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Project Readiness Framework Value for Money and The Business Case Approach

Project Readiness Framework Value for Money and The Business Case Approach. Owain Ellis. Value for Money. VfM is a concept that is used to compare options Affordability and Compliance are thresholds VfM is important: Better outcomes Decision making Presentation.

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Project Readiness Framework Value for Money and The Business Case Approach

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  1. Project Readiness Framework Value for Money and The Business Case Approach Owain Ellis UNCLASSIFIED

  2. Value for Money VfM is a concept that is used to compare options Affordability and Compliance are thresholds VfM is important: Better outcomes Decision making Presentation UNCLASSIFIED

  3. Affordability and Quality thresholds UNCLASSIFIED

  4. VfM of PPPs compared with traditional delivery Balance between qualitative and quantitative assessment Considers project and market features Embeds an evidence-based approach Qualitative assessment is often sufficient Quantitative assessment uses generic models for the PSC and “should cost” PFI solution UNCLASSIFIED

  5. Main Focus is on the Qualitative Assessment Viability Measurable and definable outputs, clear scope Operational flexibility Equity/efficiency reasons for private sector service provision Desirability Do the benefits outweigh the costs? Achievability Market interest, time scales UNCLASSIFIED

  6. Good VfM in PPPs - Enablers Definable and contractible outputs Balance of assets and non-asset based services Whole life costing Adequate size and duration Competition UNCLASSIFIED

  7. Good VfM in PPPs - Necessary Stable/ defined requirement/ long term need Stable delivery – technology Private sector can manage risks and be responsible for delivery Procurement costs are proportionate UNCLASSIFIED

  8. Creates a structure to ensure the project is properly prepared for market and likely to succeed Used for project approvals at three critical points Provides a framework to consider options - VfM An audit trail for decisions – helps with retrospective audit / scrutiny Business Cases - Approach UNCLASSIFIED

  9. The Business Case Strategic Case Intervention Benefits Requirements and scope Economic Case Options Value for money Financial Case Costs Affordability Accounting Treatment • Commercial Case • Risk allocation • Commercial interest • Contract terms prepared • Management Case • Project team/processes • Timetable • Governance & Approvals • Commitment of stakeholders/users UNCLASSIFIED

  10. Additional Slides UNCLASSIFIED

  11. 100% Gate 5 Benefits Evaluation Gate 4 Readiness For Service Gate 3 Investment Decision Whole Life Expenditure Gate 2 Procurement Strategy Gate 1 Business Justification Gate 0 Strategic Assessment 0% Confirm Justification Competitive Procurement Contract Award Confirm Benefits Confirm Strategy In-Service Key stages - Ability to influence outcomes SOBC HMT OBC HMT FBC HMT UNCLASSIFIED

  12. Public Sector Comparator Numerically based system Compares risk adjusted costs Provides a “should cost” model Quantifies risks Question : Is the extra cost of the private finance outweighed by risk transfer to the private sector and private sector efficiencies? UNCLASSIFIED

  13. The Quantitative Test - Public Sector Comparator 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 UNCLASSIFIED

  14. Public Sector Comparator - Lessons Advantages – can be apparently helpful with political /public perception But....challenges: Can be misused and misleading (spurious specificity) Avoids use of real judgement Timing of final output does not help with decision making process Needs empirical data and sector experience (limited at start of programme) We have therefore withdrawn our quantitative model and will be revising our approach over the Autumn UNCLASSIFIED

  15. Conclusions The UK has been practicing PFI for over 15 years and has progressively refined its model Everyone has to adapt to current economic circumstances Our business case methodology and emphasis on value for money continues to lie at the heart of our approach to PPP and other projects. UNCLASSIFIED

  16. UK Definitions of Value for Money “ The optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements. VfM is not the choice of goods and services based on the lowest cost bid.” HM Treasury UNCLASSIFIED

  17. Example Options - Privatisation, PPP, Outsourcing UNCLASSIFIED

  18. Example Range of UK Procurement Models Complex JVs and PPPs outside PFI/PF2 ICT Change Management Segment of highest risk Traditional PFI/PF2 Concessions Strategic Partnership DBO Complexity of Procurement Housing Program Alliancing School Program Target Price Out-sourcing Cost plus Enhanced Services Programme Regulation by Dept or Delivery bodies Traditional D and B Framework Traditional Services Extent of Central Involvement UNCLASSIFIED

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