Construction of the Public Sector Comparator

1
Construction of the Public Sector Comparator Andy
Stubbings, Private Finance Unit PPPs / Regional
Government of Madrid 3 March 2006
2
Background

• Financial Consultant in the Private Finance Unit
• Team of 14 legal and financial consultants,
  working closely with a team of civil servants
  responsible for
• reviewing and approving business cases for new
  investment
• helping develop and implement PFI policy in
  health
• managing the health PFI market
• advising on specialist legal and financial
  issues.
• Specialisms risk, payment mechanism, commercial
  issues and funding.

3
Introduction

• PFI has been used in the UK Health Sector for
  about 10 years
• A total of 79 schemes have reached financial
  close with a capital value of 9.2 bn
• Period marked by continual evolution
• Standard contract
• Increasing standardisation of performance
  standards
• Increasing understanding of risk transfer.
• PFI now a familiar procurement tool

4
Focus of Presentation

• PFI must continue to evolve in the light of
  experience
• Greater emphasis on using PFI when it is right to
  do so
• Requirement to assess affordability and value for
  money early
• This has implications for
• How and when we use the Public Sector Comparator
  (PSC) and
• how it is constructed.

5
The Public Sector Comparator (PSC)

• Costed public sector solution to deliver a
  projects output specifications
• Adjusted to take into account an estimate of the
  risks that would be assumed by the private sector
• Used as the basis for assessments of value for
  money and affordability at various stages of a
  project
• Based on the entire life of the asset (60 years)
• Expresses the value for money of a project in a
  single figure, or Net Present Cost (NPC)

6
Overview of Business Case Approval

• Three key stages
• Strategic Outline Case (SOC) broad analysis of
  need
• Outline Business Case (OBC) more detailed
  option appraisal, identification of preferred
  option prior to approaching the market. PSC
  developed from the preferred option
• Full Business Case (FBC) comprehensive summary
  of the procurement and basis for DH and HM
  Treasury approval

7
Approach to PSC

• New guidance issued by HM Treasury, August 2004
• More work done at OBC
• Rigorous costing of the PSC
• Early quantitative analysis
• Standard model for comparing NPCs of PFI and the
  PSC
• Coupled with an assessment of viability,
  desirability and achievability
• No further quantitative work after OBC
• Strong competition and benchmarking used to
  assure value for money thereafter

8
Working up the preferred option

• Services and capacity health needs and
  developments
• Estate options rebuild, refurbishment, other
  sites
• Long list produced, then subjected to standard
  Option Appraisal
• Resulting short list then costed
• Whole life costs discounted to give NPCs
• Based on use of public capital
• Qualitative assessment of risks and benefits
• Lowest costs per benefit point preferred option

9
Costing the preferred option as the PSC (1)

• Saying what we need in terms of
• Developing a more detailed design brief covering
  quality, design vision and clinical
  functionality
• Developing more detailed operational policies for
  clinical and non-clinical services
• Specifying standards that will have a material
  impact on cost e.g. room sizes, circulation
  space, performance, engineering and construction
• Objective to be clearer about what we want, but
  not prescriptive about how it is delivered.

10
Costing the preferred option as the PSC (2)

• Translating design and service requirements into
  costs
• Build Standards Health Building Notices (HBNs)
• Capital costs for given units e.g. wards,
  theatres assembled from Departmental Cost
  Advisory Guides
• Inflation standard index issued for tender
  price inflation in the public sector
• Norms for maintenance, operation and lifecycle
  costs, modified according to standards required
• Objective to obtain a more realistic assessment
  of affordability before going to market.

11
Risk and the PSC (1)

• PSC (preferred option) costed on best practice
  public sector design and construction
• PSC therefore adjusted according to standard risk
  template and methodology
• Risk that costs are underestimated addressed by
  Optimism Bias
• Risk transfer quantified
• Cost estimates and risk assumptions must be
  tested by sensitivity analysis
• Objective improving the quality of assumptions,
  but recognising their limitations.

12
Risk and the PSC (2)

• Points regarding Risk Transfer
• National Audit Office and Public Accounts
  Committee feedback
• No longer based on scheme specific estimates
• Based on standard assumptions for the sector
• Deviations from assumptions have to be justified
• Highly sensitive assumptions will be subject to
  review
• Heavy emphasis on sensitivity analysis
• Output is basis for quantified risk adjustment
• Objective assessment of risk informed by
  experience.

13
How do we use the PSC (1)?

• At OBC to
• Assess whether PFI should be the procurement
  route to follow qualitatively based on past
  experience
• Assess whether PFI is suitable quantitatively
  using a standard model to compare estimated PFI
  and PSC NPCs before going to market
• Assess affordability better, using more detailed
  costing

14
How do we use the PSC (2)?

• After OBC
• No further quantitative analysis required
• PSC only revised to reflect genuine changes in
  scope, not private sector innovation
• Some usefulness in benchmarking
• Some parts of the PSC may be used for briefing
  the private sector
• Update of qualitative factors at FBC

15
What have we learned?

• PFI has proven benefits for certain types of
  procurement, but not all types of procurement
• Early and detailed costing provides a better
  indicator of affordability
• If you can explain what you want, you are likely
  to get a better solution
• Qualitative risk assessment should not be
  over-emphasised
• A better PSC helps avoid wasting both public and
  private sector time, resources and cash
• Approval to be concentrated earlier in
  procurement

16

• Questions

17
Links to useful documents
DH Value for Money Guidance http//www.dh.gov.uk
/ProcurementAndProposals/PublicPrivatePartnership/
PrivateFinanceInitiative/PFIArticle/fs/en?CONTENT_
ID4120015chkt/sbV9 Costing Design Guidance
for PSCs http//www.dh.gov.uk/PublicationsAndStat
istics/Publications/PublicationsPolicyAndGuidance/
PublicationsPolicyAndGuidanceArticle/fs/en?CONTENT
_ID4122632chkxfkAF7 Links to Standard Output
Specifications for Services http//www.dh.gov.uk/
ProcurementAndProposals/PublicPrivatePartnership/P
rivateFinanceInitiative/NewStandardOutputSpecifica
tions/NewStandardOutputSpecificationsArticle/fs/en
?CONTENT_ID4016183chkC32BBiQ