Difference between Quantitative and Qualitative VfM Criteria

1. Difference between Quantitative and Qualitative VfM Criteria Owain Ellis12 June 2008

2. Contents • Pros and Cons • Qualitative VfM Criteria • Quantitative VfM Criteria • Challenges

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

4. When is the VfM assessment made? • Programme level • Suitability of using private finance • Project level – pre market launch • Important decision point • Procurement level • Check that procurement will deliver the forecast VfM benefits

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

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

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

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

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

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

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

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

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

14. VfM Analysis – Input Sheet

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

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