Public-Private Comparator Manual

Transcription

1 Public-Private Comparator Manual

2 Public-Private Comparator Manual Public-Private Comparator Manual

3 Contents Preface 5 Introduction 7 Module 1: initiation report 11 Action 1A: specifying PPC process, stakeholder analysis and communication 12 Action 1B: listing preconditions from the preliminary stage 15 Action 1C: delineating scope, duration and implementation scenarios 15 Action 1D: listing non-financial considerations 19 Module 2: qualitative analysis 23 Action 2A: describing receipts and expenses and risk items 24 Action 2B: making a qualitative assessment of both implementation scenarios 28 Module 3: quantitative analysis 31 Action 3A: preparing for the drafting of cash flow statements 33 Action 3B: quantifying the public implementation scenario 34 Action 3C: quantifying the private implementation scenario and any other implementation scenario 35 Action 3D: calculating the net cash value and conducting a sensitivity analysis 37 Module 4: final report 41 Action 4A: describing the results 43 Action 4B: drawing conclusions and making recommendations 44 Appendices 45 Appendix 1: Glossary 46 Appendix 2: Scope of PPC 49 Appendix 3: Model overviews of receipts and expenses 53 Appendix 4: Risk analysis 58 Appendix 5: Model overviews of pure risks 63 Appendix 6: Discount rate 65 Appendix 7: Determining differences between the public and the private implementation scenarios 68 Colophon 74

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5 Preface 5 Preface It is with great pleasure that I present to you the updated Public-Private Comparator Manual (PPC). We updated the manual so that the advantages and disadvantages of the various implementation scenarios may be analysed even better for even more large government projects. The central government continuously strives for service provision which is as cheap, as flexible and as efficient as possible. Especially in these times of budget cuts, we have to grasp every opportunity to offer the same level of service provision with less budget. And the PPC may prove to be a helpful aid in achieving this, because you can use the manual to assess and calculate, step by step, which implementation scenario offers the best opportunities. This may help you with making a choice between contracting out an activity, cooperating with other government parties, or performing an activity on your own. The PPC Manual has been in use for more than ten years in the areas of housing and physical infrastructure and has proved to be more than useful in these sectors. Much more added value may also be achieved outside these sectors by carefully considering the various implementation scenarios. Therefore, the PPC Manual can now be more widely used. Based on this consideration, we decided to extend the manual. The updated PPC Manual is widely applicable, for instance also when choosing an implementation method for operational management activities, wind farms or the purchase and maintenance of new ICT systems. I am pleased to see the manual already being more widely used. For instance, the Ministry of Defence has been using the PPC Manual for projects in which a sourcing decision has to be made, such as for security systems. Furthermore, the PPC Manual is also useful for authorities other than the central government. Hopefully, the updated manual will be widely used by these government bodies. Many people, both at and outside the Ministry of Finance, have contributed to the making of this document, to whom I am very grateful. This PPC Manual may help you make good and well-founded choices which serve the public interest, and I hope it lives up to your expectations. Richard van Zwol Secretary-General The Hague, March 2013

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7 Introduction 7 Introduction This is the Public-Private Comparator Manual (PPC). The PPC is intended to provide you with insight into the advantages and disadvantages of the various implementation scenarios in which large government projects can be executed, namely in a public or a private scenario, or another (mixed) scenario. In this manual, you will find information on how to compare the various implementation scenarios, so that the authorities can select the best scenario. The PPC has been in use since 2002 and has resulted in a more conscious consideration of the implementation scenarios, resulting in significant added value for the central government. Target group: parties involved in drawing up a PPC. The manual explains which steps have to be taken so that an extensive user group can independently conduct the PPC. The main target group of this manual comprises the people who will be applying the PPC, which usually takes place in a team. In addition, the manual may also give other users such as decision-makers and auditors insight into the methodology and process regarding the PPC, even though they are more indirectly involved in drawing up a PPC. The manual has been mainly drawn up for central government bodies, but it can also be applied to projects of local authorities and semi-public institutions. Objective: selecting the best implementation method for large government projects This manual can also be used in any large government project in which various forms of contract are considered. The central government is obliged to conduct a PPC in central government projects in the areas of housing and infrastructure which exceed a threshold of twenty-five million euros and sixty million euros, respectively. However, the PPC can be applied in many more sectors, such as: housing, including facilities services; infrastructure, such as roads, railways, sluices and tunnels; sustainable material, such as means of transport; other large investment projects, such as new ICT systems and wind farms; make-or-buy decisions in operational management activities, such as security, catering and ICT support. Over the years, much experience has been gained with PPCs, particularly in housing and infrastructure projects. This has led to a standardisation of the manner in which the steps of the PPC Manual have to be followed. The Government Buildings Agency has detailed its PPC experience in the reader 'PPC in housing projects', and has been using this reader to conduct PPCs. The Directorate-General for Public Works and Water Management and the Ministry of Defence have also translated their experience in a standardisation of the manner in which PPCs are followed, or have plans to do this.

8 8 Public-Private Comparator Manual Place of PPC in the project phases With respect to project phases, you generally conduct a PPC in the assessment phase, between the initial phase and the preparation phase. The initial phase aims to clarify the scope of a Project 1 in broad outlines. In the assessment phase, a rough variance analysis is conducted with the help of the PPC, which ultimately results in the selection of the Project's implementation scenario. You generally detail the implementation scenario in the preparation phase 2. Place of the PPC on the timeline as part of the total project lifecycle 3 PPC Initial phase > Assessment Preparation Transaction Realisation Operational Finalphase > phase > phase > phase > phase > phase > Manual and Reader's Guide This PPC Manual consists of four modules which describe the steps you have to take to draw up a PPC. The PPC results in two end products: an initiation report and a final report. 1. Initiation report Initiation report Final report 2. Qualitative Analysis 3. Quantitative Analysis 4. Final report Starting points of the PPC Overview of expenses, receipts and risks. Assessment of differences between implementation scenarios Quantified differences implementation scenarios 1 In this manual, all activities which are necessary to supply a particular product of service up to and including the final phase are referred to as 'Project". 2 The PPC should not be confused with the Public Sector Comparator (PSC). If a private implementation scenario has been selected after the PPC, a PSC should be drawn up in the preparation phase. The PSC contains a more detailed assessment of expenses, receipts and risks. Please consult the PSC Manual for more information about the PSC (see 3 See module 2, action 2a for a description of the various phases.

9 Introduction 9 Module 1: Initiation report In this module, you get an overview of all elements which are necessary in order to make a financial comparison of the various implementation scenarios. Components of the initiation report are a description of the PPC process and a description of the Project in broad outlines, such as the scope and the duration. The initiation report also comprises all implementation scenarios which you will compare as well as the non-financial considerations which may be relevant to the selection of the implementation scenario. Module 2: Qualitative analysis In this module, you are going to draw up a list of all expected expenses, receipts and risks for the entire duration of the comparison. You then document any differences between the implementation scenarios for each expense, receipt and risk item. Module 3: Quantitative analysis In this module, you quantify the differences between the implementation scenarios and you calculate the Project's cash value (current value) per implementation scenario. Module 4: Final report The results are summarised in the final report. Based on these results, you formulate conclusions and recommendations for the further approach. Optionally, you may add a policy advice for the decision-makers to the final report. Appendices There are a number of appendices at the back of this manual. Among other things, they comprise a definition of the most important concepts, the theory of risk analysis, an explanation of discount rate, and model overviews of the scope, expenses, receipts and risks.

10 10 Public-Private Comparator Manual The four modules of the PPC with the associated actions Module 1 Initiation report Actions: Specifying the PPC process, stakeholder analysis and communication Listing the preconditions from the preliminary stage Delineating scope, duration and implementation scenarios Listing non-financial considerations Module 2 Qualitative analysis Actions: Describing the expenses, receipts and risks Making a qualitative assessment of the differences between the implementation scenarios Module 3 Quantitative analysis Actions: Preparing for the drafting of cash flow statements Quantifying the public implementation scenario Quantifying the private implementation scenario and any other implementation scenario Calculating the net cash value and conducting a sensitivity analysis Module 4 Final report Actions: Describing the results Drawing conclusions and making recommendations Contact possibilities If you have any questions about this PPC Manual, or if you have a question about public-private partnership (PPP) at the central government level in general, please contact the Public-Private Investments Department (PPI) of the Ministry of Finance. You can contact a separate service desk with questions about public-private partnership at the level of local authorities and semi-public institutions, called PPSsupport. The contact details of the PPI and PPSsupport can be found on The Hague, March 2013

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12 12 Public-Private Comparator Manual Module 1 Initiation report Module 1 Initiation report > Module 2 Module 3 > Qualitative analysis > Quantitative analysis > Module 4 Final report Action 1A Action 1B Action 1C Action 1D Specifying the PPC process, stakeholder analysis and communication Listing preconditions from the preliminary stage Delineating scope, duration and implementation scenarios Listing non-financial considerations Your client has asked you to conduct a PPC. You now face the task of drawing up an initiation report to this effect. An initiation report can be seen as a plan of action for drawing up a PPC. The plan of action must clearly state what is assessed in the PPC and how, with which parties and under which preconditions. A sound plan of action prevents delays and/or misunderstandings in conducting the PPC (see modules 2 to 4). Objective Agreement between all parties involved about the manner in which the PPC is conducted. Output: initiation report The initiation report must always comprise the following: 1 which parties have an interest in the PPC; 2 which communication strategy is adopted; 3 under which preconditions from the preliminary stage the PPC is conducted; 4 which scope, duration and implementation scenarios apply to the Project 4 which are assessed in the PPC; 5 which non-financial considerations are relevant to the decision about the implementation scenario. Module structure Module 1 consists of four actions: 1A up to and including 1D. Action 1A is about the organisation of the PPC process. It is recommended you start this action before you deal with the more substantive, professional aspects of the comparator (see actions 1B up to and including 1D). Action 1A Specifying the PPC process, stakeholder analysis and communication The organisation of the PPC process concerns the detailing of the PPC process, identifying that which is necessary to properly conduct the PPC and who should be involved in this in what way and when. 4 In this manual, all activities which are necessary to supply a particular product of service up to and including the final phase are referred to as 'Project".

13 Module 1 Initiation report 13 Getting an overview of the PPC process First, you must outline the decision-making process and the implementation process. 5 The steps and the products to be achieved, the initiation report and the final report in this manual may serve as starting points for these processes. You must detail how you are going to follow the steps in this process, how much time, money and capacity this will take, and which data, knowledge and expertise are needed to properly execute these steps. It depends on the Project how much time is needed to draw up the PPC. This partially depends on the type of project, the complexity of the project and the organisation's experience in drawing up PPCs. If an organisation draws up a PPC for the first time, the processing time is usually two to four months. Organisation which have experience in PPCs mostly conduct a PPC much more rapidly. The indicative division of the time required per module is as follows: Initiation report 1-2 weeks Qualitative analysis 3-5 weeks Quantitative analysis 5-8 weeks Final report 1-2 weeks In order to be able to properly conduct a PPC, you need experience in contracting out as well as knowledge of your organisation and of the market for the product or service concerned. If you do not have this knowledge and experience, you may hire external specialists, or parties from the central government which have experience in conducting PPCs. The PPI Department of the Ministry of Finance can provide you with advice in these matters. Integrity and confidentiality risks may play a role in the PPC process, for instance when a party is involved in drawing up the PPC who runs the risk of losing his job if it is decided to have the service provided by an external party. Please be advised to take this into account when organising the PPC process. The Directorate-General for Public Works and Water Management and the Government Buildings Agency have standardised the decision-making process within the framework of the PPC Manual 6. The Government Buildings Agency has defined these agreements in collaboration with the Ministry of the Interior and Kingdom Relations (DGOBR) and with the Ministry of Finance 7. In addition, the Government Buildings Agency uses a standard reporting format, which can be retrieved from 'PPSsupport' 8. 5 In certain cases, standard processes and standard methodologies are already in place in external policy documents or manuals. For instance, the PPP knowledge pool of the Directorate-General for Public Works and Water Management has specifically concentrated its PPC methodology on infrastructure projects. Similarly, the PPP knowledge pool of the Government Buildings Agency has focused on government buildings projects (see the reader 'PPC in housing projects'). 6 The decision-making process in projects of the Government Buildings Agency is in accordance with the 'PPC policy line for government buildings projects' (2005). 7 See Final report of work group 'Inclusion of DBFMO in operational management in central government', 21 September See

14 14 Public-Private Comparator Manual Three groups of stakeholders important in the PPC process At the start of the PPC, the PPC Team conducts a stakeholder analysis and determines the communication objectives and communication actions for each target group based on this analysis. Stakeholders are all parties which are directly or indirectly involved in the PPC, which influence the PPC, or have an interest in the PPC. Involvement, influence and interest may apply to the drawing up of the PPC and to the decision-making process regarding the PPC (choice of implementation scenario). Based on the stakeholder analysis, the PPC Project Leader also determines the composition of the project group. The analysis may also prompt the Project Leader to propose to the client(s) any changes to the group of decision-makers regarding the PPC. There are roughly three groups of stakeholders in the PPC process: Decision-makers They receive all information relevant to the decision-making process in time. Decision-makers are mainly interested in the quality and costs of the service provision envisaged in the Project, and how the implementation scenario influences the quality and costs. Members of the PPC Team The PPC Team in its entirety is involved in the PPC process. This means that all team members must be informed in a timely manner as well as at the same time about anything that may be relevant to the team. The relevant information roughly consists of all data and assumptions with the associated substantiation which are necessary for understanding the result of the PPC. Interested parties In general, interested parties are (groups of ) persons or institutions which may have to deal with the PPC and with the consequences of the chosen implementation scenario. The composition of the group of interested parties differs per PPC. This may concern: purchasers of the envisaged service or product; parties which have to provide the product or service, or which are responsible for the provision; parties which have a policy-related interest in the implementation scenario. For instance, the human resources department may be interested in the transfer of staff, and facilities services may be interested in housing projects; market players. Designing communication per target group Since the group of stakeholders is so heterogeneous, you determine the communication design for each target group. You should always take account of the confidentiality regulations for PPCs. Certain parties, particularly external parties, are not informed about the implementation scenario until the PPC has been completed and a decision about the implementation has been made.

