Public Private Partnership approach.

3.2 Under the Public Private Partnership approach, private firms become long-term
providers of services rather than simply upfront asset builders, combining the
responsibilities of designing, building, operating and possibly financing assets in
order to deliver the services demanded by the public sector. As a result, Contracting
Authorities will increasingly become involved as regulators and will focus their time
and resources on service planning, performance monitoring and contract management
rather than on the direct management and delivery of services to the public.

3.3 Depending on the terms of the Public Private Partnership contract, assets may be
owned by the Local Authority throughout the contract period, or they may revert to
Local Authority ownership at the end of the contract.

3.4 The services and outputs required from a project are presented in the form of an
output specification. The purpose of the output specification is to define what needs
to be achieved, not how it is to be achieved. This provides scope for the private sector
to be innovative in relation to asset design and service delivery.

Initial Output Specification

3.5 The PPP Assessment should include an initial output specification. The initial output
specification should be developed from the project objectives as set out in the Project
Appraisal.

3.6 To facilitate the development of an initial output specification, the project objectives
should be specified in terms of the outputs that the project is required to deliver, and
they should be specific, measurable, achievable, realistic and time-bounded.

3.7 The outputs specified should be capable of being assessed against clear and
measurable performance criteria and defined in ways that allow their subsequent
achievement to be evaluated. Describing objectives in terms of outputs and required
levels of performance, rather than in terms of the inputs and resources that a project
requires, will help to open up a wide range of solutions and promote innovation
amongst private sector tenderers.

3.8 The initial output specification should also reflect the specific constraints on the
project, as it is these constraints that will set the boundaries on how the outputs can be
delivered. In particular, the initial output specification should be affordable to the
public sector in both capital and operating terms. The affordability of a project should
be addressed during the Project Appraisal.

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Department of the Environment and Local Government Public Private Partnership Assessment

3.9 The preparation of an initial output specification as part of the PPP Assessment
provides a clear basis for comparing the characteristics of a project against the
characteristics of different Public Private Partnership options. In this way a well
defined initial output specification will enable the most appropriate form of Public
Private Partnership to be more readily identified.

3.10 The preparation of an initial output specification will also assist the preparation of a
detailed output specification at the commencement of the procurement process. It
will also assist in the development of an appropriate set of evaluation criteria against
which to measure private sector bids.

3.11 Further guidance to assist Contracting Authorities in the preparation of output

specifications is presented in the Guidance Note entitled Output Specifications.

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Department of the Environment and Local Government Public Private Partnership Assessment

IV. Value for Money Assessment

Introduction

4.1 Public Private Partnerships should only be pursued where they are expected to deliver
improved value for money. The assessment of value for money is therefore a
fundamental requirement of a Public Private Partnership procurement.

4.2 Before entering into a PPP procurement, it is important to make an assessment of the
potential for a Public Private Partnership to deliver improved value for money. This
should allow some understanding of the potential for achieving cost savings or
additional benefits through Public Private Partnerships.

4.3 The assessment of the potential to secure value for money is a key element of the PPP
Assessment. The conclusions on value for money potential will inform the decision
of the Central Authority on whether or not to proceed with a Public Private
Partnership procurement, and if so, the form of Public Private Partnership to be used.

4.4 The final assessment of whether a Public Private Partnership procurement represents
improved value for money can only be made at the conclusion of the competitive
tendering process. The nature of this assessment is considered in Section Nine of this
Guidance Note.

4.5 The assessment of the potential for a Public Private Partnership to deliver value for
money has two parts:

(a) identification of the factors that will determine whether a project delivers
value for money; and

(b) an assessment of the potential of the private sector to deliver value for money
with regard to those factors.

4.6 These parts are described further in the paragraphs that follow. The outcomes of the
assessment will help to inform not only the potential for a Public Private Partnership
to deliver value for money, but also:

selection of the most appropriate form of Public Private Partnership;

identification of the optimum scope of the Public Private Partnership; and

identification of the parameters that should be used at the end of the

procurement process to assess whether the preferred Public Private Partnership
tender represents value for money.

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Department of the Environment and Local Government Public Private Partnership Assessment

Factors that Determine Value for Money

4.7 The factors that determine whether a project delivers value for money will vary by
type of project and by sector. Some factors will be common to a number of projects,
and may relate to the strategic objectives of the Central Authority. In general, Public
Private Partnerships can generate improved value for money through a number of
ways including, inter alia:

Reduced whole life costs - the integration of infrastructure design, build and
operation, facilitating private sector innovation in design, an avoidance of
over-specification and improved maintenance scheduling;

Better allocation of risk - cost effective transfer of risk to the private sector,
enabling efficiency benefits to be generated across the term of the contract;

Faster implementation - the transfer of design and construction risks, together

with the principle of no payment until commencement of service delivery, will
provide significant incentives for the private sector to deliver infrastructure
projects within short construction timeframes. This is highly relevant in the
context of the National Development Plan 2000 2006;

Improved quality of service resulting from better integration of services with

supporting assets, improved economies of scale, the introduction of new
technology and innovation in design, and the performance incentives and
penalties included in the Public Private Partnership contract; and

Generation of additional revenue - more intensive exploitation of assets to

generate additional revenues, for example from shared use of facilities or the
sale of surplus assets.

4.8 Other factors will be project specific, and may be identified by considering the
experience of similar projects, including projects constructed and operated using
traditional approaches, and projects constructed and operated using a Public Private
Partnership approach. For example, the experience of Hereford and Worcester
County Council in procuring an integrated waste management service under a Public
Private Partnership indicates possible ways in which the private sector might seek to
deliver value for money within an integrated waste management PPP contract. These
included the use of whole life costing approach to provide a long term integrated
waste management solution, innovation in relation to service delivery, substantial risk
transfer, maximising use of commercial management skills and commercial freedoms,
and unlocking alternative uses to generate third party revenues (e.g. energy from
waste).

4.9 A recent review of Public Private Partnership projects in the United Kingdom,
conducted by Arthur Andersen for the Treasury Taskforce, identified that from a
public sector perspective, there are six key drivers of value for money in PPP projects.
These are: risk transfer, the long term nature of contracts (including whole life
costing), the use of an output based specification, competition, performance
measurement and incentives, and private sector management skills.

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Department of the Environment and Local Government Public Private Partnership Assessment

4.10 The review also identified that Public Private Partnerships are becoming well
established as a procurement method in the United Kingdom, and that large and small
projects have been successfully procured across a range of industry sectors. The
average percentage saving in net present cost terms of using the Public Private
Partnership approach, compared with traditional procurement, was estimated to be
seventeen per cent (across a sample of twenty-nine projects) over the duration of the
contract. The long term operational benefits, and hence value for money, of these
projects will take more time to establish, and will depend on how well the private
sector manages the risks transferred to it, and on the success of the public sector in
managing contracts throughout their duration.

