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5.4 OBC and FBC Requirements

5.4.1

A summary table indicating what is required in both the OBC and the FBC is included in the table Summary of DFP OBC and FBC Requirements. It may be used as a checklist to aid assessment of whether an OBC or FBC covers all the necessary issues. DFP will expect Departments to address all of the issues in this checklist in their OBCs and FBCs, with appropriate and proportionate effort. The remainder of this Section elaborates on a number of key considerations concerning OBCs and FBCs.

Outline Business Case (OBC)
5.4.2

The OBC provides the basis for a decision on whether to proceed to procurement. The main components of an OBC include:

  1. an economic appraisal, which reviews business need and assesses strategic options in accordance with NIGEAE;
  2. an assessment of procurement options, which assesses the suitability of the various forms of PPP and conventional procurement, including appropriate application of the HM Treasury PFI VFM Test;
  3. a full affordability analysis covering the year-by-year capital and revenue DEL impact, cash flow analysis and funding statement; and
  4. consideration of other relevant issues ranging from output specification to arrangements for post project evaluation and scheduling arrangements for Gateway Reviews.(See Summary of DFP OBC and FBC Requirements, components 4 to 17).

Appraising Procurement Options at OBC Stage
5.4.3It is important that the alternative procurement options are fully explored. PPPs and conventional procurement options can take various forms and it is important to compare the alternatives available and determine the approach that offers the best VFM. An indication of the possible alternatives is provided in Infrastructure Procurement: Delivering Long-term Value (HM Treasury, March 2008) and CPD can provide advice on the options currently available.
5.4.4The current HM Treasury quantitative VFM assessment model provides for a broad comparison of a single PFI option with a single conventional procurement option and is not designed for the assessment of alternative forms of PPPs and conventional procurement options. HM Treasury recognised the need to develop the VFM guidance to cover a wider range of procurement alternatives and stated an intention to do so in Infrastructure Procurement: Delivering Long-term Value. However, no developments in the guidance have materialised.
5.4.5In the absence of tailor-made guidance for assessing the alternative procurement options, DFP's advice is to compare them at OBC stage drawing on the general principles in NIGEAE and the HMT Value for Money Assessment Guidance. The alternatives should be compared in both quantitative and qualitative terms, including suitable modelling of estimated whole life costs. Departments may make reasonable adaptations to the HMT model or may develop suitable alternative cost models to compare the different forms of procurement. Based on this assessment, the OBC should recommend which form of conventional procurement and (where applicable) which form of PPP should be carried forward to procurement stage.

Full Business Case (FBC)
5.4.6

The final test of VFM, affordability and achievability occurs at FBC stage. The FBC's purpose is to inform the final decision on the project and provide a basis for approval to proceed to the award of a contract. The FBC should cover the requirements indicated in Summary of DFP PFI OBC and FBC Requirements. In brief, it should include:

  • an update on key changes and developments since the OBC;
  • full details of the procurement process, including detailed description of private sector bids received;
  • thorough appraisal of the private sector bids and (where applicable) the conventional procurement option;
  • final review of strategic fit, options, value for money, affordability and achievability;
  • a plan and timetable for final negotiations and award of contract; and
  • final plans for monitoring, evaluation, Gateway Reviews and benefits realisation.

Shadow Bid Model
5.4.7Where PPP procurement is under consideration, it is good practice to develop a Shadow Bid Model (SBM) for use at both the OBC and FBC stages. The SBM is usually developed by financial advisers appointed to the project, based on their knowledge and experience of what the private sector is likely to deliver.
5.4.8Creating a SBM is generally helpful for benchmarking affordability and VFM throughout the procurement. It also helps to provide additional reassurance where there is limited experience of PPP in the area of activity under consideration; or when there are relatively few bidders and hence competition cannot be relied upon to ensure VFM.
5.4.9Initial financial modelling is necessary at OBC stage both to inform assessment of the alternative PPP procurement options, and as an input to comparisons with conventional procurement using the HM Treasury Stage 2 VFM assessment model. It also helps to assess the likely affordability implications of a PPP procurement at OBC stage.
5.4.10

When or if a preferred form of PPP is selected, the initial financial modelling should be developed into a detailed SBM for use throughout the procurement to benchmark affordability and VFM. It should reflect the estimated cost of meeting the same output specification as is supplied to bidders in the course of the procurement.