15 Module 1 Initiation report 15 Action 1B Listing preconditions from the preliminary stage Only when the initial phase of a project has been concluded, are you able to decide to conduct a PPC. This is because the project's preconditions have to be sufficiently clear in advance in order to be able to determine the scope, duration and implementation scenario in the PPC phase. No later than at the end of the initial phase, it must also be determined if there is sufficient support and, in principle, financing for the Project. In order to be able to conduct a PPC, you must have answered the following questions beforehand: 1 What is the benefit of the Project? 2 Are there sufficient means available for the Project, or will there be sufficient means available? 3 Is there sufficient administrative commitment? 4 Is the scope of the Project clear in broad outlines? 5 Is the desired output of the Project clear in broad outlines? Action 1C Delineating scope, duration and implementation scenarios With this action, you can unequivocally delineate the PPC. Since this delineation is of major influence on the result of the PPC, you must make sure to substantiate it carefully. 9 Sound substantiation can prevent delays in the PPC at a later stage caused by discussions about the delineation. The PPC must at any rate be delineated in the following areas: the scope of the PPC; the duration of the PPC; the implementation scenarios which have to be assessed in the PPC; Delineating the scope of the PPC This concerns the scope of the PPC. Make sure to formulate the scope in such a way that the added value which may be achieved is maximal. For this reason, it is wise to keep the scope sufficiently wide, so that market players have room to achieve efficiency benefits by aligning activities more closely. The starting point is the scope in broad outlines, as provided to the PPC Team by the client at the start of the PPC. Since the scope determines the result of the PPC, the PPC Team must always investigate how the scope may be optimised. 9 In some cases, the starting points are already uniformised and laid down in policy documents, such as in the new building and renovation projects of the Government Buildings Agency.

16 16 Public-Private Comparator Manual Determining the scope in a five-step plan The scope is determined and delineated in five steps. The first three steps are taken by the client, and fall outside the scope of the assignment of the PPC Team. However, the PPC Team must have a full understanding of the results of these steps in order to be able to delineate the scope. In case of ambiguities, the PPC Team must contact the client. The plan comprises the following five steps: 1 Describe the public objective to which the Project contributes. 2 Describe the Project in broad outlines. 3 Describe in broad outlines the desired output of the Project. Which results must the Project yield? Lay down this output with the public objective in mind. 4 List and analyse which activities are necessary to realise the desired output. Do not only include the direct activities, but also the indirect activities, such as facilities services and human resources management. Then, consider which mutual connections there are and list the activities which cannot be outsourced, for instance because only the government is allowed to perform them (military activities, the administration of justice), or because they have to be performed by the government itself in order to safeguard the continuity of core duties (access to critical databases). 5 Determine the scope of the PPC by combining all activities which could be outsourced. 10 Include all related activities in the scope. You can increase the chances of financial added value by combining activities. Furthermore, combining activities offers private parties more options for optimisation. Example, combining activities offers private parties more options for optimisation. One private contractor designs and realises a building and is also responsible for cleaning during the operational phase. This combination means that this contractor can already take the cleaning activities into account in designing the building by making sure that the rooms in the design are easy to clean. Submitting the determined scope to the decision-makers The result of this five-step plan may be an amended scope or even an entirely different scope from the one provided at the start of the PPC. You must submit this amended or new scope and the initiation report to the decision-makers as advice. If the decision-makers wish to deviate from the scope which potentially provides the most added value, they are obliged to state their reasons in the PPC for doing so. Appendix 2 lists examples of how you can determine the scope of the PPC in concrete project situations. 10 If you do not include a particular activity in the PPC, you must substantiate this exception. If outsourcing a separate activity in itself does not provide added value, this does not constitute a reason for leaving it out of the scope, because added value is often achieved by a better harmonisation of activities. A valid reason for excluding an activity from the scope may be that the market does not offer good solutions.

17 Module 1 Initiation report 17 Determining the duration: carefully and substantiated The duration selected in the PPC is usually the same as the duration of the contract in the private implementation scenario, although this is not always the same. Carefully choose the duration, because it influences the outturn of the PPC. In determining the optimal duration several factors come into play, such as the duration of an object's lifecycle, the predictability of demand and the customary contract terms for the product or service in the market. Therefore, the optimal duration is not always unambiguous. In these cases, the choice for a particular duration is a strategic decision which you have to substantiate well. Assessment of lifecycle and investment expenses In determining the duration, you must take into account the period in which reasonably can be provided for the demand for the product and/or the service from the Project. On the other hand, it is important to harmonise the duration in the PPC with the lifecycle of the necessary investments in order to optimise the financial results. This enables private parties which have to make investments first before they can provide the products and/or services to have sufficient time to recover investment expenses and to stimulate them to minimise the total costs across the entire lifecycle. You may also decide you want the duration of the PPC to be longer than the duration of the investments which have to be made. By making the duration of the contract longer than the lifecycle of certain investments, private parties are stimulated to take account of replacement investments. They will strive to minimise the replacement investments or to extend the lifecycle by using sustainable materials and by providing optimal maintenance. Example, Duration in relation to investment lifecycle A PPC of 31 years has been chosen for the project involving the widening of a road. The duration is divided into a preparation phase of 1.5 years, a transaction phase of 1.5 years, a realisation phase of 3 years, followed by a maintenance phase of 25 years. A 25-year maintenance phase has been chosen because all important components of the contract, such as the layer of asphalt, will have at least been replaced one in the course of the contract. Customary contract terms: sometimes a good indicator for duration In actual practice, a good indicator for the optimal duration is usually found in the contract terms customary in certain sectors. However, you must take account of project-specific situations. Sometimes, the customary contract term gives the wrong indication, particularly if you have to determine a duration for operational management activities. In case of operational management activities, services do not terminate after expiry of the contract, but they are put out or 'in' for tender again. The risk in this is that the outturn of the PPC are strongly determined by the contract term chosen, particularly when the transition costs are high. The shorter the

18 18 Public-Private Comparator Manual contract term, the less time private parties have to recover the transition costs, and the more expensive the private implementation scenario becomes. In these cases, it is often forgotten that the costs in private implementation scenarios may structurally be lower after the contract term due to cost-saving measures. This advantage is not factored in when the contract term is applied as the duration in the PPC. In order to prevent this situation, the duration in the PPC in case of structural operational management activities such as catering or ICT support for workstations is at least twenty years. You are free to deviate from this duration, but only if you can substantiate this decision. In the PPC, allow for the fact that upon expiry of a contract, activities have to be put out to tender again. This entails extra expenses, but the organisation also has to be prepared for this. Include an estimation of these costs in the PPC. Three implementation scenarios in the PPC Before you start the qualitative and quantitative comparison of the implementation scenarios (see modules 2 and 3), it has to be clear which implementation scenarios you are going to compare. Therefore, it is important that you describe the various scenarios in great detail. In the PPC, three implementation scenarios are assessed and compared. The public implementation scenario This is the implementation scenario in which the Project is executed in accordance with current practice. A desired implementation scenario in principle cannot be used as a public implementation scenario 11. If a public implementation scenario which deviates from current practice is still selected, this must be clearly substantiated, for instance by means of already approved and implemented change processes. It is recommended to take a critical look at the expected results of these change processes. In the public implementation scenario, a government agency does not have to do everything on its own, because certain elements may have already been outsourced in the existing situation. In case of new products or services, make sure to link up with the implementations scenario of any previous, similar projects assigned by the client. Contract with external parties in the public implementation scenario are usually shorter than the selected duration of the PPC. Also make sure to include future contracts which will be concluded within the duration of the PPC. Otherwise you will not be able to properly compare the public implementation scenario with the private implementation scenario. Private implementation scenario The private implementation scenario is based on activities being outsourced in an integrated manner based on output specifications. The starting point is that all activities which fall within the scope are contracted out to the private party. In the private implementation scenario, the central government, as the client, determines the 'what' and the private contractor determines 11 Often, there are plans to improve the existing practice, but the implementation does not take place, or the results fall short of expectations. Therefore, a desired implementation is often unsuitable as a reference for the public implementation scenario.

19 Module 1 Initiation report 19 the 'how'. The private contractor therefore has the freedom the optimise the implementation. The private contractor is remunerated based on performances agreed on beforehand. The agreed on performances are not products, but obligations of result such as high customer satisfaction. The central government uses the DBFM(O) contract form (Design-Build-Finance- Maintain-Operate) as the private implementation scenario for investments in buildings amounting to more than twenty-five million euros and for investments in infrastructure amounting to more than sixty million euros. Other (interim) scenarios If you wish, you may include more scenarios in the PPC in addition to the public and private implementation scenarios. 12 These may be public-private interim scenarios, but also other private scenarios or other public scenarios. You do need sufficient reliable data in order to identify and quantify the relevant differences between these scenario(s) and the public and private implementation scenarios. You must take into account that it takes more time to conduct the PPC with each extra scenario you decide to include. A critical assessment of the financial added value each possible implementation scenario may yield saves time in the rest of the process. Action 1D Listing non-financial considerations The PPC is essentially a financial comparison tool. However, the decision-makers also allow for non-financial matters, which therefore form a part of the PPC. In the PPC, financial and non-financial considerations are not balanced against each other, but the decision-makers determine to what extent the non-financial considerations are weighed. 13 Non-financial considerations may influence the selection of the scenario with the highest financial added value, but they may also form a decisive argument against a particular implementation scenario. Therefore, it is important to clearly formulate and substantiate the non-financial considerations so that the decision-makers are informed about the arguments, which may result in them selecting another scenario, despite the financial added value of a particular implementation scenario (public, private or other). In order to prevent too much attention being placed on the scenario with the most financial added value, the identification of the non-financial considerations takes place before the financial calculation. 12 It is also possible to compare the public and private scenarios in the PPC first. Only when the private implementation scenario does not yield added value, may the public implementation scenario be compared to other scenarios. This is the current practice for government buildings projects. 13 For investments in buildings and infrastructure, such as roads, railways and sluices, the government has decided that the central government must in principle choose DBRM(O) when this would yield added value ( , Government's view on DBRM(O)).

20 20 Public-Private Comparator Manual General and project-specific non-financial considerations Non-financial consideration may be general (e.g., effects on a sector or region) or projectspecific (e.g., consequences for the organisation's identity). Include all relevant non-financial considerations in the initiation report. Continuing insights into non-financial considerations Even if the initiation report has already been released, new non-financial considerations may be identified during the rest of the PPC process. It may also become transparent that nonfinancial considerations may be translated into financial considerations after all. The amendments ensuing from the continuing insights must be included in the final report (see module 4).