Assessing Value for Money Potential

4.11 The potential of the private sector to deliver value for money through Public Private
Partnerships may be considered in terms of the experience of similar projects,
particularly those that have been operational for a number of years. Such experience
may be accessed through either desk-based research, or through consultations with
potential private sector suppliers.

4.12 The main tools used to identify potential sources of value for money, and to assess the
potential of the private sector to deliver value for money, are precedent review and
market sounding. The key issues to be investigated within the precedent review and
market sounding exercise will vary from project to project. However, in general,
experience of similar projects should be investigated and the views of the private
sector should be established in relation to the factors described above, and in
particular in relation to:

the scope of the project, including the balance between asset provision and
service delivery;

the potential for cost effective risk transfer, particularly in relation to statutory
process risk, demand risk and residual value risk;

the scope for user charges, third party revenues and alternative asset uses that
might reduce the cost of the project to the Contracting Authority; and

the potential for value for money, measured in terms of the main sources of
value for money (in monetary and non-monetary terms) that were identified at
the end of the procurement of similar projects, and evidence that value for
money has actually been achieved in these areas during the construction and
operation stages.

4.13 Documentation on previous projects, such as the Report on the Tendering Process and
the project reviews undertaken at the end of the construction phase and during the
operational phase, should assist in this regard. Quantitative information should be
recorded wherever possible, and may include:

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Department of the Environment and Local Government Public Private Partnership Assessment

Cost information for example, the costs included in the tender submissions
and the Financial Comparator (where appropriate), the actual cost to the
Contractor (where available), and the actual cost to the Contracting Authority
(in terms of payments made);

Revenue information for example, estimates of any revenue generated from

third parties;

Timetable for delivery - the actual timescale for project delivery compared
with the timescale proposed in the tender submission and the timescale
assumed in the Financial Comparator (where appropriate);

Performance information - performance against the output specification; and

Information on customer demand and satisfaction details of the demand

for the service, including any statistical evidence of customer satisfaction.

4.14 For the pilot PPP projects, it may be possible to obtain some of the above information
for international projects from published reports and relevant contacts. For future
PPP projects, it will be important to establish and maintain a database of information
on the pilot projects to ensure that the experience of those projects is taken into
account in the development of future Public Private Partnerships.

4.15 Further advice on conducting precedent review and market soundings is provided in
the paragraphs that follow.

Precedent Review

4.16 Where there is an established market for the development of an asset or the provision
of a service, it is desirable to undertake a review of precedent prior to commencing a
detailed market sounding. The precedent review should examine experience in both
local and international markets.

4.17 The review of precedent will be useful in providing background information on the
level of market interest, the capabilities of the private sector, the key risks associated
with projects and the willingness of the private sector to accept those risks. The
market sounding process can then focus on particular issues arising out of the
precedent review, and issues that are specific to the infrastructure project in question.

4.18 At the extreme, the review of precedent could highlight such a wealth of experience
and information (including the results of previous market soundings) that further
market sounding is not considered necessary. However, unless a project is very
standard in nature, there is normally benefit to be gained from conducting at least a
limited market sounding exercise to investigate the particular circumstances of the
project under consideration.

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Market Sounding

4.19 A Public Private Partnership project is only practicable where there are contractors
able to deliver the required service and willing to accept sufficient risk transfer.
Therefore, once the essential characteristics of an infrastructure project have been
defined and an initial output specification produced, the nature and extent of market
interest in a Public Private Partnership solution should be established by means of a
market sounding exercise.

4.20 Private sector interest may be known on the basis of previous market soundings or
from earlier projects. However, for large, innovative or complex infrastructure
projects a separate market sounding exercise should be conducted as part of the PPP
Assessment. The market sounding should focus on issues that are specific to the
project in question. There are a number of elements to be considered as part of the
market sounding process, including the strength of the private sector market for the
project, the private sectors scope for achieving economies of scale, and its relevant
expertise. The most important factors will be the likely level of interest in the project,
and the capability of the market to undertake the project.

4.21 The different forms of Public Private Partnership should be explored, the private
sector consulted and their interest not presumed or pre-judged. Every effort should be
made to avoid implying that one solution is favoured over another. It is also
recommended that the market sounding should be undertaken jointly by the relevant
Authority and its appointed advisors.

4.22 The market sounding process should take the form of preliminary and confidential
discussions with potential private sector partners, including consulting engineers,
contractors and financiers. It is important to ensure that all those consulted, either on
a formal or informal basis, clearly understand that all discussions are on a without
commitment basis, and that they do not restrict or distort competition, or give one
supplier an advantage over another in any subsequent formal tendering process.

4.23 To maximise the effectiveness of the market sounding process, private sector
organisations will need to be provided with a Project Prospectus that sets out an
indication of the likely scope and scale of the project, its service content, its
anticipated key contractual terms and preliminary risk allocation (refer to Section Five
of this Guidance Note). The discussions should also be supplemented with a Project
Questionnaire in order to provide a formal record of responses to key questions.

4.24 To ensure the widest possible participation in the market sounding exercise, a Prior
Information Notice (PIN) can be placed in the Official Journal of the European
Communities inviting potential private sector suppliers to express their interest in
participating in the market sounding exercise. In such circumstances, advice should
be sought from the appointed legal advisors to ensure the proper use of the Prior
Information Notice.

4.25 The results of the market sounding should be recorded in the PPP Assessment. If a
Project Questionnaire is issued to private sector suppliers, then the responses received
should be analysed and the results presented in detail. Some further useful tips on
conducting market sounding are presented at Appendix C to this Guidance Note.

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Department of the Environment and Local Government Public Private Partnership Assessment

Shadow Bids

4.26 If there are major concerns regarding the potential for a Public Private Partnership to
deliver value for money compared with a traditional procurement, then the
Contracting Authority could consider asking the financial and technical advisers to
develop a shadow bid as part of the PPP Assessment. Shadow bids can be developed
in one of two ways:

(a) Estimating the cost savings required this involves adding the additional
costs of a PPP solution (e.g. cost of private finance, private sector profit
margins, private sector tendering costs, and the costs of public sector
regulation) to the Financial Comparator (defined in Section 9 of this Guidance
Note), and then making a value judgement within the PPP Assessment, based
on the results of the precedent review and market sounding, on the potential of
the private sector to eliminate these additional costs; or

(b) Actual bid - developing an actual bid for the PPP project from first
principles. This actual bid would be compared to the estimated cost of
traditional public sector procurement to assess, within the PPP Assessment,
the potential to achieve value for money using a Public Private Partnership
approach.

4.27 Experience in the United Kingdom would however suggest that the shadow bids
described in (b) above tend to be over-elaborate financial and economic models,
which require substantial investment of time and money, but often provide spurious
results and low levels of precision. The time and money used to prepare these models
as part of the PPP Assessment could, in many instances, be more usefully applied in
proceeding to a formal procurement process, which would provide a definitive
assessment of the potential for value for money.

