Skip the NI Direct Bar
Skip navigation

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 appraises all the available contracting options, including conventional methods and others;
  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 vital to compare the alternatives available and determine the approach that offers the best VFM. CPD can provide advice on the options currently available.
5.4.4Until December 2012, DFP recommended use of the HM Treasury quantitative VFM assessment model, which provided for a broad comparison of a single PFI option with a single conventional procurement option. This model was withdrawn by HMT on 5th December 2012. DFP no longer regards this model as fit for purpose and therefore NI Departments should cease using it immediately. In its place, Departments should use standard Net Present Cost (NPC) models in keeping with the relevant guidance in NIGEAE.
5.4.5

For every project, there should be an initial economic appraisal according to NIGEAE guidance to determine a preferred option in terms of the public services to be delivered. This should be followed by a separate assessment of all the relevant alternative procurement options available to deliver the preferred option, including conventional methods and others. Key elements of the VFM assessment of these alternatives should include:

  • Calculation of the NPC of the direct costs of each procurement option, with appropriate adjustment for optimism bias according to NIGEAE guidance.
  • Risk analysis of each option according to NIGEAE guidance.
    NB Risk analysis should be conducted separately from the NPC calculations. There should be no adjustment of NPCs for risk, apart from optimism bias adjustments. Suitable sensitivity analysis should also be conducted separately.
  • Qualitative analysis of the options based on standard NIGEAE non-monetary assessment guidance, including suitable reference to the existing HMT qualitative VFM assessment guidance where appropriate.

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 ABC and FBC stages.In cases where a PPP arrangement is considered to offer the prospect of VFM, the requirement to develop a Shadow Bid Model and continue assessing a viable Conventional Procurement Option at ABC and FBC stages remains in force.

HMT is reviewing its VFM assessment methods and plans to issue new guidance for consultation in Spring 2013. DFP will keep abreast of developments and review the NIGEAE guidance in due course.

Full Business Case (FBC)

5.4.6The 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.
5.4.7

In brief, the FBC 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

5.4.8A detailed Shadow Bid Model (SBM) should be developed in all PPP/PFI cases for use throughout the procurement. It should be updated at all key stages, including, where applicable, OBC, ABC and FBC stages.
5.4.9The SBM should reflect the estimated cost of meeting the same output specification as that supplied to bidders in the course of the procurement. It should be developed by suitably qualified personnel, such as financial advisers appointed to the project, based on their knowledge and experience of what the private sector is likely to deliver.
5.4.10

Creating a SBM is 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.

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 cost (NPC) 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 NPC of the service payments to the private sector over the life of the project; and
  • for the CPO, the expected NPC of the public sector costs required to procure the same service, typically a capital investment and subsequent annual operating costs.
5.4.16Once calculated, the NPCs should be compared to identify which option offers the best VFM in monetary terms. Note however that NPCs are point estimates. It is sensible to consider ranges around these estimates, to avoid spurious precision. Sensitivity analysis, involving the recalculation of NPCs for various possible outcomes of key assumptions, can help to achieve this.
5.4.17Comparison of NPCs 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.
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.

Read on to Advice and Guidance

Back to Topic Index