21 Module 1 Initiation report 21 Examples of non-financial considerations Non-financial consideration Flexibility of products and services Core duties of the government Budget flexibility Explanation Since future developments are hard to predict, supporting activities must be flexible in responding to the latest demands and wishes of the organisations, particularly in case of long-term contracts. It depends on the implementation scenario chosen how these demands and wishes can be achieved. In case of the public implementation scenario, the government is responsible itself for adapting the supporting activities in a timely manner. In case of the private implementation scenario, the responsibility for the implementation lies with an external party, and it has been stipulated in the contract how changes in the demands and wishes should be dealt with. Which implementation scenario scores best on flexibility depends on several things, such as the extent to which a public party is able to anticipate new needs, and how certain or uncertain future developments are. A non-financial consideration may be that the management wants to focus as much as possible on the organisation's core duties and to leave the non-core duties to a private party. In the private implementation scenario, the contracting out of non-core duties is maximal, because the private party both manages the implementation and is responsible for attuning the various activities as well as possible, such as design, construction and maintenance of a new office building. This leaves the government party to manage compliance with the agreed on performances. In case of a long-term contract between the government and a market player for construction, financing and maintenance, for instance of a road, these parties make agreements beforehand about the quality of said road. If the market player complies with the agreements, it receives periodic compensation with which it may recover the investment and the maintenance expenses. The agreements and the compensation are laid down in a contract. This makes it more difficult for the government to adjust the budget for management and maintenance downwards in case of future cutbacks. (This is only possible after amending the contract.) In this case, the disadvantage of the private implementation scenario is the limited budget flexibility. The advantage is that quality is guaranteed for the entire duration of the contract and is not influenced by short-term cutbacks. For both the public and the private implementation scenario, the PPC starts from the premise that there is sufficient budget for the anticipated maintenance costs. Innovation Innovation is stimulated when the request is result-oriented and when the contractor has sufficient room to determine how to achieve these results. The contractor has the most freedom in the private implementation scenario. On the other hand, risk transfer may result in private parties being wary of pursuing break-through and therefore high-risk innovations.

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23 Module 2 Qualitative analysis

24 24 Public-Private Comparator Manual Module 2 Qualitative analysis Module 1 Initiation report Module 2 Module 3 > Qualitative analysis > Quantitative analysis > > Module 4 Final report Action 2A Action 2B Describing receipts and expenses and risk items Making a qualitative assessment of both implementation scenarios Whereas in module 1, the focus lies on determining the manner in which the PPC is conducted, this module explains how you can identify and list the expected expenses, receipts and risks of the Project. This module also explains how you can draw up the expected differences between the public and private implementation scenarios. During the various phases of a project, various expenses are made such as design expenses, education expenses and investments in equipment. In the course of time, project risks may arise, for instance construction risks, setbacks in maintenance or difficulties in recruiting staff. On the other hand, there may be receipts. In this module, you map identify and list the sources of these expenses, receipts and risks. In this module, you only describe the expenses, receipts and risks, and in module 3 you learn how to calculate them. Objective Gaining insight into the qualitative differences between the implementation scenarios. Output a Overview of expenses, receipts and risk items. b Overview of the qualitative differences between the public and private (and any other) implementation scenario per item. Module structure In action 2A, you learn how you can identify and list the relevant expenses and receipts of the Project, and how to describe the associated risks. In action 2B, you learn how you can make a qualitative assessment of each of these items or if there is a difference between the various implementation scenarios. Action 2A Describing receipts and expenses and risk items The first step in making a qualitative analysis is a description of all expenses, receipts and risk items in the various project stages of the Project.

25 Module 2 Qualitative analysis 25 Comparing the implementation scenarios in broad outlines You should take into account that you are only comparing the implementation scenarios in broad outlines when you are determining the items and collecting the financial data. The PPC is not intended to determine the absolute financial level of the implementation scenarios, but only sheds light on the differences between the scenarios. Furthermore, you conduct a PPC when the project details have not been fully described yet. This means that you do not have to add much detail to the expenses, receipts and risks, because this would lead to apparent accuracy and duplication rather than a reliable result. Clustering expenses, receipts and risks per lifecycle phase If you want to have a good overview, it is important that you cluster the expenses, receipts and risks in a practical manner. You can divide the expenses, receipts and risk items in various ways. A well-thought out division offers a practical tool with which you can list all relevant expenses, receipts and risk, and it prevents duplication. We therefore advise you to divide these items according to the relevant lifecycle stages. The diagram below depicts the various lifecycle stages of a Project, of which the expenses, receipts and risks are mapped out in the PPC. Any expenses incurred during the initial phase or assessment phase, including the expenses incurred in drawing up the PPC, have not been included. This is because these expenses do not differ per implementation scenario. Phases compared in PPC Initial phase Assessment Preparation Transaction Realisation Operational Finalphase > phase > phase > phase > phase > phase > In the PPC, you divide the expected expenses, receipts and risks in a Project's following five lifecycle phases: a Preparation phase This includes expenses up to the start of the call for tenders or in preparation of a reorganisation, for instance expenses incurred in drawing up a Schedule of Requirements. b Transaction phase This includes expenses of (a) call(s) for tenders or expenses incurred in entering internal service provision agreements (for instance, tying in with a government-wide shared service centre). This concerns all tender-related expenses for the entire duration of the Project. If short-term contracts for certain components are concluded in the public implementation scenario, you must also include all retender-related expenses within the selected duration. c Realisation phase This includes all expenses for constructing a new object or for the transition to a situation in which an operational management activity has been outsourced, for instance in the construction of a road/railway, a government office building, a barracks facility, a new supporting ICT system, or reorganisation expenses for the transition of staff to a new employer.

26 26 Public-Private Comparator Manual d e Operational phase This includes all costs of operations, maintenance costs and any receipts for the duration of the Project, such as repair costs, replacement investments and amendment costs. Final phase This includes all expenses and receipts borne by the public client at the expiry of the contract, including costs connected to a transfer or a dismantling, or any receipts from sales for the public client. Based on this division in lifecylce stages, you determine which expenses, receipts and risks are important to the selection of the implementation scenario. Module 3 will show you how to quantify these items. Appendix 3 contains model overviews of expenses and receipts. Appendix 4 explains how you can draw up a list of relevant risks, and Appendix 5 lists examples of pure risks. Expenses When drawing up expenses, it is important to pay attention to hidden expenses and transition expenses. You must include these hidden expenses in the PPC, otherwise you cannot make a proper comparison of the implementation scenarios. For instance, the costs of the public implementation scenario are not always fully estimated, because not all Project-related expenses incurred are borne by the Project alone but by the entire organisation. For example, this may be general expenses for managing services. If duties are contracted out, this leaves your own organisation with more capacity, or you save on this capacity. Therefore, in this phase of the PPC, you decide which supporting services, such as human resources management and accounts, require less capacity because they will be contracted out. 14 Make an estimation how much less capacity is needed and state if this saved capacity can be used within your own organisation, or if it is expected that expenses have to be made to reduce this capacity. Transition expenses are all expenses which are necessary to prepare and extract the product and/or service from the existing organisation. Transition expenses are only made if the product or service can be outsourced to another party and may continue until after the actual extraction. Receipts In the PPC, you must make a distinction between two types of receipts: a Receipts during operations The general guideline is that only receipts are included in the PPC which are relevant for the public implementation scenario. You must base the estimations of these receipts on previous projects or on realistically expected receipts and not on potential receipts. You may only include potential receipts if you can make them plausible based on a clear substantiation. 14 A much-used division of supporting services is PIOFACH: Personnel, Information provision, Organisation, Finances, Administrative organisation, Communication and Housing.

27 Module 2 Qualitative analysis 27 b Receipts after operations At the end of the Project's lifecycle, there may be receipts from the residual value of certain assets, for instance from the sale of land, sustainable materials, production resources, buildings and inventory and equipment. It is not always easy to determine the residual value, because things will not be effected until at a (much) later date. Therefore, you should only include this residual value if it is relevant to the comparison, meaning if it significantly differs per implementation scenario. Risks After including and dividing the expenses and receipts, you identify and list the risks. These are events or factors which have a substantial financial influence on the extent of the expenses and receipts determined by you. For instance, in a construction project, you may encounter delays on account of heavy rainfall or hailstorms, which leads to higher expenses. The starting point is that risks only the client can influence, such as decision-making risks, remain the responsibility of the client. This means these risks are not transferred to the contractor. You do not need to make these risks financial, because they are virtually the same in each implementation scenario and therefore not distinctive. It is not necessary to conduct an extensive and detailed risk analysis in the PPC phase; this will be done at a later stage in the Project. However, for the PPC, you must identify which events or factors pose the biggest risks to the Project's financial results. The risk analysis is conducted in the following steps: 1 Brainstorm about the biggest risks in each phase of the lifecycle. The PPC Team participates in the brainstorm, assisted by internal and external legal, financial and technical risk experts, if necessary. 2 The PPC Team draws up a list of the biggest risks of the Project and describes them briefly. Since the PPC concerns a general risk analysis, this list does not have to be exhaustive. You may limit it to the ten identified biggest risks. The list with identified risks is the same by definition for all implementation scenarios. However, the probability (chance) and scope (impact) of the identified risks may differ per implementation scenario 15. These differences will be addressed at a later stage when you will quantify the risks (see module 3). Appendix 4 contains a more detailed description of a risk analysis. 15 For instance, in case of contracting out existing operational management activities, transition risk is not present in the public implementation scenario (chances are zero), because in the public implementation scenario operational management activities are not transferred to another contractor, thus no transition takes place.

28 28 Public-Private Comparator Manual Action 2B Making a qualitative assessment of both implementation scenarios If you have created an overview of the expenses, the receipts and the risks, it is time to analyse the differences per item and per risk between the private and public implementation scenario. Once again, this concerns a qualitative analysis and not a quantitative analysis. You answer the question for each expense, receipt and risk if the level in one implementation scenario is higher than expected, lower than expected or the same as in the public implementation scenario. You also state why this is expected. At a later stage, you will quantify the differences (see module 3). This qualitative assessment of the differences between the implementation scenarios is done as follows: a Describe the unique characteristics of the Project. For instance, if the Project concerns the realisation of a new office building, the requirements will most likely be comparable to those for an office building of another government body. Naturally, there may be unique characteristics for the office building for which you are drawing up a PPC, if it has to comply with higher security regulations because state secrets will be saved there, for instance. b When assessing the differences between the implementation scenarios, we suggest you start top-down. By describing the differences in broad outlines first it will be easier to assess the differences between the public and the private implementation scenario per item and per risk (see Appendix 7 for the determining differences). c Research how big the impact of these differences on the Project is, and check if any major differences are lacking in the description. If you have included extra scenarios in the PPC, you must also describe the differences between the extra scenario(s) and the public implementation scenario. d Determine the qualitative difference to the public implementation scenario for each expense, receipt and risk. Below, you can read how to do this. Substantiating a qualitative variance analysis In order to substantiate the expected differences implementation scenarios, you use all available preliminary studies, estimates and other relevant material about the Project. You are also advised to make use of useful information about similar projects from the central government or from the market. If there is little data available, request market players to explain how they would achieve the desired output in the public implementation scenario. Hopefully, you will be able to get a clear image of the differences between the implementation scenarios with the information gained from such market consultations. Analysing risks based on manageability Regarding the risks, the qualitative difference between the scenarios lies in the extent to which the risks are managed. This depends in part on the party which bears the risk and the party which is able to manage the risk. In case of the private implementation scenario, the starting point is that risks are placed with the party who is best able to manage them. This means that only those risks are transferred from the public party to the private party, if the private party is better able to manage or bear the risks. In the realisation phase, risks such as delay caused by a

29 Module 2 Qualitative analysis 29 design flaw will be borne by the private party. The public party usually remains responsible for risks such as delay caused by amended requirements and force majeure, such as an earthquake or a flood. This means you assess whether the client or the contractor is better able to bear or manage the risk for each separate risk. It may help to ask yourself the question to what extent either the client or the contractor are stimulated to manage the risk for each implementation scenario. The more they are stimulated, the more strict they will see to the drawing up of and compliance with management measures. Creating a differences matrix The result of the qualitative analysis is an overview of all expenses, receipts and risk items, with a substantiation of the assessment. For each implementation scenario, you determine if an expense or a receipt is expected to be higher or lower than or the same as those in the public implementation scenario. You do the same for the risks: you assess whether or not they are managed better (positive), worse (negative) or the same (neutral).