4.28 For these reasons, the use of shadow bids in the form of (b) above is not
recommended in the PPP Assessment to determine the potential of a Public Private
Partnership to deliver value for money.

Conclusions

4.29 The value for money assessment described above is not definitive. It provides an
understanding of the potential for cost savings or additional benefits using the Public
Private Partnership approach. The final assessment of whether PPP represents value
for money can only be made at the end of the procurement.

4.30 The main findings of the precedent review and market sounding should be presented
in the PPP Assessment in such a way as to facilitate consideration of:

the potential for the private sector to deliver value for money through a Public
Private Partnership;

the forms of Public Private Partnership that provide the greatest potential for
value for money to be achieved.

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Department of the Environment and Local Government Public Private Partnership Assessment

the optimum scope of the Public Private Partnership; and

the parameters that should be used at the end of the procurement process to
assess whether the preferred Public Private Partnership tender represents value
for money.

4.31 If the findings of the precedent review and market sounding suggest that a Public
Private Partnership is unlikely to deliver improved value for money, then the
Contracting Authority should not proceed with the remaining elements of the PPP
Assessment, but should consider delivering the project through traditional public
sector procurement.

4.32 As described previously, the conclusions of the value for money assessment will
inform the decision of the Central Authority on whether to approve the Contracting
Authority to proceed with a Public Private Partnership procurement. If the Central
Authority decides to give such an approval, it is likely to specify to the Contracting
Authority the form and scope of Public Private Partnership to be adopted. It might
also highlight specific areas of the project that the Contracting Authority should
investigate in more detail to determine whether there is scope for further
improvements in value for money. For example, the Central Authority may consider
the value for money provided by the transfer of demand risk to be an area of
uncertainty. Under such circumstances it might advise the Contracting Authority to
conduct further investigation on the most cost-effective allocation of demand risk
prior to commencing the procurement, or even to seek variant bids during the course
of the procurement.

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Department of the Environment and Local Government Public Private Partnership Assessment

V. Preliminary Risk Assessment

Introduction

5.1 A risk can be defined as a potential threat to the successful completion and operation
of a project in terms of cost, time or quality. The efficient allocation of risk between a
public sector procuring entity and a private sector supplier is an essential part of any
successful procurement through Public Private Partnerships and the guiding principle
is that risk should be allocated to the party or organisation best able to manage it.
Although there may be policy reasons to encourage maximum risk transfer, the aim is
to achieve the optimum allocation of risk and not simply the transfer of risk for its
own sake.

5.2 In any Public Private Partnership project, the degree of risk transfer to the private
sector will be determined by the nature of the project and will by definition vary on a
project by project basis. The underlying principle is that risk should be allocated to
the party best able to manage it.

5.3 It is important that this is not confused with transferring risk for its own sake. Figure
4 below shows that as risk transfer is increased beyond the optimum, the incremental
increase in unit cost for an incremental increase in risk transfer increases significantly.
Risk transfer above the optimum therefore results in reduced value for money, due to
the premium that the supplier charges for managing those risks that they are less well
equipped to manage.

Figure 4: Cost Effective Risk Transfer

Unit cost
of service

Risk Transfer
Optimum
PPP Project

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Department of the Environment and Local Government Public Private Partnership Assessment

5.4 The main benefit of cost effective risk transfer is that it generates the incentives for
the supplier to deliver cost effective and high quality services on time.

Preliminary Risk Assessment

5.5 The purpose of conducting a preliminary risk assessment as part of the PPP
Assessment is to identify and quantify the main risks associated with the project, and
determine the optimum allocation of risk between the public and private sectors. The
preliminary risk assessment comprises four steps, namely:

Figure 5: Steps in a Preliminary Risk Assessment

Step Description Outcome

Preliminary Identification of the principle risks associated with the Preliminary list of
Risk design, construction and operation of an infrastructure risks
Identification project

Formation of an initial view as to whether the Contracting

Preliminary Authority or the Contractor is likely to be best able to Preliminary risk
Risk manage each risk. Risks are then either allocated to the allocation
Allocation Contracting Authority, the Contractor, or identified as risks
to be shared.

Qualitative assessment of the potential significance or

Qualitative impact of each risk. The results of the qualitative Preliminary risk
Risk assessment are combined with the list of risks and the risk matrix
allocation to provide a preliminary risk matrix for the
Assessment
project. A risk management plan is prepared for those Risk management
risks that are to be retained by the Contracting Authority. plan

Preliminary Preliminary assessment of the monetary value of the most

significant risks identified in the preliminary risk matrix. Risk adjusted
Risk
The monetary value of the most significant risks Financial
Quantification transferred to the Contractor is included in the Financial Comparator
Comparator.

5.6 The purpose of quantifying risk as part of the PPP Assessment is:

to improve understanding of the size and monetary value of risk and the
importance of risk management;

to help identify the party that is best able to manage each risk, and also
whether it would be cost effective to transfer the risk to the Contractor;

to provide a more robust assessment of the cost of the project, and hence its
affordability; and

to provide a basis for developing a Financial Comparator (if required).

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Department of the Environment and Local Government Public Private Partnership Assessment

5.7 The preliminary risk assessment should be informed through discussions with
potential private sector partners and experience to date both nationally and
internationally. The precedent review and market sounding exercise should provide
information on the main risks associated with particular types of project, the
probability of their occurrence, the scale of their impact, and the ability of the public
and private sectors to manage risks.

5.8 The preliminary risk assessment should provide a clear statement on the key risks
(including their estimated value) that could be cost effectively transferred to the
private sector. The conclusions of the preliminary risk assessment will inform the
Central Authoritys decisions on whether to proceed with a Public Private Partnership
procurement, and if so, the form of Public Private Partnership to be used. For
example, if the private sector is unwilling to bear the financial risk on a project, then
neither Design, Build, Operate and Finance nor Concession contracts are likely to
deliver optimum value for money.

5.9 More detailed guidance on the preliminary risk assessment is provided in the separate
Guidance Note entitled Risk Assessment.

Statutory Process Risk

5.10 A unique feature of infrastructure projects in the roads, water and waste sectors is the
complex nature of the statutory process through which such projects are developed.
Accordingly, it is important to note that where a decision is taken to transfer statutory
process risk to the private sector it will have a number of significant implications for
the structure of the procurement process and the pattern of risk allocation underlying
the Public Private Partnership.

5.11 The allocation of statutory process risk must therefore be decided before the
procurement stage is commenced. For this reason, the allocation of statutory process
risk is considered to be a separate stage in the Public Private Partnership Route Map,
and is undertaken either at the same time, or immediately following, the PPP
Assessment (Figure 1). As noted in Section 2 of this Guidance Note, the PPP
Assessment and Statutory Process Assessment are closely related, and it will be
important to establish mechanisms to facilitate feedback between the two stages.

