Economic Appraisal Guidance
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NI Practical Guide to the Green Book

5.  

PPP Projects and Procurement Issues
   

Introduction
5.1   Where there are alternative procurement options, they should be examined carefully before proceeding. DFP's Central Procurement Directorate (CPD) provides detailed guidance on the procurement options that are available, and how to conduct the relevant procurement process13. If the private sector is involved, proposals should be fully developed before tenders are invited.
5.2   Where implementation will be by procurement, there are extensive requirements that need to be met under European Commission Directives and also under regulations within the United Kingdom. Often, these impose requirements over and above those stipulated by the Green Book, and must be complied with at all stages. Specialist advice can be sought from either the procurement unit within a Department or agency or from CPD.
   

Public Private Partnerships (PPP) Policy Framework and Guidance
5.3   The policy framework for PPPs, including Private Finance Initiative (PFI) projects, in Northern Ireland is set out in Working Together in Financing Our Future (OFMDFM/DFP, 2003) available at http://www.ofmdfmni.gov.uk/maindoc.pdf This framework was adopted with regard to the recommendations of the Report of the Working Group on Opportunities for Public Private Partnerships (available at http://www.ofmdfmni.gov.uk/public-private-partnership/) and an extensive consultation exercise that followed its publication.
5.4   The framework applies to all Northern Ireland Departments and their Agencies and NDPBs. It encourages the uses of PPPs for the procurement of public services where it is appropriate to do so. Appropriateness must be judged in relation to:
  • Value for Money (VFM) - the project must deliver value for money compared to conventional procurement, as assessed in relation to a properly constructed Public Sector Comparator (PSC) where it is appropriate and necessary.
  • Affordability - the PPP must be sustainable in the longer term and compatible with the effective management of public expenditure.
  • Best Practice - PPPs should be taken forward in an open and transparent manner consistent with social partnership arrangements but respecting commercial confidentiality. The need for consistency with European Union requirements and best procurement practice applies in full to PPPs
5.5   The framework explains the role of the Strategic Investment Board (SIB), which will include working with Departments to develop strategically important PPP projects, assisted by a new Public Private Investment Unit. (See fuller reference to SIB at 12.4.9 below). The framework also lists various sources of guidance that are relevant in Northern Ireland. This includes the HMT/OGC guidance on PPPs, which generally applies to NI Departments14. This guidance stresses the importance of considering the PPP route to procurement as an alternative to traditional procurement methods.
5.6   Guidance on PPP is updated periodically, and Departments should seek to take account of revisions to guidance as and when they emerge. For example, the following guidance should be applied specifically to PFI projects and programmes:
   

Involvement of the Private Sector
5.7   The extent of involvement of the private sector can vary from minor elements of a proposal being contracted-out through to full privatisation, with various forms of contracting, outsourcing and PPPs (including PFI) in between. Public bodies need to consider carefully which procurement route is likely to be most effective. In some cases, the appropriate balance between public or private sector provision will be clear. In others, the best solution must be identified across a range of public, private and partnership options.
5.8   Private sector provision may be more likely to provide a better solution where the scope for the following is greatest:
  • Innovation to reduce costs or to improve observable outcomes;
  • Generating additional revenue flows by sales to third parties;
  • Reduction in risk of cost overrun or benefit shortfall;
  • A contractor is able to exploit economies of scale in the provision of services (e.g. IT support or facilities maintenance);
  • Savings in whole life costs and/ or for improved outcomes through effective design (e.g. where a broad range of services may be provided in association with an asset, or when many inputs must be integrated in delivering a service, or where whole life and operating costs are importantly determined by good design);
  • Clear specification of quality standards in absolute terms or in terms of client satisfaction;
  • Ability of private sector to control discrete elements of the project without excessive oversight or interference; or,
  • Clear boundaries and interfaces between public and private sectors.
5.9   Provision by the private sector may be less appropriate where:
  • Risks which threaten the viability of a project are outside the control of the contractor (and these risks cannot be separated contractually from the project);
  • The predominant risks are ones where the public sector has the comparative advantage in managing them;
  • A large degree of discretion is required in determining the quality of services, and quality is not observable; or,
  • Bidding costs are large in proportion to the value of the project (although there may be means of reducing these costs).
   