30 30 Public-Private Comparator Manual Qualitative differences matrix: an example Mission Phase Difference between private and public Substantiation Costs of external hiring Transaction Negative Due to the longer and relatively new manner of tendering, we expect the need of external hiring to increase. Construction expenses Results Negative Since the maintenance expenses are transferred to the private party, it is likely that this party will invest more in sustainable materials, which will increase the construction expenses. Staffing costs Operational Positive The wage costs for operational staff is lower in the private implementation scenario, because the design already takes account of a limitation to the deployment of personnel. This means that the Project can be operated with less personnel, leading to less staffing costs. Maintenance expenses Operational Positive Thanks to lifecycle optimisation, a private party will achieve a design with lower maintenance expenses. Risks of malfunctions (ICT or other) Operational Positive Since a private party is directly assessed on availability and since the private party is able to properly manage the risk of malfunctions because it controls the design, realisation and maintenance itself, the private party is expected to be able to minimise the risk of malfunctions, resulting in less malfunctions than in the public implementation scenario.

31 Module 3 Quantitative analysis

32 32 Public-Private Comparator Manual Module 3 Quantitative analysis Module 1 Initiation report Module 2 Module 3 > Qualitative analysis > Quantitative analysis > > Module 4 Final report Action 3A Action 3B Action 3C Action 3D Preparing for the drafting of cash flow statements Quantifying the public implementation scenario Quantifying the private implementation scenario and any other implementation scenario Calculating the net cash value and conducting a sensitivity analysis After you have made a qualitative assessment of the difference between the implementation scenarios, you quantify these differences in this module. This creates insight into the financial differences between the implementation scenarios. With the outturn of the quantitative analysis you should be able to make an optimal assessment of the financial added value to be gained. You should take into account that for the phase in which the PPC is conducted, namely the assessment phase of the Project, a variance analysis in broad outlines suffices. A thorough, financial analysis is not required here. Objective Gaining insight into the financial differences between the implementation scenarios. Output An overview of expenses, receipts and risks of the Project and assumptions with which cash flows can be calculated. These are: The cash flow statement of the public implementation scenario The cash flow statement of the private implementation scenario The cash flow statement of any other implementation scenario described in the initiation report The net cash differences between the implementation scenarios Module structure The figure below shows the steps taken in the quantitative analysis. Steps in the quantitative analysis Module 3 Module 2 Action 3A Action 3B Action 3C Action 3D Overview qualitative differences Preparing for the drafting of cash flowstatements Quantifying the implementation scenarios Quantifying private and other implementation scenarios > > > > Calculating net cash values

33 Module 3 Quantitative analysis 33 The basis for the quantitative analysis is the outturn of module 2, namely the overview of the qualitative differences between the implementation scenarios. Action 3A determines the relevant factors which are important for drawing up the cash flow statement of each implementation scenario. Action 3B quantifies the expenses, receipts and risks of the public implementation scenario. The public implementation scenario is the benchmark against which the other implementation scenarios are tested. Action 3C quantifies the differences between the private implementation scenario (and any other included implementation scenarios) and the public implementation scenario. In this action, you look at expenses, receipts and risk items. In action 3D, the net cash values of the implementation scenarios are calculated. All cash flows per year are restated to their current value, or the net cash value. The difference in net cash value is the financial added or decreased value of a particular implementation scenario. Finally, a sensitivity analysis is conducted to test the robustness of the financial outturn. Action 3A Preparing for the drafting of cash flow statements In order to be able to conduct the quantitative analysis, you first draw up the framework for the cash flow statement and determine guidelines. Framework for cash flow statement a Start the overview with the date on which the preparations for the Project begin and end the overview with the end of the duration of the PPC, as determined in module 1. This start and end date are the same for the public and private implementation scenarios. b For each year, you must state the net off amounts and you must provide a brief overview of how you have calculated these amounts 16. 'Net off' means that the expected receipts are deducted from the expected expenses, and the value of the risks is added to the expenses. c State in the cash flow statement which receipts, expenses and risks belong to which phase: preparation, transaction, realisation, operations or termination. General guidelines The following general guidelines apply to the quantification of the implementation scenarios: Explanation Substantiate all choices with as many objectively verifiable data as possible. Show how you have calculated each amount by documenting the source data and the assumptions. This substantiation must be traceable and verifiable after the conclusion of the PPC. 16 Amounts in the cash flow statement have to be traceable. This means that it is clear how the net off cash flows are built up component which the reader finds easy to understand.

34 34 Public-Private Comparator Manual Inflation Determine the inflation index (or indices) for which the cash flows have to be corrected, or how they are converted into nominal amounts (amounts including inflation). Explain your choice of index or indices 17. Estimate all items from one and the same price level. Tax aspects Central government bodies do not include VAT in their calculation of the PPC. On a central government level, VAT is not relevant since payment by the commissioning government body to the Tax and Customs Administration leads to an equal VAT income for the central government 18. Action 3B Quantifying the public implementation scenario In module 2, you saw how the expenses, receipts and risks were identified in the public implementation scenario. Below you will find information on how to quantify these items and risks. Quantifying expenses and receipts In order to quantify the expenses and receipts in the public implementation scenario, you first look at the current situation. Which expenses are made and which receipts are received? It is not necessary to collect all financial data, but you should focus on the items which will probably differ per implementation scenario. In case of a new Project, you cannot base the quantification on an existing situation, so instead you should use historical data from similar projects executed by the government body in the past. You should also make use of the government-wide benchmark data, for instance the standard costs for a workstation. Quantifying risks In quantifying risks in the public implementation scenario, you have to distinguish between two types: risks and market-related spread risks. 19 Pure risks are special events during one of the project's phases which negatively influence the net financial results (see Appendix 5 for examples). Spread risks are events which result in deviating assessed amounts, both downwards and upwards. Pure risks are included in the cash flows (by adding them to the expenses of a certain year) and market-related spread risks are included in the discount rate (see 17 You may also choose to leave out inflation in the calculations, in which case you have to start from a real discount rate. The real discount rate is the discount rate without inflation. However, we do not recommend this. In order to determine the real discount rate, you have to assess the inflationary expectations. There are sources which may give an indication, such as the CPB Netherlands Bureau for Economic Policy Analysis, but market data which can precisely determine inflationary expectations are not available. 18 If you are drawing up a PPC for a local authority or a semi-public institution and the VAT is a decisive factor in selecting a particular implementation scenario, you are advised to contact the Tax and Customs Administration, because specific tax agreements have been made for the public implementation scenario for local authorities. 19 Another risk category is formed by technical spread risks. Technical risks relate to insecurity regarding assessed amounts and prices. These risks may be excluded from the PPC due to the broad and general character of the PPC, but they are included in the PSC.

35 Module 3 Quantitative analysis 35 Appendix 6 for an explanation of the discount rate and action 3D and Appendix 4 for determining the level of the discount rate). The most important pure risks are identified with the help of the risk analysis in module 2. You quantify these risks by placing them in a risk matrix for each implementation scenario: how probable is it that these risks will occur, and what financial impact will they have when they happen? 20 Appendix 4 contains a detailed description of a risk assessment. Action 3C Quantifying the private implementation scenario and any other implementation scenario The public implementation scenario forms the bases for calculating the expenses, receipts and risks for the private implementation scenario and any other implementation scenario. The relative deviation is assessed for each item as compared to the public implementation scenario. Substantiate the differences with historical data or other sources Determine the differences between the public and private/other implementation scenarios in such a way that you can demonstrate later on that the assessment was a 'best effort'. It is preferred you use historical data. If no historical data are available for certain items, you may make use of other sources, such as: market consultations; expert opinions; comparative studies, researches and evaluations. Use comparable benchmark figures Bench mark figures are available for certain products and/or services. By comparing the internal cost prices with the external benchmark figures, you can get a good indication of the financial added value in a particular implementation scenario. However, in practice it has turned to be difficult to check which expenses were and which were not included in the benchmark figures. When you compare benchmark figures with internal cost prices, you therefore have to demonstrate that the scope of the benchmark is comparable to that of the internal cost price. Likewise, if you use prices of internal service providers or benchmark figures from the central government, you have to check if the comparison is fair, and if the same expenses, receipts and risks were included for the services or products in the various implementation scenarios. 20 There are other methods to make a first, rough calculation of pure risks. For instance, calculating the risk profile of the Project with the help of a top-down risk assessment based on historical data without identifying the individual risks.

36 36 Public-Private Comparator Manual Include transition expenses in the comparison in case of make-or-buy considerations If the existing service provision is not continued in its current form, but an implementation scenario other than the public implementation scenario is chosen, transition expenses are usually paid. Include these transition expenses in your comparative calculation in order to properly assess the private implementation scenario(s). See module 2 for an explanation of transition expenses. Quantifying risks When quantifying risks, allow for the fact that these risks may be managed differently in each implementation scenario 21. It may also be the case that a particular risk does not apply to a particular implementation scenario. 22 The chances of this risk occurring is zero, so please state 0 in the corresponding implementation scenario. You have to add the results of the chances per implementation scenario x the impact of the calculations per Project phase to the cash flows of the implementation scenarios. Risk matrix for an implementation scenario, a simplified example Phase Risk Chances of the risk occurring Preparation Ambiguities in output specification Preparation Total Impact if risk occurs 20% Value of risk Transaction Results Operational Effect on price as a result of limited market tension Transaction Total Chances of extra work in the realisation phase Realisation Total Chances of extra work in the operations phase Operations Total 10% 1, % 2,000 1,000 50% 1, Total of phase V - E 1, For instance, interface risks between design and implementation can be managed better by a contractor who is responsible for both the design and the implementation. In this situation, interface risks occur less rapidly and they have a smaller financial impact if they do occur, which means that they are assessed at a lower amount in the quantification. 22 For instance, transition risks, including possible ICT problems, if ICT systems of the private party are linked to the ICT system of the government party. In the public implementation scenario, an existing activity is contracted out within the organisation, which means that no new links have to be made and no transition risks will occur.

37 Module 3 Quantitative analysis 37 Quantitative differences matrix: an example Phase Mission Year Costs of public implementation scenario Preparation Transaction Results Deployment of staff Other items in preparation phase Deployment of staff Other items in transaction phase Investment in fixed assets Other items in realisation phase % Difference to private implementation scenario Costs of private implementation scenario t million +20% 0.6 million t million +50% 3 million t million +10% 22 million Operational Maintenance expenses t 0 +5 t/m 15 1 million (per year) -25% 0.75 million (per year) Other posts in operational phase Action 3D Calculating the net cash value and conducting a sensitivity analysis In this last component of this module, you learn how to calculate the cash value of amounts. Money which is currently being spent has a different value than the same amount of money that will be spent next year. Include this in you calculation by restating the cash flows in the different years to the value on the start date. You can do this in two steps: 1 Discount the amounts set out through time (and net off ) to the start date. 2 Add the discounted amounts. Finally, conduct a sensitivity analysis to check if the results are robust. The net cash value and the sensitivity analysis form the basis for the final report (see module 4). Setting out cash flows through time The moment of completion may differ per implementation scenario. These differences may have an effect on the outturn of the net cash value. This value decreases when the expenses lie further ahead in the future. This may mean that the last implementation scenario in which the Project is completed may have the lowest net cash value without this yielding added value. In order to calculate similar net cash values, you have to start from the same start date in each implementation scenario (date on which the provision of the products or services started) and the same end date.

38 38 Public-Private Comparator Manual If a product or service in a particular implementation scenario can be realised earlier, you have to include this as a non-financial advantage in the final report. Discounting amounts with the help of the discount rate Discounting means taking into account the decreasing value of money in the future and market-related spread risks. These aspects must be included in the discount rate (see Appendix 6 for an explanation of the discount rate). Below, you can read which formulas you have to apply. Which risk can you manage or spread by working with the discount rate? This concerns the sensitivity of the Project to macroeconomic developments. This sensitivity does not depend on the party who executes the Project and therefore all implementation scenarios (public and private) in the PPC have a similar discount rate which is made up of the same components: Risk-free interest rate In order to estimate this, you can use the interest on government bonds as a basis. Since this also includes inflationary expectations, the cash flows have to be compensated for inflation. In other words, they have to be expressed in nominal amounts. 23 Premium for market-related spread risks. The best way to estimate the discount rate is to add the competitive risk premium from similar projects to the risk-free interest rate. 24 If you have difficulties in finding the competitive risk premium, you may want to use the guideline for social cost-benefit analyses in order to determine a suitable discount rate as a fallback option. 25 If a tender procedure is started after the PPC and a PSC is executed, you still have to make an assessment of the competitive risk premium. You can calculate the net cash value with the following formula: Discount each annual amount to year t=0 K(t) (1+d) t 23 It is also possible to use a real discount rate by estimating a real risk-free interest rate and by using real amounts in the cash flows and so no compensating expenses and receipts for inflation. 24 You can also determine the risk-free interest rate, in addition to using the interest on government bonds, with interest rate swaps with a duration similar to that of the PPC. 25 See Real risk-free discount rate and risk premium in social cost-benefit analyses. Government Finance Inspectorate /2011/605 U, 24 August 2011.