5.12 The desirability of transferring statutory process risk to the private sector is examined
in detail in the Guidance Note entitled Statutory Process Assessment. However, it is
clear that for the pilot projects at least, Contracting Authorities should retain
responsibility for the statutory process. This will enable both the public and private
sectors to adapt to the requirements of Public Private Partnership projects in an
evolutionary way that will help to minimise the risk of problems and delays. Once a
number of projects have been progressed in each sector and the principles of Public
Private Partnerships are better understood, then the potential for cost effective transfer
of statutory process risk is likely to increase.

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Department of the Environment and Local Government Public Private Partnership Assessment

5.13 The main exception to this evolutionary approach relates to the waste sector. Under
current legislation a license application to the Environmental Protection Agency for a
waste treatment facility must be accompanied by specific details of the processes to
be employed. As a result, statutory process risk can only be borne by the contractor
responsible for the detailed design of those processes.

Contractual Considerations

5.14 The ultimate allocation of risk will depend on the terms of the contract finally signed.
The PPP Assessment should therefore record preliminary views on the main
contractual issues such as:

payment mechanisms;
termination arrangements;
step-in arrangements;
changes to requirements;
changes of law;

ownership of assets;
service level agreements;
length of contract; and
arrangements for post contract monitoring.

5.15 Staff, transfer of undertakings and acquired rights issues may also need to be
considered.

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VI. Bankability Assessment

Introduction

6.1 The PPP Assessment should include an assessment of the bankability of any project
that will be part or wholly financed by the private sector. This specifically relates to
projects that are expected to be procured and managed under Design, Build, Operate
and Finance or Concession contracts.

6.2 Where relevant, the bankability of a project should be assessed through precedent
reviews and market soundings with financial institutions. Financial advice will be
required to undertake the bankability assessment as part of the overall PPP
Assessment.

6.3 In general, providers of finance for infrastructure projects will look favourably on
projects with the following characteristics:

Contractual balance - where there is a commercial incentive for all parties

(including the Contracting Authority) to complete the transaction, and deliver
the project throughout its life.

Bankable cashflows projects with characteristics that make them an

attractive proposition for debt providers, possibly lowering the projects cost of
financing.

Security of cashflows providers will have a preference for availability based

payment mechanisms. They may be satisfied in some sectors by usage based
payments underpinned by market testing of demand related revenues, or when
the project involves an increase in existing capacity, where the level of
demand is already known.

Opportunity to innovate projects where technical innovation is introduced

can significantly reduce a component of the wholelife cost of the asset.

Synergies may be important where the equity provider is also the operator of
complementary facilities.

Opportunities for financial engineering - which increase the overall return

on equity.

Appropriate risk transfer appropriate allocation of risk between the public

and private sector, and between parties best able to manage the risks, should
result in optimal project pricing.

Environmental issues limited circumstances in which the parties to the PPP

project could become at risk for liability for environmental damage. In the
sectors under consideration, this is likely to be an important issue.

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Repayment cushion - a reliable net revenue stream in excess of capital and

interest repayment requirements, supported by sufficient equity/guarantees and
loan reserve accounts, to provide sufficient funds to service debt.

Sponsor credit - strong performance bonds or completion guarantees given by

the PPP Contractors during the construction and operation phase, and any
mitigants used to enhance the creditworthiness of Contractors.

Vires/legislative framework very clear legal powers of the public sector

body to enter into the contract and to pay on termination.

Technical complexity a project solution that is based on proven technology,

ease of replacing the operator, minimal complicating factors such as planning,
licensing or environmental constraints.

Residual interests good alternative use value of the assets, and ease of
access for the lender to utilise them.

Compensation on termination the contractual basis for termination does not

provide either party with an incentive to terminate, but if the project is aborted
a formula exists for the lenders to step in to solve the problems or be
compensated, and the public sector can meet break costs on termination.

6.4 Thorough consideration of these issues should be included within the PPP
Assessment, and reference should be made to the separate Guidance Note entitled
Financial Context in this regard. The conclusions of the bankability assessment will
help to establish the suitability of projects for Design, Build, Finance and Operate and
Concession contracts. In addition, it will help to identify those issues that need to be
addressed prior to commencing a procurement, or that need to be reflected in contract
documentation.

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VII. Legal Viability Assessment

Introduction

7.1 It is critical, before commencing the procurement of any project under a Public
Private Partnership, to conduct a thorough legal viability assessment in order to
identify any issues that need to be addressed prior to commencing a procurement, or
that need to be reflected in tender documentation.

7.2 The Contracting Authority should therefore use legal advisors to undertake a legal
viability assessment as part of the PPP Assessment. The principal issues to be
considered by the legal viability assessment are as follows:

Legal ability of the Contracting Authority to:

enter into a Public Private Partnership contract; and
introduce user charging.

the implications of the Public Private Partnership for:

existing statutory duties and responsibilities;

existing employees (including stakeholder consultation);
existing assets; and
existing contracts.

The nature and form of any property interest(s) to be granted; and

The implications of the Landlord and Tenant Act.

7.3 Thorough consideration of these issues should be included within the PPP
Assessment, and reference should be made to the separate Guidance Note entitled
Legal Context in this regard.

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VIII. PPP Option Selection

Introduction

8.1 Taken together, the initial output specification, assessment of value for money
potential, preliminary risk assessment, bankability assessment and legal viability
assessment should provide a rationale for:

selecting the most appropriate form of Public Private Partnership; and

identifying the optimum scope of the Public Private Partnership.

8.2 Further details are provided in the paragraphs that follow.

Selecting the Most Appropriate Form

8.3 The Guidance Note entitled Introduction to Public Private Partnerships describes the
main forms of Public Private Partnership that have been identified as being the most
likely to form the basis of the PPP programme in Ireland. They are:

Design and Build (DB) contracts - contractual relationships between public

sector entities and private sector suppliers for designing and building public
facilities or infrastructure. The facility (or infrastructure) is financed, owned
and operated by the public sector;

Design, Build and Operate (DBO) contracts - contractual relationships

between public sector entities and private sector suppliers for designing,
building and operating public facilities or infrastructure. The facility (or
infrastructure) is financed by the public sector, and remains in public
ownership throughout;

Design, Build, Operate and Finance (DBOF) contracts - contractual

relationships between public sector entities and private sector suppliers for
designing, building, financing and operating public facilities or infrastructure.
The facility (or infrastructure) is owned by the private sector for the period of
the contract, at the end of which ownership transfers to the public sector. The
private sector supplier recovers its costs solely from public subventions; and

Concessions - similar to Design, Build, Operate, Finance contracts, except that

the private sector supplier recovers its costs either through direct charges on
private users of the asset (e.g. tolling), or through a mixture of user charging
and public subventions.

8.4 The results of the precedent review, market sounding, preliminary risk assessment,
bankability assessment and legal viability assessment provide an indication of the
suitability of the above forms of Public Private Partnership for infrastructure projects
in the roads, water and waste sectors.

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8.5 The suitability of each form of Public Private Partnership may be usefully considered
in the form of impact statements or a weighting and scoring matrix. In this way the
costs and benefits of each form of PPP may be presented in relation to both the
objectives of the project and the factors that are likely to determine whether value for
money is provided (see Section 4 of this Guidance Note).