The Outline Business Case (OBC)
5.10   The option of pursuing a PPP solution should be considered in OBCs by reference to the above criteria and in light of the current relevant HMT/OGC guidance. Where a PPP solution is ruled out without detailed analysis, the reasons for doing so should be stated explicitly in the OBC by specific reference to these criteria. Experience suggests that PPP approaches suit some situations better than others, and resources should not be wasted investigating PPP solutions where they are clearly not appropriate. Where there is doubt over the relevance of PPP solutions, advice should be sought from Departmental PPP advisers, the Public Private Investment Unit or DFP Supply.
5.11   Where PPP procurement is under serious consideration, the OBC should include a full economic appraisal and details of project management and finance in accordance with the general requirements of The NI Practical Guide. However, the potential for a PPP solution should be assessed in more depth. The PPP assessment should include detailed analysis of the scope for risk transfer, the affordability of a PPP option, and the output specification. Further details of the expected content of an OBC where a PPP is in view are provided in Appendix 3 - PPP/PFI Business Cases.
   

New Guidance on Tax Adjustments
5.12   The Green Book indicates that the adjustment of market prices for tax is appropriate where it may make a material difference to the decision. This will be the case for some PPPs. For example, the tax regime for a PFI option is quite different to that for a PSC, so tax differences need to be stripped out to ensure their resource costs are compared on a like-for-like basis.
5.13   Accordingly, HMT has published "supplementary guidance on the taxation of PFI and the public sector comparator". It includes a step-by-step flowchart approach to derive an appropriate percentage adjustment to the net present cost of the PSC. Effective use of the flowchart requires the user to have a detailed understanding of the project and the key corporation tax risks in relation to it. The advice of finance/tax specialists may be required to apply it successfully.
5.14   This guidance is taken into account in the quantitative model issued with the August 2004 Value for Money Assessment Guidance. It should be applied by Northern Ireland Departments when using that model to compare the PFI and PSC options in the OBC.
   

Commercial Agreements
5.15   Appraisals are generally made up of estimates that are forecast some time in advance of either the projected costs being incurred or benefits being realised. Any estimate made well in advance may or may not prove to be correct once a project has been implemented. The less well developed an appraisal, the greater the variability there is likely to be between the estimated value attached to a cost or benefit and the outturn.
5.16   By transferring risk away from the public sector in different ways, different procurement options provide procuring authorities with choices about how they might manage and mitigate certain risks around estimated costs and benefits. For example, typically PFI contracts transfer to the PFI partner the risk that capital costs will exceed estimates made by the procuring authority in a way that some conventional contracts may not. Equally, a payment mechanism that calibrates payments made under a contract with the delivery of well-defined benefits provides procuring authorities with a way of ensuring that certain costs are incurred only if certain benefits are delivered.
5.17   The level of confidence that public bodies can have that estimated costs and benefits will be similar to eventual outturn will depend on:
  • The length of time between the cost or benefit estimate being made and the date of contract award; and
  • The procurement option chosen.
5.18   In relation to the latter, for example, costs which are fixed under contract and which become payable against measured milestones of physical progress in construction will have a higher probability of being incurred than costs which, although fixed under contract, are only payable to the extent that defined benefits, outcomes or contractual outputs associated with the contract are delivered. Comparisons between various procurement options need to take account of the impact that different contractual terms have on the likelihood that, in fact, certain costs will be incurred and benefits realised at the level estimated by the procuring body.
   

DFP Approval of PPP Projects
5.19   PPP (including PFI) projects generally require approval in two stages, corresponding to the submission of an Outline Business Case (OBC) and a Full Business Case (FBC). DFP requires all PPP projects above delegation limits to be submitted to DFP for approval at both of these stages. The FBC should be submitted for DFP approval even if the decision at FBC stage is not to proceed with a PPP solution.
5.20   Where DFP approves a PPP procurement at OBC stage, the Full Business Case (FBC) must be submitted subsequently to DFP for approval, even if the decision at FBC stage is not to pursue a PPP solution.
5.21   When approval has been granted on the basis of an OBC, the principles of appraisal should continue to be applied through until a contract is awarded. Thus, for example, private sector bids obtained through a tendering process should be subjected to the principles of option appraisal. An important difference between PPP and traditional procurement at this stage is that, in the case of PPP, the appraisal should normally cover a PSC in addition to the bids from the private sector. This appraisal should be documented in a Full Business Case (FBC). Appendix 3 - PPP/PFI Business Cases explains further what is required in a FBC.


13 The CPD website is at http://www.cpdni.gov.uk/
14 See Appendix 3 - PPP/PFI Business Cases for further references to the relevant guidance.