39 Module 3 Quantitative analysis 39 Add the discounted annual amounts: CW= Σ n t=0 K(t) (1+d) t K(t) = net off expenses (including risks) and receipts in year t, without allowing for inflation CV = cash value d = discount rate in percentage t = year (year 0, 1, 2,...., n-2, n-1, n) n = duration (of year t=0 to year t=n) Apply this formula to all implementation scenarios. The result is an overview of the cash values of the various implementation scenarios. Sensitivity analysis: are the results robust and reliable? The main objective of the sensitivity analysis is to check if the results are robust. In addition, this analysis with a particular confidence interval yields a range band within which the net cash value falls. The more uncertainties a Project has, the wider the range band is. In order to execute a sensitivity analysis you must first identify the most important factors for the net cash value. You can do this by changing parameters in the model, such as the level of the discount rate or the impact of a major risk, and to see what the effects on the outturn are. Then, create two scenarios for the most important factors, a worst case scenario and a best case scenario, and make a summary of the results. This analysis will help you get a grip on the financial results of the implementation scenarios. You can also test whether or not errors have been made in the calculations by comparing the results to the outturn assessed beforehand based on the qualitative analysis and to the results of similar PPCs. Major differences which cannot be explained may point to calculation errors.

40 40 Public-Private Comparator Manual

41 Module 4 Final report

42 42 Public-Private Comparator Manual Module 4 Final report Module 1 Initiation report Action 4A Action 4B Module 2 Module 3 > Qualitative analysis > Quantitative analysis > Describing the results Drawing conclusions and making recommendations Module 4 Final report > The final report deals with all aspects which are important to the PPC. This report is both a review and a preview. First of all, the final report contains the results of the PPC: which implementation scenarios did you research, what where the results, which rationales and conditions formed the basis and which relevant non-financial considerations have you identified? Finally, you draw a conclusion based on the results of the PPC and you can draw up advice. Objective Decision-makers can make well-founded decisions about which implementation scenario they will use in the follow-up process. Output A final report must at least contain the following elements: an overview of the most important (financial) differences between a public, a private and any other implementation scenario; an explanation of the assessment of these differences; conclusions which can be drawn from the PPC; recommendations for the further approach; if applicable, policy advice for the decision-makers. Such as policy advice may sometimes fall outside the mandate of the PPC Team, for instance when the mandate has been granted to a hierarchically higher placed steering group. In this case, the PPC is accompanied by a supplementary memorandum containing policy advice to the decision-makers, which has been drawn up by (representatives of ) the steering group. Module structure All work executed in and findings from the previous three modules are systematically and conveniently arranged in module 4, action 4A. In action 4B, these results are translated into conclusions and recommendations.

43 Module 4 Final report 43 Action 4A Describing the results In the final report, you give a schematic overview of the work performed and investigations conducted by the PPC Team during the PPC. You must pay attention to the following elements: Objective, scope, research forms, duration Include these elements in a description of the research assignment. During the PPC, it may have been desirable, or even necessary, to slightly deviate from the original starting points, due to a lack of data, for instance. You have to clarify this in the final report. Summary of the work performed In this summary you describe the following: the preconditions and rationales; the information sources and estimates used; the risk inventory and variance analysis; (if applicable) the specific problems which came up during the investigation. Overview of the differences between the implementation scenarios investigated This is where you describe the following: the cash flows of the various implementation scenarios (outgoing, incoming and net off ); the calculation of the net cash value of the net off cash flows, including range band; a comparative overview of the net cash values of the different implementation scenarios; the results of the sensitivity analysis in which it is stated what the most decisive expenses, receipts and risks are for the net cash value; the most important qualitative differences between the implementation scenarios. Non-financial considerations You have to name the non-financial considerations, but they do not form a part of the PPC calculation based on which you have to make a statement about the financial added or decreased value of the implementation scenarios. In principle, you have already listed the non-financial considerations in the initiation report (module 1). However, it may be necessary to change them in the final report due to continuing insights. For example, new, non-financial considerations may have come up in the PPC or certain non-financial considerations can be made financial after all.

44 44 Public-Private Comparator Manual Action 4B Drawing conclusions and making recommendations In this action, the results of the PPC (Action 4A) are translated into conclusions. Based on these conclusions, a policy advice is drawn up for the decision-makers and recommendations are made for follow-up steps. Sometimes, policy advice and follow-up steps are not included in the PPC and the parties who hold this mandate submit a separate supplementary memorandum to the decision-makers to this effect. Eventually, the decision-makers choose the preferred implementation scenario, for which they assess the financial and non-financial aspects. The PPC enables the choice of implementation scenario of the Project. By comparing the different implementation scenarios, although rough, decision-makers can make well-founded choices based on figures and estimates. However, the final report should also pay attention to the follow-up process. If the PPC has shown that the private implementation scenario is financially interesting, one of the follow-up steps is to draw up a Public Sector Comparator (PSC). With the PSC, you can compare the private bids, and you can compare them to the calculated public implementation scenario as well as estimate the necessary budget. More information about the Public Sector Comparator is available in the PSC Manual on www. ppsbijhetrijk.nl.

45 Appendices

46 46 Public-Private Comparator Manual Appendix 1 Glossary Concept Added value Call for tenders Cash flow statement Cost-benefit analysis DBFMO Deal flow Discount Discount rate Financial added value Hidden expenses Implementation scenarios Description This may have different meanings, such as quality gains, costs savings, quicker realisation, or a combination of these factors, The PPC is about determining the financial added value. See also: Financial added value Procedure in which companies submit bids to provide a service or product. The client awards the contract to the company with the bid which scores best on the award criteria and which meets the minimum requirements set. See also: Output specifications. An overview of the annual balance of expenses, including risks, and income for the duration of a PPC in a particular implementation scenario (public or private). In a cost-benefit analysis, the (expected) costs are compared with the (expected) income, with the purpose of determining whether or not a Project is useful. In a cost-benefit analysis, it is important to know which elements are identified as costs and income and how they are quantified. In a social cost-benefit analysis, negative and positive external effects of government acts or omissions are also included in the calculation. Design, Build, Finance, Maintain and Operate (DBFMO) is an implementation scenario in which design, construction, financing, maintenance and operations are placed with one private party or private consortium. There are also version in which private involvement is less extensive. These are, in increasing order of involvement: DB, DBF, DBM and DBFM. In case of DBFMO, the entire chain has been privately outsources except operations, which are partially outsourced. The client largely operates the object by himself for the performance of his primary duties. Stream of similar project assignments. Making cash flows comparable by adjusting them for expected inflation, time preference and (if applicable) degree of risk of the cash flows. See also: Discount rate and Net cash value. Percentage (divided by 100) with which the cash flows can be discounted. In the PPC, the same discount rate is used for all implementation scenarios. Added value of a particular implementation scenario of a Project expressed in money compared to the public implementation scenario. Financial added value is in place if the costs of an implementation scenario for the duration of the Project are lower than those of another implementation scenario. Please note, this concerns financial added value 'in a narrow sense'. Any effects expressed in money for society as a whole do not fall within the scope of the PPC. See also: Cost-benefit analysis Expenses incurred by a party, but which not count toward the project expenses. This concerns overhead such as costs of property, computerisation and management. In the PPC, at least two implementation scenarios of a Project are compared, namely a public and a private implementation scenario. However, extra (interim) scenarios are sometimes included. See also: Public implementation scenario and Private implementation scenario

47 Appendix 1 Glossary 47 Initiation report Interface risks Lifecycle Lifecycle phases Lifecycle costs Market consultation Net cash value Non-financial considerations Output specification PPC scope A document at the beginning of the PPC process in which the main issues are laid down, such as objective and preconditions of the PPC scope and implementation scenarios, process description and actor analysis. Risk related to the link between the interfaces of activities during a Project's lifecycle (design, build, maintain, operate). When responsibility for activities are placed with a separate party, the interface risks are borne by the government organisation. If a Project is outsourced in a more integrated manner, the interface risks are borne by the contractor. In the lifecycle approach to a Project, the total expenses and receipts for the entire duration of the Project is reviewed: preparation phase, transaction phase, realisation phase, operations phase and, if applicable, the termination phase. The idea behind this is that choices in the lifecycle phases influence expenses and receipts in a later phase and thus can be best weighed together. A method by which information from private parties can be gathered to substantiate the private implementation scenario(s). The information may be qualitative, for instance where market players see opportunities for optimisation, and/or it may concern financial information about prices and costs in the market. The sum total of all annual balances of expenditure and income for the entire expected lifecycle of the Project. You discount the annual balances of expenditure and income in order to take account of the time value of money. See also: Discount Considerations which are important in choosing an implementation scenario, but which cannot be made financial in the PPC. The non-financial considerations are included in the initiation report and in the final report. In choosing a particular implementation scenario, financial as well as non-financial considerations play a role. The PPC only provides the financial considerations for the desired implementation scenario in terms of financial added value. It is up to the decision-makers to balance the non-financial considerations against the financial considerations and to make a decision about the desired implementation scenario. A description of the end result which is achieved with the activities which fall within the scope of the Project. The output specification also sets requirements for the functionalities of the Project to be provided. This concerns output in terms of amount, quality, and time of availability. On the other side of the equation is the concept of input specification, which concerns a description of the activities and means which play a role in the process that should lead to the end result. The input specification sets criteria for the technical implementation of the Project, as is often the case in call for tenders by the government. The scope of the PPC is the collection of activities in the Project for which it is assessed in the PPC what the financially most optimal implementation scenario is The scope is determined based on the set of objectives to be reached, the output to be reached and the necessary activities.

48 48 Public-Private Comparator Manual Private implementation scenario Project Public implementation scenario Public-Private Comparator (PPC) Public-Private Partnership (PPP) Public Sector Comparator (PSC) Residual value Risk allocation Schedule of Requirements Transition expenses The implementation scenario in which the government outsources a Project to a market player or a consortium based on output specifications. The government primarily directs towards the performances delivered and not, or less, towards the input. The market player has more freedom to implement the Project. The profit incentive and the options for optimisation will lead the market player to optimally use its knowledge of the market, efficiency and innovation. The central government uses the DBFM(O) contract form as the private implementation scenario for investments in buildings amounting to more than twenty-five million euros and for investments in infrastructure amounting to more than sixty million euros. All activities which are necessary to provide the product or service, up to the final phase. In practice, this will be the implementation method used by the government. The implementation usually takes place per project component based on detailed project definitions with input specifications. The interface risks are largely placed with the government. Public implementation is also known as traditional implementation. The PPC is a tool which leads to general insight into the most attractive implementation scenario. Alliances in which public and private parties share responsibilities and risks in the implementation of a Project. The PSC is a tool which is applied to gain more insight into the total costs across the entire product lifecycle in a public implementation scenario of a Project. The PSC acts as a benchmark for assessing private bids. The value which is left over at the end of the lifecycle of the Project, for instance in the sale of ground, buildings and inventory and equipment. The residual value is sometimes difficult to determine, because by definition it concerns an action which will take place relatively far ahead in the future. In certain cases, there may be a negative residual value, for instance due to expensive soil decontamination. The allocation of risks. The concept behind PPP is that risks are placed with the party which is best able to manage them and can demand lower prices for risk management. In PPP, it is about the contractual division of risks between the contracting government body and the private consortium, and between the consortium partners. Requirements to be determined by the client for the execution of the Project. Expenses related to the extraction of an existing product or service from its current setting, and its incorporation into a new setting.