8.6 However the assessment of suitability described above is unlikely to be definitive, and
may only provide an indication of suitability. It may for example conclude that more
than one form of PPP is suitable for the project in question.

8.7 The final selection of the PPP form should be made by the Central Authority with
regard to policy and project objectives. As indicated previously, the Central
Authority will be required to consult with the Department of Finance before giving
approval to proceed with the procurement of a Public Private Partnership project that
involves private finance with long term implications for the Exchequer.

Identifying the Optimum Scope

8.8 The optimum scope of the Public Private Partnership should be considered in terms of
both geographical area and service requirements.

8.9 Often, projects will deliver improved value for money if the scope of the contract is
increased to provide greater scope for innovation and economies of scale. For
example, in the waste sector, Government policy favours regional co-operation to
provide a more effective framework, in planning and volume terms, for the
development of integrated waste management systems. A single Public Private
Partnership could therefore be established for each region to provide a seamless
integrated waste management service, incorporating all elements of waste collection,
separation, recycling, treatment and disposal.

8.10 Some projects may however be sufficiently large and/or complex that there exists a
number of sub-options to the Public Private Partnership. These options may relate to
the separation of a business by function or geographical area. For example, if the
Contracting Authority is considering the use of Public Private Partnerships to provide
integrated waste management services in a particular region, then it could use a
number of area based contracts, or separate PPP contracts for waste collection and
waste treatment/disposal. Where such sub-options exist, the costs and benefits of
each sub-option should be appraised in monetary and non-monetary terms and the
preferred option identified in the PPP Assessment.

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IX. Parameters for the Final VFM Assessment

Introduction

9.1 The final assessment of whether a Public Private Partnership represents improved
value for money can only be made at the conclusion of the procurement process. The
Central Authority and the Department of Finance need to be satisfied that the
preferred tender represents value for money before approving the award of contract.

9.2 The achievement of value for money in a Public Private Partnership procurement is
evidenced through effective competition between potential suppliers and, on projects
that involve public money, through a value for money assessment of the costs and
benefits of the preferred Public Private Partnership tender.

Nature of the Final Value for Money Assessment

9.3 The nature of the value for money assessment undertaken at the end of the
procurement process depends on whether the Public Private Partnership project is
financially free standing, generates the majority of its revenues from third parties, or
is reliant on public subvention. The nature of the value for money assessment for
each type of project is summarised in the paragraphs that follow.

Financially Free-Standing Projects

9.4 Financially free-standing projects require the Contractor to recover all costs through
charges on the final users of the service. The public sector plays a facilitating role but
no public money is involved. It is therefore the responsibility of the Contractor to
determine whether the project is commercially viable and suitable for investment.

9.5 The Contracting Authority should satisfy itself through the Project Appraisal and the
PPP Assessment that a Concession contract is the preferred form of PPP for the
project, and that the application of user charges is appropriate. The Contracting
Authority should determine its preferred approach to the setting of user charges, and
develop a payment mechanism that will deliver government policy, the objectives of
the project and protect the public interest. Further advice on this issue is provided in
the Guidance Note entitled Payment Mechanisms.

9.6 Given that the project involves a commercial transaction between the Contractor and
the users of the project and that there is no public money involved, there is no need to
undertake a detailed value for money assessment at the end of the procurement
process. Value for money is achieved through the competitive tendering process.

Concession Contracts with Public Subvention

9.7 The issues set out above for financially free-standing projects also apply to those
projects where the Contracting Authority contributes a subvention but the revenues
come principally from user charges.

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9.8 However, such projects do involve the investment of public money and there is
therefore a need to ensure that the project represents the best use of the public
subvention. For this reason the benefit gained from applying the subvention to the
PPP project should be compared with the benefit gained from applying the subvention
to an alternative project that would otherwise not proceed. Policy priorities will be an
important consideration in this regard.

9.9 Public subvention could take a number of forms, including capital grant and revenue
support. Indirect costs, such as the cost to the Contracting Authority of providing
connecting roads to a major road scheme, should also be taken into consideration.

Projects where the Public Sector is the Main Purchaser

9.10 In the case of projects where the public sector is the sole or main purchaser of the
services being provided (i.e. direct and indirect subventions are greater than 50% of
total cost), a detailed value for money assessment is required at the end of the
procurement. The assessment should compare the costs and benefits (in monetary and
non-monetary terms) of the preferred PPP tender with the costs and benefits of
traditional procurement, or under certain circumstances, with other comparable
measures. The parameters used to undertake the value for money assessment for such
projects are established at the end of the PPP Assessment. Full details are provided in
the remainder of this section.

Elements of the Value for Money Assessment

9.11 In the case of projects where the public sector is the sole or main purchaser, the value
for money assessment undertaken at the end of the procurement process comprises
two key elements:

Monetary comparison - comparison of the cost of the preferred Public Private

Partnership tender, with the cost of traditional public sector procurement,
expressed in terms of discounted cashflows over the life of the PPP contract
(the Financial Comparator). Under certain circumstances other measures may
be used as the basis for a Financial Comparator, and these measures are
described later in this section of the Guidance Note; and

Non-monetary comparison comparison of all the factors that are difficult to

quantify in monetary terms, but their value to government and the wider
public is significant. Examples include speed of project delivery, quality of
service, and security of supply.

9.12 The parameters used to undertake the monetary and non-monetary comparisons are
established at the end of the PPP Assessment. Full details are provided in the
paragraphs that follow. The separate Guidance Note entitled Procurement
Management describes the process of conducting the value for money assessment at
the end of the procurement process.

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Parameters Required for the Monetary Comparison

9.13 A monetary comparison is required for projects where the public sector is the sole or
main purchaser. The monetary comparison could take one of four forms depending
on the characteristics of the project and the stage of development of Public Private
Partnerships in Ireland. The four forms of monetary comparison can be summarised
as follows:

Financial Comparator involving a comparison of the cost of the preferred

PPP tender with the cost of delivering the project (to the standards set out in
the initial output specification) through traditional public sector procurement;

Best available alternative - for projects where the cost of traditional public
sector procurement is difficult to determine, the cost of the preferred PPP
tender should be compared with the best available alternative costing;

Price benchmarks involving a comparison of the preferred PPP tender with

reliable, comparable and independent price benchmarks or unit costs (for
example, standard costs per volume); and

Comparable PPP projects involving a comparison of the preferred PPP

tender with the cost of other comparable PPP projects.

9.14 The circumstances under which each of the different forms of monetary comparison
may be used are described in the paragraphs that follow. However, it is recommended
that for the pilot projects at least, wherever possible the Financial Comparator should
be based on the estimated cost of delivering the project (to the standards set out in the
initial output specification) through traditional public sector procurement.