Conventional Procurement Option
5.4.11Departments should have the flexibility to pursue an alternative procurement route without undue delay if at any stage it emerges that a PPP solution has become unaffordable or does not offer the best VFM. Accordingly, DFP has reintroduced the general requirement to develop a conventional procurement option (CPO) for assessment at Stage 3.
5.4.12

The high level assumptions for conventional procurement used in the Stage 2 VFM analysis should be developed into a fully detailed CPO that will provide the same output as the private sector bids. It should be updated regularly throughout the procurement process, taking account of any changes in scope to the project, to provide a genuine comparator to any private sector bids and thus help ensure that the procurement route offering the best VFM is chosen. Key points for updating a CPO and comparing it with the PPP alternatives should include:

  • prior to commencement of procurement, within the Outline Business Case (OBC);
  • prior to appointment of a Preferred Bidder, within an Appointment Business Case (ABC); and
  • prior to financial closure, within the Full Business Case (FBC).

Appraising Options at FBC Stage
5.4.13

VFM should be tested regularly throughout the procurement. The bids received from private firms responding to the invitation to tender will usually present a number of options for appraisal. Each short-listed bid represents an option to be appraised. Two categories of options are typical:

  • Standard Bids: Every short-listed proposal should include a standard bid for appraisal alongside the other standard bids; and
  • Variant Bids: In addition to a standard bid, firms may submit variant bids reflecting the scope which PPP allows for innovative solutions and the incorporation of commercial elements. Variant bids should normally meet the requirements of the output specification but offer special features which are additional to, or which vary from, those included in the standard bid. Variant bids should be treated as separate options to be appraised alongside the standard bids and (where applicable) conventional procurement to see whether their special features offer benefits worth pursuing in terms of improved VFM.
5.4.14A thorough appraisal of the bids should be conducted in order to determine a preferred bid. The bids should be assessed against pre-defined bid evaluation criteria, covering the relevant monetary and non-monetary factors. The advice of CPD or , if appropriate, another designated centre of procurement excellence (CoPE), must be sought regarding the appropriate bid evaluation criteria to use and how to apply them.
5.4.15

Calculation of the net present values (NPVs) of the costs of the PPP bids and the CPO is a vital element of VFM assessment. The calculation includes:

  • for the PPP bids, the expected NPV of the service payments to the private sector over the life of the project;
  • for the CPO, the expected NPV of the public sector costs required to procure the same service, typically a capital investment and subsequent annual operating costs; and
  • adjustments to ensure that the PPP bids and the CPO are fully comparable. In particular:
5.4.16

Once calculated, the NPVs should be compared to identify which option offers the best VFM in monetary terms. Note however:

  • NPVs are point estimates. It is sensible to consider ranges around these estimates, to avoid spurious precision. Sensitivity analysis, involving the recalculation of NPVs for various possible outcomes of key assumptions,can help to achieve this;
  • Not every risk relevant to a project can easily be quantified and included in the straight arithmetic comparison. It may be necessary to make a qualitative allowance for unquantified risks. An element of judgement is unavoidable.
5.4.17Comparison of NPVs is vital, but it is also important to give due weight to non-financial considerations such as how the bids perform against service quality criteria. These should be reflected in the pre-defined bid evaluation criteria. The procurement route decision should also be informed by applying the HM Treasury Stage 3 VFM assessment guidance.
5.4.18The decision on whether to proceed with the project, and, if so, by which procurement route, should be informed by a final review of strategic fit, options, value for money, affordability and achievability.

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