49 Appendix 2 Scope of PPC 49 Appendix 2 Scope of PPC The following steps are described under action 1C in order to determine the scope of the PPC: 1 Describe the public objective to which the Project contributes. 2 Describe the Project in broad outlines. 3 Describe in broad outlines the desired output of the Project. Which results must the Project yield? Lay down this output with the public objective in mind. 4 List and analyse which activities are necessary to realise the desired output. Do not only include the direct activities, but also the indirect activities, such as facilities services and human resources management. Then, consider which mutual connections there are and list the activities which cannot be outsourced, for instance because only the government is allowed to perform them (military activities, the administration of justice), or because they have to be performed by the government itself in order to safeguard the continuity of core duties (access to critical databases). 5 Determine the scope of the PPC by combining all activities which could be outsourced. Include all related activities in the scope. You can increase the chances of financial added value by combining activities. Furthermore, combining activities offers private parties more options for optimisation. In this Appendix, there are three examples in which the scope has been determined in the following manner: a basic scope which is used in housing; b scope for widening an existing road; c scope for ICT workstations. Example a: Basic scope which is used in housing The basic scope is the starting point for discussing the project-specific scope and it contains the elements for which the most substantial financial added value is expected. It comprises the following DBFMO elements: design, realisation, financing, maintenance and a number of facilities services. In determining the elements which do or do not fall within the scope of the possible DBFMO form, a standard division (NEN 2748) is used for government buildings projects. It concerns the elements of the project which are a part of the added value comparison and which distinguish themselves from the public implementation scenario (added value by early and multidisciplinary harmonisation). The elements and starting points of the basic scope are explained below. Contact PPSsupport to request the 'Final report PPCs format' of the Government Buildings Agency, in which it is stated per NEN category whether or not it falls within the basic scope and why. Housing The private party is responsible for the design, realisation and maintenance of the building including the building-specific installations and user installations. The consortium, the contractor, will be assessed against the actual level of quality during operations. Furthermore,

50 50 Public-Private Comparator Manual the consortium is responsible for alterations in the building and for the consumption of gas, water and light. By placing the volume risk with the contractor, he is stimulated to develop a building which is as sustainable as possible. Furthermore, by using the government-wide energy contract, the price risk (increase in energy prices) remains with the central government. Services and resources This includes items such as cleaning and residue management, consumptive services (catering, snack and drinks facilities), risk management, design of (office) spaces and (internal) moves. The service 'Provision of consumptive services' may be optimised, for instance due to choices in the area of logistics (design and in use). Returns to scale is also possible due to multitasking (the consortium may deploy staff to multiple services). The service 'Risk management' may be optimised regarding the deployment of staff in the operations phase and investments in installations and logistics. Cleaning and residue management may be optimised in terms of design, for instance due to choices in the area of materials, logistics, detailing and in the operations phase by multitasking. For internal moves, the interfaces with the building are relevant, for instance in preventing damages when moving and the option to multitask. For the service 'Office design' (furniture), consortiums may make use of the central government's procurement contract, but they will become responsible for the logistics of placement and for the risk of damages in in-house logistics. This, and the previously mentioned example of energy, shows that PPP offers options for applying master agreements of the central government. These options are detailed in the preparation phase of a call for tenders. ICT (Infrastructure) ICT is included in the scope insofar as it concerns the relationship with the building regarding the installation and alterations. The external and internal infrastructure, other the cables up to the building and in the building up to the sockets in the wall fall within the scope. As soon as it concerns information flows, the client is responsible for organising this himself (e.g., the computer servers).

51 Appendix 2 Scope of PPC 51 Example b: Scope for widening an existing road Step Explanation 1 Public objective Improved circulation of traffic and safe traffic 2 Project in broad outlines Expansion of capacity of an existing road with an extra lane in each roadside and change in the form of a widening of several construction in and across the road 3 Desired output The road system: meets all requirements for a safe and comfortable use of the road; is achieved with minimal hindrance to the environment and users; is developed as sustainably as possible. 4 Activities In order to widen the existing road, an extra lane is needed on each side of the road along a distance of 32 km, and 12 fly-overs in or across the road need to be altered. Along the entire length of the road, traffic facilities and traffic management systems have to be replaced where necessary. Most traffic facilities can be recycled, but most traffic management systems and portals needs to be updated. Hindrance to the road users on account of the road works must be minimised. This requirement has consequences for the phases of the work to be completed and for the traffic measures to be taken. The road, constructions and traffic facilities must be maintained for the entire lifecycle of 25 years. Traffic management: matching the road demand and capacity supply of the network, both in terms of time and space. 5 PPC scope In the PPC, the project scope is analysed for the entire lifecycle of 25 years after the completion of the road. The scope takes the following into account: all preparatory work of the client; all work of the client to tender the Project; all work of several parties in order to reach a valid bid. This includes: designing and arranging suitable project financing; the financing of the Project; all design and construction work of the contractor; all operations work of the contractor, particularly maintenance, lifecycleextending maintenance and integral major maintenance; the project management tasks of the client during the realisation and operations phases.

52 52 Public-Private Comparator Manual Example c: Scope for ICT workstations Step Explanation 1 Public objective Good, decisive and efficient public administration 2 Project in broad outlines Uniform digital workstations for the central government 3 Desired output accounts are available for users regardless of time and location; availability of necessary hardware at the workstation. Up-to-date: functionalities meet current market standards. 4 Activities design, development and management of all general workstation applications and operating systems; provision, change and management of workstation services; provision, change and management of communication services; connectivity; application hosting; professional ICT support. 5 PPC scope All activities and products such as design, management, provision and change of telephones, workstations, printing and copying equipment, networks, storage capacity and applications. Except design, development and management of specific applications which are vital to the performance of core tasks.

53 Appendix 3 Model overviews of receipts and expenses 53 Appendix 3 Model overviews of receipts and expenses Example a. Housing project: receipts and expenses Phase Mission Explanation Preparation Transaction Costs of personnel deployment Costs for design and preparation Development costs of the Government Buildings Agency and fees for architect and consultants Realisation Construction costs Costs exclusive of ground costs, contingent item and VAT, including building installations and parking Costs of user installations Provide ICT for the external infrastructure Provide ICT for the internal infrastructure Costs of space Special room This includes security installations (fire alarm system, access control, detection, camera wired, one-off connection Workstations and/or office space and/or meeting room and/or informal meeting places. Investment prior to the moment the building is completed. Operational Operations general Alterations Annual consumption of energy/water Building-specific management costs (annual costs) Operations maintenance For instance, removing and/or placing inner walls/ doors/installations and inclusive of termination of Regular maintenance of the building Regular maintenance of building-specific installations Non-regular maintenance of the building (annual costs) Non-regular maintenance

54 54 Public-Private Comparator Manual of the installations (annual costs) Maintenance of the building Maintenance of the grounds User part, building, installations, fixed facilities, including deployment of handyman Operations services and resources Costs of consumptive services Costs of risk management Cleaning costs Removal costs Costs of residue management Costs of space Issuing (office) supplies (including the restaurant) for staff and for visitors Security, and reception of the outer security perimeter Internal move, not external Workstations and/or office spaces and/or meeting rooms and/or informal meeting places Costs of making other services and resources available All activities, services and resources used for the organisation which have not been previously mentioned. Operations ICT External infrastructure Internal infrastructure Facility management control Providing facility services Providing facility management (policy) Implementing facility policy Completion

55 Appendix 3 Model overviews of receipts and expenses 55 Example b. Infrastructure project: receipts and expenses Phase Mission Explanation Preparation Deployment of staff FTE internal x duration of preparations x average wage sum + expected expenses for external expertise Transaction Deployment of internal staff FTE internal x duration of transaction phase x average wage sum Deployment of external staff Design fee FTE external for legal, technical and financial expertise x duration of transaction phase x average wage sum/external staffing costs Fee offered by the contracting authority to the private parties in order to draw up a valid bid/design for the call for tenders. The starting point is that only a part of the expenses incurred by the contracting authority is compensated. Realisation Deployment of internal staff FTE internal for supporting the realisation x duration of realisation phase x average wage sum Deployment of external staff Regular maintenance Variable maintenance Replacement costs Costs of traffic measures FTE private contractor for maintenance and management x duration of operations phase x average wage sum/private staffing costs Direct costs for material and resources for annual maintenance, usually with a surcharge for indirect costs and contingencies Direct costs for material and resources for periodic maintenance, usually with a surcharge for indirect costs and contingencies Direct costs for material and resources for replacement of parts, usually with a surcharge for indirect costs and contingencies Personnel and material costs for road blocks, diversions, information provision and so on, during work in the operations phase Operational Deployment of internal staff FTE internal staff for maintenance and management x duration of operations phase x average wage sum Deployment of external staff FTE private contractor for maintenance and management x duration of operations phase x average wage sum/private staffing costs

56 56 Public-Private Comparator Manual Regular maintenance Variable maintenance Replacement costs Costs of traffic measures Direct costs for material and resources for annual maintenance, usually with a surcharge for indirect costs and contingencies Direct costs for material and resources for periodic maintenance, usually with a surcharge for indirect costs and contingencies Direct costs for material and resources for replacement of parts, usually with a surcharge for indirect costs and contingencies Personnel and material costs for road blocks, diversions, information provision and so on, during work in the operations phase Completion Residual value Only include this receipts in case of an increase or decrease in value of the private implementation scenario Example c. Operations activities: receipts and expenses Phase Mission Explanation Preparation Deployment of staff FTE internal x duration of preparations x average wage sum + expected expenses for external expertise Transaction Deployment of internal staff FTE internal x duration of transaction phase x average wage sum Realisation* Deployment of external staff Design costs Transition of staff to another employer Redundancies Project implementation costs Fixed assets Necessary legal, technical and financial expertise Expenses of the private party submitting a bid for making designs for the call for tenders Wage and pension supplementation and secondary terms of employment based on the average wage sum of internal personnel - wage sum of private personnel (source: collective labour agreements) Reassignment costs, unemployment benefit costs, severance pay and so on. The average wage sum of internal staff x percentage of not reassignable staff x years of continued payment (based on the Social Policy Framework) Costs of deployment of internal and external staff to implement the transition Investment in structure, capital goods and so on

57 Appendix 3 Model overviews of receipts and expenses 57 Immovable property ICT Investments in ground, building and so on Provision of ICT infrastructure, purchase and/or development costs of software and connection to internal business processes Operational Direct staff Direct staff are employees who are directly involved in the execution of operational management activities FTE x average wage sum Supporting services Overhead Management Maintenance Operational costs ICT Material costs Logistics and transport Departments of Human Resources, Finance, Housing, Communication and so on. Necessary FTE x average wage sum per department Higher management, general facilities and so on. (only relevant of the capacity will decrease in the non-public implementation scenario) Supply/demand management and contract management FTE x wage sum Management and maintenance investments for fixed assets Technical and functional management and any replacement costs Material necessary for the execution of primary tasks, such as company clothing and office supplies Personnel and material costs for transport, including investment in sustainable material such as cars Completion Residual value Only include this item in case of an increase or decrease in value of the private implementation scenario

58 58 Public-Private Comparator Manual Appendix 4 Risk analysis 1 Introduction Risk is the chance of damages or loss. Risks are part and parcel of any Project. You have to have an overview of the types of risks and their environment for the financial comparison of the various implementation scenarios. You can gain this insight with the risk analysis. A general risk analysis suffices for the PPC. A more detailed risk analysis is necessary at a later stage in the Project. 2 Types of risk PPCs make a distinction between pure risks and spread risks. Pure risks Pure risks are special events during one of the project phases which negatively influence the expected balance of the total revenue and total costs of a Project. One example is the risk of heavy rainfall or hailstorms causing delays during construction, which leads to higher expenses. Such a risk is quantified as follows: the chances of this risk occurring x the financial consequences. The quantified value of these risks is added to the estimated expenses. You can shed light on pure risks in the overview of the expected cash flows. Spread risks Spread risks occur due to the uncertainty of estimated amounts and pure risks. Spread risks partially depend on developments on a macroeconomic level, and partially on uncertainty regarding the estimated amounts and prices. Therefore, we call them market-related and technical spread risks. The technical spread risks do not have to be included in the PPC. However, they are included in the PSC. Figure B1 Methodological categorisation of risks Risks Pure risks Spread risks Market-related spread risks Technical spread risks