Financial Comparator

9.15 A Financial Comparator is the estimated cost of delivering the project (to the
standards set out in the initial output specification) through traditional public sector
procurement, presented in terms of a discounted cashflow analysis. The Financial
Comparator should be prepared at the end of the PPP Assessment for projects in
which the public sector is the sole or main purchaser (i.e. all DB, DBO and DBOF
contracts and some concession contracts).

9.16 The Financial Comparator is developed from the preferred option arising from the
Project Appraisal to provide a full and adequate costing of the public sector providing
all those services included within the scope of the preferred Public Private Partnership
option, for the expected contract duration. In practice, if the preferred Public Private
Partnership option results in the transfer to the private sector of all services included
in the preferred option arising from the Project Appraisal, then the differences
between the Financial Comparator and the preferred option will be limited.

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Department of the Environment and Local Government Public Private Partnership Assessment

9.17 The Financial Comparator should be prepared by the financial advisors to the Central
Authority, with relevant input from the Contracting Authority and the technical and
legal advisors. It is important that the results of the Financial Comparator remain
confidential and therefore the Central Authority will communicate the results of the
Financial Comparator to the Contracting Authority after tenders have been received.

9.18 To facilitate the preparation of the Financial Comparator, the construction and
operating cost estimates included in the Project Appraisal should be presented
separately for each element of the project or for different categories of cost. Central
and Local Authorities should establish a database of project costs to assist in this
regard, recording initial cost estimates and actual outturns for both traditional and
Public Private Partnership projects.

9.19 Technical guidance on the preparation of Financial Comparators is set out in

Appendix D to this Guidance Note.

Projects with No Track Record of Public Procurement

9.20 Ideally, the Financial Comparator should be based on the same services and service
levels as the preferred Public Private Partnership option. However, for projects where
there is no track record of public sector procurement, the cost of the public sector
providing the service levels defined in the output specification may be difficult to
determine and subject to a high level of uncertainty.

9.21 In such circumstances, the Financial Comparator should be based on the best
available alternative costing, which will most likely relate to the provision of services
to a lower or alternative standard. The best available alternative may relate to the cost
of current provision as set out in the Project Appraisal.

9.22 It is essential that the service levels assumed by the Financial Comparator are clearly
recorded in the PPP Assessment so that, at the end of the procurement process, the
differences between the preferred private sector tender and the Financial Comparator
can be understood and evaluated.

Projects Involving Non-Specialised Services

9.23 A Financial Comparator may not be required for projects that involve the provision of
standard, non-specialised services for which there is a well established market. In
such circumstances, the financial comparison could simply involve a comparison of
private sector bids against reliable, comparable and independent price benchmarks or
unit costs (for example, standard costs per volume). The use of price benchmarks or
unit costs is likely to be most applicable to outsourcing type contracts.

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Department of the Environment and Local Government Public Private Partnership Assessment

Projects with a Track Record in PPP procurement

9.24 As the use of Public Private Partnerships increases in Ireland, there will be less
information available on the costs of traditional procurement on which to base a
Financial Comparator. Therefore, where there is a track record of Public Private
Partnership procurement that has been shown to deliver improved value for money,
the costs associated with these projects may be used as the basis for developing a
Financial Comparator.

9.25 In such circumstances, it is necessary to take into consideration the costs associated
with the differences between projects, for example in relation to the price base,
requirements of the output specification, risk allocation and any geographical
considerations such as land values. Financial Comparators prepared on this basis
should also take into account the performance of projects during the construction and
operation stages as set out in project reviews. Project reviews will therefore be
increasingly important in this regard.

Parameters Required for the Non-Monetary Comparison

9.26 The monetary comparison will not take into consideration all of the factors that
contribute to value for money. Many factors will be difficult to quantify in monetary
terms, but their value to government and the wider public is significant. Examples
include speed of project delivery, quality of service, security of supply and equity
issues such as the accessibility of services. Consequently, the monetary comparison
should not be approached as a pass fail test, and should be complemented with a value
for money assessment of the costs and benefits of the preferred tender in non-
monetary terms.

9.27 The costs and benefits of the preferred tender may be usefully compared with the
costs and benefits of traditional procurement in non-monetary terms through the use
of impact statements or a weighting and scoring matrix.

9.28 The non-monetary factors to be considered by the impact statements and/or weighting
and scoring matrix should be established at the end of the PPP Assessment. It is
expected that the factors will relate to the objectives of the project and also to those
factors identified in Section 4 of this Guidance Note as being likely to determine
whether value for money is provided.

Results of the Value for Money Assessment

9.29 The results of the value for money assessment that is undertaken at the end of the
procurement process determine whether establishing a Public Private Partnership with
the preferred Contractor will deliver improved value for money compared with
traditional procurement. The value for money assessment is therefore the
fundamental tool in deciding whether or not to proceed with a Public Private
Partnership contract. The results of the value for money assessment will determine
whether or not the Central Authority approves the Contracting Authority to enter into
a Public Private Partnership contract with the preferred public sector supplier.

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Department of the Environment and Local Government Public Private Partnership Assessment

9.30 If the results of the value for money assessment undertaken at the end of the
procurement process are not entirely positive, the Contracting Authority needs to
consider the realistic options for the project and reflect these in the Report on the
Tendering Process. This should include the implications of abandoning the project,
the chances of an alternative being implemented (particularly if the tendering for the
Public Private Partnership has been competitive), the likely market impacts and the
impact of time delays. It will often be more expensive in overall economic terms to
abandon an infrastructure project having gone through complex procurement.

9.31 It is essential therefore that the Report on the Tendering Process for such a project is
retained by the Central Authority and made available to other Contracting Authorities
to ensure that the experience of completed PPP projects is taken into account in the
development of future Public Private Partnerships.

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Department of the Environment and Local Government Public Private Partnership Assessment

X. Indicative Implementation Plan

Introduction

10.1 The PPP Assessment should conclude with a summary of the main findings and with
a recommendation on the preferred form of Public Private Partnership. The
conclusions of the Statutory Process Assessment and the Procurement Procedure
Selection could also usefully be presented in the PPP Assessment.

10.2 The conclusions to the PPP Assessment should also include a summary analysis to
show that the project contains many of the elements needed to complete a successful
Public Private Partnership Approach. This may be undertaken using the simple tick-
box approach presented below.

Key Elements of a PPP Project Element Present

Output or services based solution 4

Significant services content 4

Scope for design innovation 4

Manageable sensitivities 4

Availability of surplus assets 4

Long term contract 4

Risks largely commercial in nature 4

Interested private sector suppliers 4

Credible private sector suppliers 4

Scope for alternative use 4

1 0 . 3 The PPP Assessment should then present an indicative implementation plan

describing the organisational structures that the Contracting Authority would expect
to establish to manage the procurement, and including an indicative timetable with
target completion dates for the main activities involved in the procurement of the
project.

10.4 Contracting Authorities would then use the indicative implementation plan as a basis
for developing more detailed project management tools and procedures. A separate
Guidance Note entitled Project Management has been prepared to assist Contracting
Authorities in this regard.

