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)
The OBC provides the basis for a decision on whether to proceed to procurement. The main components of an OBC include:
Appraising Procurement Options at OBC Stage
|5.4.3||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 where relevant.|
|5.4.4||Until 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 This model was withdrawn by HMT and DFP in December 2012. In its place, Departments should use standard Net Present Cost (NPC) models in keeping with the relevant guidance in NIGEAE. The following paragraphs expand on what this means in practice.|
Considering the Alternatives
It is always appropriate to consider the procurement options available, for example in terms of alternative forms of contract. Evidence of such considerations, including consultations with DFP’s Central Procurement Directorate (CPD) or other relevant Centre of Procurement Excellence (CoPE), should be recorded in the Outline Business Case (OBC). All procurement options should be designed to deliver the same required output specification and their ability to do so should be confirmed. The alternatives considered and the justification for selecting the intended form of contract should be stated clearly.
However, it is rarely necessary to conduct detailed formal option appraisal, nor are detailed quantitative VFM assessment calculations generally required. In the great majority of cases, qualitative consideration of alternatives is sufficient and the most appropriate form of contract to suit the project may be decided based on advice from CPD or other relevant CoPE, without such detailed assessment.
The main circumstance in which detailed quantitative VFM assessment of procurement options remains necessary is when private finance is being seriously considered. Given that the cost of raising capital through private finance remains generally higher than the cost of obtaining it through government borrowing, DFP currently does not generally require detailed consideration of private finance solutions for all capital projects. However, Departments may consider private finance solutions in particular cases where they appear to offer a realistic prospect of delivering best VFM.
Quantitative VFM Assessment – Identifying the Least Cost Option
Where detailed quantitative VFM assessment is considered necessary, the assessment should seek to determine the procurement option that offers to deliver the required project at least financial cost to the public sector procuring authority.
Costing should be conducted in accordance with standard NIGEAE appraisal principles. The assessment should focus on comparing the NPCs of the financial costs and benefits to the public sector procuring authority for each of the various procurement options. Only those impacts that give rise to a financial cost from a NI perspective should be included in the relevant NPCs.
The NPCs should reflect financial costs and benefits over the whole life of the project. The relevant costs and benefits should include all the expected financial impacts on the procuring authority, including, for example, financial expenditures, financial opportunity costs and financial residual values.
In order to calculate NPCs, costs and benefits should be discounted to present values using the standard discount rate, which remains at 3.5%pa in real terms. Note that, since this rate is defined in real terms, it must be applied to values which are also expressed in real terms, as opposed to nominal or cash values. This means that the anticipated effects of inflation should generally be removed from all the figures before discounting.
Financial Costs of Conventional Funding Options
The financial costs of conventional procurement options should be based on mature estimates arising from thorough assessment of the relevant costs and risks borne by the procuring authority. To the extent that risk assessment helps identify financial costs, this may be reflected in the financial figures.
Financial values for land and other assets employed should be counted as costs at the start of the appraisal period, whether or not the assets are already owned by Government or have to be purchased, to reflect their financial opportunity cost.
Likewise, financial residual values of assets owned by Government at the end of the appraisal period should generally be included as benefits, whether or not the assets are to be disposed of or put to another use.
The estimated financial costss may include some allowance for contingencies and/or optimism bias, provided they are supported by sound evidence and analysis. Such allowances may be expected to be relatively modest given the anticipated maturity of the cost estimates.
All figures for costs, risks, contingencies and optimism bias should be robust and clearly justified, avoiding exaggeration and double counting, and focused on determining the actual financial costs that the procuring authority will bear.
Financial Costs of Private Finance Options
Shadow bid models should continue to be used to estimate the financial costs from any PFI or other similar private finance procurement options, taking account of all the factors that will impact on annual financial charges (often called “unitary charges”). These charges should generally to be taken to reflect all the costs and risks borne by the private sector and in consequence they will often represent most or all of the financial impact on the procuring authority.
In the event that any of the financial costs identified for conventional procurement would still be borne by the public sector under a private finance solution, they should be added to the cost of the relevant private finance option(s) to ensure like for like NPC comparisons.
Note that only the financial impacts on the procuring authority should be counted. For instance, the residual value of a property should not generally be included as a benefit if the private sector provider rather than the procuring authority will own it at the end of the contract.
There should be no tax adjustment to any of the procurement options. Previously, when using the old 2006 HMT model, there was a tax adjustment to conventional procurement options. That guidance is now out-dated and from a NI perspective it serves only to inflate unduly the financial cost of conventional procurement.
Impact on Resource Budgets
Private finance can help to bring forward capital projects when capital budgets are limited, although procurement decisions should primarily be based on VFM and not affordability. It must also be noted that resource budgets are limited too and are expected to be severely constrained in the coming years. The aim should be to obtain maximum overall VFM from both capital and resource budgets.
Private finance options invariably place greater pressure on resource budgets than conventionally funded alternatives, resulting in reduced budgetary flexibility and displacement of other projects. Whether considering projects individually or in bundles or programmes, the potential negative impact upon future resource budgets through displacement of other projects and the consequent loss of benefits to Northern Ireland should be assessed and given due consideration.
Private finance is only a viable option when it is clearly the best VFM procurement route and its potential negative impact on future resource spending plans has been assessed and is considered worth bearing.
The NPCs of the financial costs should provide the primary indicator of VFM and should be the key determining factor in the choice of procurement option. Other relevant factors such as qualitative considerations and affordability including impact on capital and resource budgets should also be assessed and weighed into the decision.
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 best 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.
Full Business Case (FBC)
|5.4.12||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, the FBC should include:
Shadow Bid Model
|5.4.14||A 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.|
|5.4.15||The 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.|
|5.4.16||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
|5.4.17||Departments 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, there remains a general requirement to develop a fully detailed conventional procurement option (CPO).|
The CPO should 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:
Appraising Options at FBC Stage
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:
|5.4.20||A 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.|
|5.4.22||Once 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.|
|5.4.23||Comparison 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.|
|5.4.24||The 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.|