59 Appendix 4 Risk analysis 59 3 Risk assessment If sufficient risk assessment data are available from similar projects, you can assess the risks based on these historical data. This means you do not have to map out all individual risks, but you can calculate the risk profile of the Project with a top-down risk assessment based on historical data. However, if there are not sufficient historical data available for a top-down risk assessment, you assess the pure risks and the level of the market-related spread risks per individual Project. In this Appendix, you learn how to do this. The pure risks can be listed and assessed with the help of a risk matrix. You can include this assessment in the overview of the expected cash flows. Paragraph 4 of this Appendix deals with the assessment of pure risks in more detail. You preferably assess the market-related spread risks with a benchmark method (see paragraph 5 in this Appendix). 4 Assessing pure risks with the risk matrix With a risk matrix, you can gain insight into a Project's risks. You can draw up a risk matrix in a number of fixed steps, which are displayed below. You will also find a fictional example which may help you in performing your own risk analysis. These are the steps you have to follow: a b c d e identifying lists; clustering lists; assessing the scope (impact) and probability (chance) of the risks; drawing up a risk matrix, including the value of the risks; presenting the results. You can assess the pure risks for each implementation scenario with these steps: you have to assess the chance and impact of the identified risks occurring for each implementation scenario. You have to allow for the extent to which the public and/or private party/parties involved are capable of managing risks in the most cost-efficient manner. The risks identified will also be assessed differently for each implementation scenario. a. Identifying risks In this first step, you identify every conceivable risk which may be important to the implementation of the Project, and you document them. View the Project from different angels and involve as many experiences as possible form inside and outside your own organisation. Potential participants are financial, economic, legal and technical experts and people involved in similar projects. Different angels to look at the risks are: legal/statutory; organisational;

60 60 Public-Private Comparator Manual technical/executive; spatial/geographical; financial/economic; social; political/administrative. Verify whether or not the list is balanced by: explicitly reviewing all relevant interfaces between the actors in the project; explicitly reviewing all project phases; reviewing risk assessments of previous projects. Process and project risks Divide the risks into process and project risks. Process risks are mainly risks which occur in the call for tenders and in the preparation phase, and therefore cannot be included in a contract. One example of a process risk is the loss of key figures in the project on the side of the client. The process risks are points for attention for the project organisation, which can respond to these risks by taking management measures. Project risks are risks which are allocated in a contract. In the PPC, only project risks are assessed. because process risks are not distinctive, since they fall under the client in each implementation scenario. Appendix 5 contains a list of examples of risks. You can use it as a checklist when you identify the risks for a specific Project. b. Clustering risks After you have identified all risks, you start to cluster them. This mainly involves a systematic approach. On the one hand, clustering is a method with which you systematically check whether or not you have overlooked risks. On the other hand, it helps you gain insight into the correlation and any overlap between the risks, which increases surveyability. The risks can be clustered in several manner, for instance chronologically, based on the responsibility for the risks or per project phase. For the PPC, we have chosen for a clustering per project phase, because this dovetails with the way in which the pure risks are added to the cash flows per project phase. c Assessing the scope and probability of the risks The next step in drawing up the risk matrix is that you make an assessment of: the scope (impact) and timing of the risks; the probability of the risks: the chances they occur. Assessing the value and probability of the risks is not an exact science. For instance, you can use data from similar projects or from fees with which you can insure risks. Always be clear about which rationales and sources you have used as starting points. This also applies to the extent to which experts agree or disagree about the estimate. The bigger the differences between their estimates, the greater the uncertainty.

61 Appendix 4 Risk analysis 61 Limit yourself to the biggest risks (for instance 10) and only study these risks in more detail, for instance by focusing on the risks with a high probability and/or significant impact. This enables the PPC Team to concentrate on the risks which are the most relevant to the Project. d. Drawing up a risk matrix, including the value of the risks A risk matrix is nothing more than a summarising overview of the risks, including their values. In a risk matrix, you summarise all available data. It is important that you always provide an explanation in your risk matrix in the form of substantiation. Risk matrix for one implementation scenario: a simplified example Phase Risk Chances of the risk occurring Preparation Ambiguities in output specification Preparation Total Impact if risk occurs 20% Value of risk Transaction Results Operational Effect on price as a result of limited market tension Transaction Total Chances of extra work in the realisation phase Realisation Total Chances of extra work in the operations phase Operations Total 10% 1, % 2,000 1,000 50% 1, Total of phase V - E 1,680 In order to assess the value of a risk, you have to multiply the impact by the probability. The result is the quantified value of the risk. In order to calculate the total value of all risks, you add the values of all risks. This method is relatively quick and leads to a rough estimation of the value of all risks. Take into account that the value of the risk in the final net cash value of the implementation scenario depends on the timing of the risk, because the risks will be discounted as part of the net cash flows. e. Presenting the risks You can depict the results of your risk analysis in a diagram with a clearly written explanation. A mathematical or statistical description of the result is not sufficient. You have to present the results in clear and simple language. Describe the results of the risk analysis and the risks which weigh the most financially.

62 62 Public-Private Comparator Manual 5 Assessing market-related spread risks, preferably with the benchmark method A distinction can be made between technical spread risks and market-related spread risks. Technical spread risks are not included in the PPC, because it would not be useful at this early stage of the Project. The technical spread risks are dealt with in the PSC (Public Sector Comparator) and at later stages in the Project. However, the market-related spread risks are included in the PPC as premiums in the discount rate (see Appendix 6 for an explanation of the discount rate). The discount rate consists of the following components 26 : Risk-free interest rate The interest on government bonds may serve as an estimation. Since the interest on government bonds also includes inflationary expectations, the cash flows will also have to be compensated for inflation. 27 Premium for market-related spread risks The best way to estimate the discount rate is to add the competitive risk premium from similar projects to the risk-free interest rate. 28 This is referred to as the benchmark method. If there are current benchmark data available from similar projects, you use the level of the risk premium used by the capital market for a similar Project. You add this risk premium determined by the capital market for a similar project to the risk-free interest rate. With the resulting discount rate, you can calculate the net cash value of the cash flows. The discount rate is the same for all implementation scenarios (public and private). With the benchmark method, you look for similar projects and you use the results of the risk assessment from those projects as the risk premium for your own Project. However, it is usually not easy to find a similar project, since each project is unique. Therefore, the it is often necessary to correct the found risk premium for the project-specific risk allocation within the Project. You cannot apply the benchmark method if no information is available about the competitive premium for market-related spread risks for similar projects. In this case, you can rely on the guideline for social cost-benefit analyses. 29 However, if a tender procedure is started after the PPC, you still have to make an estimation of the competitive risk premium with the help of a method other than the benchmark method. 26 The methodology for determining the discount rate at the central government differs per type of business case. The guideline for determining which methodology you should use has been laid down in the report 'Risk assessment in public investment projects, Risk Assessment Committee (2003). 27 You can also opt for using a real discount rate, in which case a real risk-free interest rate has to be estimated and the cash flows must not be compensated for inflation. 28 The risk-free interest rate is usually determined based on the interest on government bonds or interest swaps with a similar duration. 29 See Real risk-free discount rate and risk premium in social cost-benefit analyses. Government Finance Inspectorate /2011/605 U, 24 August 2011.

63 Appendix 4 Model overviews of pure risks 63 Appendix 5 Model overviews of pure risks Example a. Housing project: pure risks Project reference Complexity of the work Complexity of implementation methods Scope of the work Chances of failure costs Complexity of the location in relation to the work Chances of damage to the environment Chances of damage by third parties Chances of damage to third parties Permits and procedures Soil conditions Complexity of maintenance and operations Description The extent to which work can be viewed as complex, for instance because it concerns a more or less unique project, or because it concerns existing of new buildings. The extent to which implementation methods for the construction/renovation can be viewed as complex, for instance as a result of the application of innovative techniques. The extent to which the work can be viewed as extensive in terms of height, length and depth. The extent to which the project is susceptible to failure costs, for instance as a result of intensive necessary discussions between contractors, or due to the specific chances of design flaws. The extent to which the location of the work in relation to the work to be performed can be viewed as complex, for instance as a result of limitations imposed by the environment on the performance of work, the room for the building site and logistic accessibility. The extent to which the project is susceptible to damage to the environment, for instance damage to adjoining premises, the public roads and the public space. The extent to which the project is susceptible to damage by third parties, for instance damage caused by vandalism or theft. The extent to which the project is susceptible to damage to third parties, for instance as a result of specific points regarding security or health. The extent to which permits and procedures may lead to delay and/or additional costs, for instance as a result of specific requirements of the building aesthetics committee, the expected procedures to be instigated by neighbours or zoning plan changes. The extent to which the soil conditions may lead to delay and/or additional costs, for instance as a result of contamination, archaeological findings, explosives or groundwater flows. The extent to which maintenance and operations can be viewed as complex, for instance because it concerns a more or less unique project, or because of the scope of the work.

64 64 Public-Private Comparator Manual Example b. Infrastructure project: pure risks Project phase Transaction phase Realisation phase Operational phase Final phase Explanation Amendment costs due to unclear or wrong specifications Delay caused by amendments from the client in the call for tenders Additional work as a result of incomplete and/or ambiguities in the contract documents Delay caused by amendments of the client Delay caused by unforeseen extension of the permit procedures Additional costs and/or delay caused by unforeseen work to cables and pipes of third parties Contingencies for the maintenance of the infrastructure (for instance due to accelerated wear of asphalt) Extra road blocks due to unforeseen repair work to asphalt (as a result of frost damage) Amendment costs caused by for instance new extensions Worse circulation of traffic due to shortcomings in the implementation Example c. Operational management activity: pure risks Project phase Transaction phase Realisation phase Operational phase Final phase Explanation Amendment costs due to unclear or wrong specifications Delay caused by amendments from the client in the call for tenders Higher staff transition costs due to less staff who can be reassigned or because the costs per employee are higher Higher material transition costs due to setbacks in the technical link of the private party to internal business processes Delay caused by amendments of the client Additional costs and/or a lower quality due to lacking management of the management organisation Additional costs or loss of quality due to lower efficiency and/or effectiveness than expected Additional costs and/or lower quality due to unforeseen demand fluctuations Additional costs in case of a retender due to a lack of competition

65 Appendix 6 Discount rate 65 Appendix 6 Discount rate In this Appendix, you can read about the function of the discount rate, why a distinction is made between private and public financing and why the discount rate differs per period. 1. What is the discount rate? The function of the discount rate in the PPC is to bring together the net cash flows in across the years - essentially, to combine them into one amount, namely the net cash value - in order to make a comparison between the various implementation scenarios possible. Cash flows in different years cannot be added up automatically. After all, the euro you have in your pocket at this moment may be invested with interest, which means that this euro's nominal value will increase in the future. Furthermore, future net cash flows may be more negative than expected. This is a risk any rational investor wants to be compensated for. The discount rate corrects future cash flows for the time value of money and the associated risk. In principle, the discount rate is the same as the return the investments which are necessary to realise the Project would have made if the money were spent in a different but similar manner. The similar manner means an investment in a project with a similar scope and risk. The required return on high-risk projects is higher, because an investor requires a higher return for a higher risk. After all, investors do not like risks and always choose the investment with the least risk at a particular return, or vice versa. The level of the return always reflects the amount of risks incurred in a project. Theoretically, the discount rate can be divided into the following components: 30 the risk-free interest rate; 31 risk premium. 32 Action 3D of module 3 and Appendix 4 explain how you can determine the level of the discount rate in the PPC. 30 The scientific basis for the discount rate is the CAPM model, which can be found in virtually all basic books about financing. 31 The PPC uses the nominal risk-free interest rate, or the interest including inflation, and not the real risk-free interest rate. This nominal risk-free interest rate is usually estimated based on the interest on government bonds. 32 More specifically, this concerns a premium for non-diversifiable risks. These are risks an investor cannot mitigate by investing in multiple projects. One example of a diversifiable risk is the increase of the oil price. The profit of a company which uses oil as a raw material will be negatively influenced by an increase of the oil price. However, an increase in the oil price is positive for a company which works in oil field exploration. By investing in both companies, an investor may mitigate the risk associated with an increase in the oil price. However, if factors affect the entire market, they cannot be diversified and an investor will seek compensation.