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Department of the Environment and Local Government Public Private Partnership Assessment

XI. Issues and Recommendations

Introduction

11.1 This section provides a summary of the main issues and recommendations that are
discussed in this Guidance Note. They can be summarised as follows:

Requirement to assess value for money potential;

Assessing value for money potential;

Selecting the most appropriate form of PPP;

Requirements of the final value for money assessment; and

Managing the PPP Assessment.

Requirement to Assess Value for Money Potential

11.2 A key driver of the PPP programme in Ireland is the desire to increase value for
money in infrastructure procurement. To ensure that value for money is achieved,
there must be clear justification for the project, a competitive procurement and the
Contracting Authority should be able to demonstrate that the option selected offered
better value for money than the alternatives. Whilst post procurement reviews will
ultimately show whether value for money is being achieved through PPP, procedures
must be in place to ensure that the options being developed are likely to deliver value
for money.

11.3 The purpose of the PPP Assessment is to assess at the Option Appraisal stage the
potential for a Public Private Partnership to deliver improved value for money
compared with a traditional procurement. The PPP Assessment is therefore the
fundamental tool in deciding whether or not to proceed with a Public Private
Partnership procurement.

11.4 The outcomes of the PPP Assessment will determine whether or not the Central
Authority authorises the Contracting Authority to proceed with a Public Private
Partnership procurement. The final assessment of whether a Public Private
Partnership procurement represents improved value for money can only be made at
the conclusion of the competitive tendering process.

Assessing Value for Money Potential

11.5 The main tools used to identify potential sources of value for money, and to assess the
potential of the private sector to deliver value for money, are precedent review and
market sounding. In undertaking a precedent review or market sounding exercise,
evidence should be sought on the potential for a Public Private Partnership to deliver
improved value for money. Experience of similar projects should be investigated and
the views of the private sector should be established.

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Department of the Environment and Local Government Public Private Partnership Assessment

11.6 Quantitative information should be recorded wherever possible, and in particular in

relation to the potential for cost savings, additional revenue generation, accelerated
project delivery, higher standards of service, increased levels of demand and higher
levels of user satisfaction. For the pilot PPP projects, it may be possible to obtain
some of the above information for international projects from published reports and
relevant contacts. For future PPP projects, it will be important to establish and
maintain a database of information on the pilot projects to ensure that the experience
of those projects is taken into account in the development of future Public Private
Partnerships.

Selecting the Most Appropriate Form of PPP

11.7 The results of the precedent review, market sounding, preliminary risk assessment,
bankability assessment and legal viability assessment undertaken as part of the PPP
Assessment will provide an indication of the suitability of the various forms of Public
Private Partnership for the project in question. However the assessment is unlikely to
be definitive and may, for example, conclude that more than one form of PPP is
suitable for the project. The final selection of the PPP form should therefore be made
by the Central Authority with regard to policy and project objectives.

Requirements of the Final VFM Assessment

11.8 The requirements of the value for money assessment undertaken at the end of the
procurement process depend on whether the Public Private Partnership project is
financially free standing, generates the majority of its revenues from third parties, or
is reliant on public subvention.

11.9 In the case of projects where the Contractor will recover its costs principally from
user charges, there is no need to undertake a detailed value for money assessment at
the end of the procurement process. The project is primarily a commercial transaction
between the Contractor and the users of the project. Value for money is achieved
through the competitive tendering process.

11.10 The Contracting Authority should however satisfy itself through the Project Appraisal
and the PPP Assessment that a Concession contract is the preferred form of PPP for
the project, and that the application of user charges is appropriate. The Contracting
Authority should determine its preferred approach to the setting of user charges, and
develop a payment mechanism that will deliver Government policy, the objectives of
the project and protect public interest.

11.11 There is also a need to ensure the best use of any public subvention that may be
provided by the Contracting Authority to the project. The benefit gained from
applying subvention to the PPP project should therefore be compared with the benefit
gained from applying the subvention to an alternative project that would otherwise not
proceed. Policy priorities will be an important consideration in this regard.

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Department of the Environment and Local Government Public Private Partnership Assessment

11.12 In the case of projects where the public sector is the sole or main purchaser of the
services being provided, a detailed value for money assessment is required at the end
of the procurement. The assessment should compare the costs and benefits (in
monetary and non-monetary terms) of the preferred PPP tender with the costs and
benefits of traditional procurement, or under certain circumstances, with other
comparable measures. The parameters used to undertake the value for money
assessment for such projects should be established at the end of the PPP Assessment.

Managing the PPP Assessment

11.13 To conduct a comprehensive PPP Assessment, a combination of Contracting

Authority, Central Authority and expert advice will be required. It is understood that
the Contracting Authority will procure the technical advice required to complete all
aspects of the Option Appraisal stage, including the Project Appraisal, PPP
Assessment, Statutory Process Assessment and Procurement Procedure Selection.
The Central Authority will procure financial and legal advice, which will be made
available to the Contracting Authority.

11.14 As described above, one of the final elements of the PPP Assessment involves
establishing the parameters to be used at the end of the procurement process to test
whether the preferred PPP tender represents value for money compared with
traditional procurement. In some cases this will involve the preparation of a Financial
Comparator as part of the PPP Assessment.

11.15 The Financial Comparator will be prepared by the financial advisers to the Central
Authority, with relevant input from the Contracting Authority and the technical and
legal advisers. It is important that the results of the Financial Comparator remain
confidential and therefore the Central Authority will communicate the results of the
Financial Comparator to the Contracting Authority after tenders have been received.

11.16 A number of pilot projects have already been identified as being suitable for
procurement as Public Private Partnerships involving private finance. To ensure
speed of delivery of these projects, it is understood that where central financial and
legal advice is not yet available, approval has been given to Contracting Authorities to
appoint multi-disciplinary teams to act as Client Representatives. These teams will be
responsible for preparing all aspects of the Option Appraisal stage and for bringing
the projects through to procurement. For future projects, the Central Authority should
indicate its preferred method of managing the Option Appraisal stage to the
Contracting Authority once the project has been identified at the Project Identification
stage as being potentially suitable and desirable for procurement as a Public Private
Partnership.

11.17 Regardless of the choices made regarding the management of the Options Appraisal
stage, a full report including the Project Appraisal, PPP Assessment, Statutory Process
Assessment and Procurement Procedure Selection should be forwarded to the Central
Authority for review and approval. The Central Authority will be required to consult
with the Department of Finance before giving approval to proceed with the
procurement of a Public Private Partnership project that involves private finance and
has long term implications for the Exchequer.