66 66 Public-Private Comparator Manual 2 Why is the same discount rate used for the public and private implementation scenario? For the level of the discount rate in the PPC, it does not matter if a public or private party finances the project. The difference between a public and a private investor becomes clear when we look at investments from the point of view of citizens as taxpayers and citizens as shareholders. When a market player finances a project, the shareholders/investors run financial risks. After all, the return on investment influences the profit of the market player. The profits are divided among the shareholders in the form of current or future dividend distributions and they also determine the value of the shares. The position of taxpayers can be compared to a certain extent to the position of shareholders: in the end, taxpayers run the risk of investment costs being higher than budgeted, or of financial yields being lower. In the end, taxpayers pay for unforeseen financial setbacks because future taxes will be higher. One important difference between taxpayers and shareholders is that the risk is imposed on the first group and shareholders decide whether or not to run a risk. Shareholders may demand compensation for risks in the form of a higher expected return, while taxpayers only hope they will receive compensation. Not every taxpayer is also a shareholder, but in order to estimate which price a taxpayer would want as compensation for the risk, the citizen as the shareholder is the best comparison. Therefore, the central government uses the same risk premium as is customary on the market, in other words the return that private investors expect. Since the required returns of a public and private investor are the same, the discount rate is the same for both parties. 3 Is project financing by the government always more favourable? The discount rate in the PPC is the same as the return for which private parties are willing to finance a project. This return is usually much higher than the interest on government bonds paid by the central government in order to attract capital. This gives rise to the question whether or not it is more advantageous for the central government to directly finance the project on its own (as in the public implementation scenario). It is a common misconception that government funding leads to lower project costs because the government can borrow at cheaper rates. In project financing, the project should be the focus, and not the project implementer. The cost of capital in projects is determined by the risk and not by the source. The interest on government bonds paid by the central government is lower than the interest at which financial institutions can attract capital and much lower than the interest at which companies can attract funding for a particular investment. This is because the government hardly runs any risks, because setbacks can be passed on to the taxpayers.

67 Appendix 6 Discount rate 67 The fact that the government can borrow at cheaper rates therefore does not play a role in the choice between public or a private financing How come the risk premium for the same type of project may differ per period? The risks of a project determine the level of the premium of the risk-free interest rate in the discount rate. These risks may be differently assessed per period. For instance, since the economic crisis, investors have demanded higher prices (return) for projects with the same risks as before. You cannot deduce from this that prices after the economic crisis are too high or prices before the crisis were too low. Fluctuations in the market interest rate are part and parcel of an efficiently functioning market. The risk premium in the market interest rate is also constantly influenced by risk perception (are there many or few risks?), and by the price charged for these risks. The risk premium is first and foremost determined by risk perception of the market. Centuries ago, an implied risk of business trips was that a vessel could fall from the edge of the world, and investors expected compensation for this risk. Nowadays, investors want compensation for the risk that the financial system may collapse. Only in hindsight can it be determined how real a risk was. Which risks investors perceive and how substantial they perceive these risks to be differs per period. The price demanded by investors for a particular level of risk is not stable either. Like with other products, such as insurance policies, these risks are influenced by supply and demand. This also explains that the interest on government bonds is sometimes negative. When in a particular period investors look for low-risk investment en masse, they are willing to accept a lower, and sometimes even negative, interest rate. In an efficiently functioning market, the scope of the risks and the price demanded for them can be best estimated based on market information such as share prices, because they contain all available information. 33 The underlying assumption is that the financial market works efficiently. If this is (temporarily) not the case, public or private financing may indeed be a decisive factor in the PPC. If need be, the Ministry of Finance will set up a more detailed analysis which may lead to a (temporary) amendment to the guidelines in the PPC for private financing. Until then, it should be used as the point of departure in the PPC that there is no difference between public and private financing.

68 68 Public-Private Comparator Manual Appendix 7 Determining differences between the public and the private implementation scenarios Risk transfer Added value may be achieved by transferring risks from the public party to the private party which is better able to manage certain risks. For instance, if the risk of cost overrun of the initial investment or the maintenance and management costs is transferred and the private party also bears the risk of technological obsolescence, this may yield a substantial cost saving for the public parties. The PPC Team has to ask itself in each project: which major risks does the public party run and are private parties better able to manage these risks (and why)? This process is described in modules 2 and 3 of this manual. Functional specification Consequences for the qualitative analysis Certain risks are best borne by the public party and other risks by the private party. In the private implementation scenario, the starting point is that risks are borne by the party which is best able to manage them. Therefore, risks are best managed in the private implementation scenario. With an improved risk management, the costs for risks during the realisation phase and operational phase in the private implementation scenario are lower than in the public implementation scenario, in principle, due to the underlying assumption that the risks are properly divided. How much lower depends on the amount and type of risks which can be transferred to a private party. If the public party outsources existing service provision, transition risks may increase the risk costs in the private implementation scenario. Functional specification means that the client describes beforehand which results he wants achieved with the project: what should the project yield? This differs from a 'traditional' call for tenders or internal management, in which the public party prescribes how the project should be executed and which input is required. In a functional, output based specification, the public party describes which output features (of what quality) have to be achieved with the project. The private parties are then free to creatively use the input, in other words the way in which they realise the required output. However, the risk is that the public party gives too many details in its specification, which means the public party overshoots itself. Another risk is that the output is not correctly specified (misspecification). The PPC Team has to ask itself the question what output the contracting party requires, and if it can be described in such a manner that the private parties have the opportunity to achieve cost savings and to apply innovations (how and why). Consequences for the qualitative analysis The more room private parties have to come up with solutions within the functional specifications, the better they will be able to minimise the total costs in the realisation phase and the operational phase in the private implementation scenario. This yields a substantial cost advantage for the private implementation scenario compared to the public implementation scenario.

69 Appendix 7 Determining differences between the public and the private implementation scenarios 69 Performance incentives Performance incentives are incentives to improve the results of a project. A method which has been tested in actual practice has revealed that performances delivered are measured and the contractor is assessed against the results. The PPC Team has to think about the question, in the context of the specific project, if the output can be measured well (this question is an extension of the questions about functional specifications) and which options there are to stimulate the product or service provider to perform better. Lifecycle optimisation Consequences for the qualitative analysis Performance incentives do not directly lead to a financial difference between the public and private implementation scenarios, but they may influence the difference in quality. If the desired service can be translated well into performance agreements, the quality in a private implementation scenario is higher, in principle. If not, the quality of the output may be reduced due to lacking direct management options. Lifecycle optimisation means that the costs for the duration of the Project are minimised. A choice for high quality in the initial investment phase may lead to lower maintenance costs. But, if the high investment costs cannot be recovered with lower maintenance costs, the overall costs for the entire lifecycle may end up higher. Furthermore, it is a well-known phenomenon that public parties keep investments (too) low in the initial phase, hoping that they will find a solution to the relatively high maintenance and management costs once the project is realised. The rationale of a long-term agreement in which investments and operational costs are combined is that this is an incentive to efficiently weigh the investment costs against possible cost savings in the operational phase. The PPC Team has to ask itself the question which contract period is optimal and why (see module 1). In the ICT sector for example, the contract period has to be much shorter than in the real estate sector, because future requirements are much harder to estimate. The PPC Team must also ask itself the question how much room private parties have to minimise costs in the operational phase by extra investments, or vice versa. Consequences for the qualitative analysis Lifecycle optimisation reduces costs for the duration of the project, thus the net cash value in the private implementation scenario. This may be achieved by higher realisation costs and lower operational costs, or lower realisation costs and higher operational costs. How substantial the financial effect is depends on the room the private parties have for lifecycle optimisation.

70 70 Public-Private Comparator Manual Market forces Market forces means that the conditions on the market force providers to perform better, either by offering better prices, or by increasing quality, or a combination of both. A condition for market forces is that there is sufficient competition between the providers of products and services. The PPC Team must review of, in the context of the project, there are sufficient potential providers (market tension), or if they can be organised, and if there is sufficient potential for similar projects, which would create an interesting deal flow. With the prospect of deal flow, private parties are stimulated to submit extensive bids in order to acquire a position in a developing market. The most important obstacles for private parties to actually compete in a call for tenders are the high entrance fees (the fee to be paid by a bidder compared with the chance of success) and the lack of prospect of a stable deal flow. Specialism Efficient deployment of resources Consequences for the qualitative analysis There is sufficient competition for most products and services and it can be assumed that the client receives the best prices and quality available on the market. In these cases, market forces do not have any consequences for the qualitative analysis. However, if there are hints that the market does not function properly, for instance in case of niche markets with high entrance fees and a limited number of market players, this increases the costs of the private implementation scenario in the realisation and implementation phase. Specialism may lead to more efficiency, which reduces costs. Often, this type of efficiency gain can be achieved by having specialist private parties execute work. This concerns scale advantages to be achieved by private parties, specific core competences they have in the market or innovative applications they can develop. In practice, they often lead to differences compared to public parties. A private party which is solely focused on cleaning office buildings will clean these buildings more efficiently, for instance by being able to manage and train staff better, than a public party whose core competence is not cleaning. Consequences for the qualitative analysis Due to specialisms the costs in the private implementation scenario are lower in the operational phase than in the public implementation scenario. Furthermore, the quality is often higher. An efficient deployment of resources can be done in different ways, for instance: more efficient deployment of human capital, in overcapacity for instance; alternative use of material fixed assets, for instance using a road to store solar energy, or a wider use of knowledge about a particular ICT system. Private parties are often more creative in realising assets in ways hitherto unknown to other parties. The PPC Team has to ascertain what human capital and which fixed assets there are, and which party can deploy them in the most effective and efficient manner. Consequences for the qualitative analysis A private party is usually able to use assets, including staff, more efficiently than a public party. They have more options thanks to their specialisms and upscaling, and they are stimulated more to think about a smart deployment of resources. In specific cases, a public party can do this better. Costs are reduced thanks to a more efficient deployment of means, or returns in the operational phase become higher.

71 Appendix 7 Determining differences between the public and the private implementation scenarios 71 Supervision Better supervision leads to better risk management, and if risks occur they are detected earlier, which leads to limited damages. Many projects require a substantial investment. Executive parties such as building companies do not finance these projects themselves, but turn to the shareholders and financial institutions for capital. In the private implementation scenario, the loan is not paid off upon completion, but in the course of the contract, which usually covers the entire lifecycle. Operational risks are therefore passed on from the public party to the shareholders and financial institutions, because they are responsible if executive parties do not meet their obligations. The involvement of financers (usually at least one bank) means that extra attention has to be paid to risk management. The expertise of financial institutions in part lies in this area of expertise. Complexity preparation Consequences for the qualitative analysis In projects which require large investments, risks in the private implementation scenario.are better managed due to the involvement of shareholders and financial institutions. This means that the costs in the operational phase, and in certain cases also in the realisation phase, are lower in the private implementation scenario. The combining of phases, such as design, construction and operations, increases the project's complexity. Furthermore, the negotiations and contract formations are more complex due to the longer terms of the contracts when phases are combined. The necessity to look far ahead increases uncertainty. In order to face this complexity in integrated contracts (projects in which components are traditionally contracted separately), the public party often hires and deploys extra staff. The preparation phase is usually longer, too. On the other hand, these are one-off costs, unlike the usual approach in which separate contracts are concluded for the various phases. Consequences for the qualitative analysis In the private implementation scenario the phases are combined as much as possible. The greater complexity of this increases the costs of the private implementation scenario in the preparation phase compared to the public implementation scenario. This is mostly the case if the private form is relatively new to the public contracting authority. Well-known private forms, such as DBFM(O) for buildings and roads, have considerably decreased costs due to standardisation and experience.

72 72 Public-Private Comparator Manual Transaction costs Transaction costs are costs involved in preparing for the agreement between the contracting party and the contractor. If a project is executed privately, based on a concession or another integrated cooperation form, this usually leads to higher transaction costs, because all private providers have to do a lot of expensive homework. They either receive partial compensation for this, or they have to recover these expenses within their possible assignment. This undoubtedly leads to higher transaction costs. Furthermore, complex processes such as public-private cooperation forms require many consultants, which may lead to higher costs. Since integrated contracts are often concluded for a longer period of time, this does save on retender costs. Consequences for the qualitative analysis The transaction costs increase the costs of the private implementation scenario in the transaction phase compared to the public implementation scenario, especially if the private form is relatively new for the public contracting authority. The difference in transaction costs between private and public implementation scenarios is relatively small for more well-known private forms, such as DBFM(O) for buildings and roads, due to standardisation and experience.

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74 74 Public-Private Comparator Manual Publisher s Imprint This manual is published by The Ministry of Finance, Financing Directorate, Public-Private Investments Department Visiting address of the Ministry of Finance Korte Voorhout CW The Hague The Netherlands Postal address Postbus EE The Hague, The Netherlands More information If you have any questions about the PPC Manual, please contact: The Ministry of Finance, Tel: +31 (0) Fax: +31 (0) For more information about public-private cooperation and PPCs: [email protected] Internet: Editorial board and design Taalcentrum-VU in collaboration with Tusch March 2013 Liability No rights can be derived from the contents of this manual. The Ministry of Finance is not liable for any printing errors and /or deficiencies in the text.

75 Ministry of Finance P.O. Box EE The Hague T +31 (0) March 2013