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Department of the Environment and Local Government Public Private Partnership Assessment

Appendices

A. Public Private Partnership Policy Guidance

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Department of the Environment and Local Government Public Private Partnership Assessment

Public Private Partnerships Policy Guidance

The Public Private Partnerships Policy Framework comprises a series of fifteen separate
Guidance Notes, the titles of which are as follows:

Introduction to Public Private Partnerships

Financial Context

Legal Context

Public Private Partnership Assessment

Statutory Process Assessment

Procurement Procedure Selection

Project Management

Stakeholder Consultation

Procurement Management

Output Specifications

Risk Assessment

Payment Mechanisms

Key Contractual Issues

Accounting Treatment

Contract and Performance Management

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Department of the Environment and Local Government Public Private Partnership Assessment

Appendices

B. Typical Contents Page for a Public Private Partnership Assessment

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Department of the Environment and Local Government Public Private Partnership Assessment

Contents

Section

I Executive Summary

II Initial Output Specification

III Value for Money Assessment

IV Preliminary Risk Assessment

V Bankability Assessment

VI Legal Viability Assessment

VII PPP Option Selection

VIII Parameters for the Final Value for Money Assessment

IX Findings and Implementation Plan

Appendices

A Results of Market Sounding Exercise

B Risk Allocation Matrix

C Financial Comparator

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Department of the Environment and Local Government Public Private Partnership Assessment

Appendices

C. Tips on Market Sounding

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Department of the Environment and Local Government Public Private Partnership Assessment

Tips on Market Sounding

Preparing for Market Sounding

Ascertain whether market sounding is actually necessary. Investigate whether a similar

scheme exists for which interest levels are already known. Dont re-invent the wheel.

Set clear objectives for the exercise. What do you hope to achieve? What information do
you want potential bidders to supply at this early stage?

Prepare a list of organisations you may wish to contact. Think broadly about the project, and
aim to contact as wide a range of potential bidders as possible. For example, for a major
roads scheme, consider:

Consulting engineers;

Construction companies;

Financial institutions;

Sector specific specialists, e.g. roadside services providers.

To ensure a wide cross-section of interest and awareness, you could consider advertising (e.g.
in newspapers).

Do not be afraid to target companies that you think ought to be interested. Do not assume
they will read the advertisements!

Target senior executives with operational and financial backgrounds and arrange for face to
face meetings. You may begin with a telephone call, but try to encourage interested parties to
come to see you.

Carrying out Market Sounding

Arrange for face to face meetings at your premises. See individual companies separately or
collectively, but ensure that they are aware that this will be an informal discussion, with no
commitment on either part. Targeted, one-to-one meetings are generally more effective.

Ensure attendees are aware that this is NOT a formal step in the procurement process, and
that they are NOT to regard themselves as chosen bidders. Attendees should be informed that
a formal procurement process will begin if, and when, the PPP Assessment has been
approved, funding has been ascertained, etc.

Allow enough time for discussions to take place, and for information to be exchanged. For a
discussion with a group of 4 or 5 companies, expect to allow in the region of 2-3 hours.

Beware of sales talk. The attendees will see this as an opportunity to impress you and
emphasise how much they would be willing to do for you. Treat such comments with healthy
scepticism at this stage!

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Department of the Environment and Local Government Public Private Partnership Assessment

Market your project well. This is your opportunity to interest potential bidders and to
convince them that you are worth working with. Make sure you are clear about the aims of
the scheme, the likely funding availability, areas of potential difficulties, etc, and be prepared
to explain these to the attendees.

Stay in control! Remember that you want to know whether they will supply what you need,
not whether you need what they want to supply.

Respect confidentiality. Interested parties may have useful suggestions, perhaps innovative
ideas, which they will not share with you if they fear that the ideas will be leaked to others.
Make sure they are reassured about confidentiality whilst also ensuring that they are clear that
you are not yet inviting them to put forward their proposals.

Golden Rules

Ensure bidders are aware that this is NOT the start of a formal procurement process. They
should be aware that you may not proceed with the project at all.

Market effectively. Be well prepared, and ensure you know your (planned) project well.

Do not be railroaded into changing your project without good cause. However, do keep an
open mind and be prepared to listen.

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Department of the Environment and Local Government Public Private Partnership Assessment

Appendices

D. Financial Comparator

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Department of the Environment and Local Government Public Private Partnership Assessment

Preparing the Financial Comparator

In order to undertake the monetary comparison at the end of the tendering process, a
Financial Comparator is required. The Financial Comparator is the estimated cost of
traditional public sector procurement to meet the service levels required in the output
specification.

The Financial Comparator is developed from the preferred option arising from the Project
Appraisal to provide a full and adequate costing of the public sector providing all those
services included within the scope of the preferred Public Private Partnership option, for the
expected contract duration. In practice, if the preferred Public Private Partnership option
results in the transfer to the private sector of all services included in the preferred option
arising from the Project Appraisal, then the differences between the Financial Comparator
and the preferred option will be limited.

The Financial Comparator is therefore based on a hypothetical contract with the public sector
to design, build and operate the project (e.g. a water treatment works) based on recent
experience of actual costs. For example, for a DBO project, it will require an assessment of
the likely costs of the public sector designing, building and then operating the project (using
traditional methods) to provide a service level that meets the same performance standards
expected of the private sector over the life of the contract.

The Financial Comparator should include the preliminary quantification of the key risks
inherent in the project, covering, among other things, cost and time overruns and service
under-performance. In addition, any assets made available for the project whose monetary
value has not been included in the Project Appraisal need to be properly accounted for in the
Financial Comparator.

The Financial Comparator should not include costs that will be borne by the Local Authority
but will not be included in the scope of the Public Private Partnership contract.

The costs associated with the Financial Comparator should be presented in real terms in a
discounted cashflow analysis. The discounted cash flow analysis should be prepared using a
test discount rate of 5 per cent in real terms. Then the net present value and equivalent
annual cost of the Financial Comparator should be calculated. An example of a proforma
discounted cashflow analysis for a Financial Comparator is presented overleaf.

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Department of the Environment and Local Government Public Private Partnership Assessment

Example Financial Comparator for Roads Project

YearYearYearYearYearYearYearYearYearYearYearYearYear
0123456789101112
kkkkkkkkkkkkk
OpportunityCosts
Land

Capital Costs
Element 1
Element 2
Element 3
Element 4
Residual Values
0.00.00.00.00.00.00.00.00.00.00.00.0ERR

Recurring Costs
Structural maintenance
Routine maintenance
Traffic maintenance
Winter maintenance
Street lighting maintenance
Network maintenance
0.00.00.00.00.00.00.00.00.00.00.00.00.0

NET COST BEFORE RISK 0.00.00.00.00.00.00.00.00.00.00.00.0ERR

NPV of Capital and Opportunity Costs0

NPV of Recurring Costs0
NPV of Costs pre Risk Analysis0

Equivalent Annual Cost pre Risk Analysis0

Risk Analysis
Statutory procedures risk
Design risk
Construction risk
Operation and maintenance risk
Other risk

NET COST AFTER RISK 0.00.00.00.00.00.00.00.00.00.00.00.0ERR

NPV of Total Net Costs0

Equivalent Annual Cost0

Guidance Note 4 14 April 2000 49