SESSION 3 Tuesday 10.00 – 10.45

Writing the Business Case

Aims of the PPP Business Case

• • • • To support and justify the case for investment To enable Ministers to decide if the project should proceed as planned To provide a realistic assessment of what is possible, not a list of impractical assumptions and proposals To allow Ministers to decide whether PPP is a better than method than conventional procurement

Aims of the PPP Business Case (cont.)

• To show that project proposals meet wider strategic and business aims • To show why a particular project has been given priority over other possible alternatives • To identify the statutory powers on which it is relying for the procurement of a particular service or facility

Contents of the PPP Business Case Summary • An explanation of the Ministry’s business need for the scheme in line with the aims of the business case supported by: ▫ ▫ ▫

A clear definition of the service objectives and the outputs – how the project aligns with the National and Sector Plan Results of an appraisal of alternative options/scenarios Indicative costs of the preferred scenario and an initial assessment of value for money and affordability

Contents of the PPP Business Case Summary • An explanation of the Ministry’s business need for the scheme in line with the aims of the business case supported by: ▫ ▫ ▫ ▫ ▫

A project management plan for project execution An analysis of the risks and benefits associated with the project scenarios The cost of the proposed solution Implementation strategy Review and approval

Contents (1) Strategic Alignment • Project should align with the business plan goals for the Ministry • Is the project critical to achieving high impact goals?

• Identify support for the PPP approach from all stakeholders

Contents (2) Service Objectives/Outputs • Objectives must be developed in terms of the outputs which the project is required to deliver • Objectives must be clear • Outputs must be able to be measured against performance related criteria

Contents (3) Appraising various options/scenarios • Find the solution that delivers best value for money • All sensible options should be considered • A short list of potential options/scenarios should be identified

Contents (3) Appraising various options/scenarios • Rank the options according to their costs and against a range of evaluation criteria • Include a ‘base case’ or a “Do Nothing/Do Minimum” option to ensure the impact of change can be properly assessed • Benefits and drawbacks of main options must be clearly identified

Contents (4) Indicative Costs of the Preferred Scenario

• • • • Consider the costs and compare the financial merits of different solutions Estimate cost implications of the short-listed options over the project life cycle Costs covered by an appraisal should include ▫ Capital Costs ▫ Running Costs ▫ A valuation of the key Project Risks Costs should be allocated to the project year in which they are expected to occur and discounted to a present value using a relevant discount rate

Contents (4) Indicative Costs of the Preferred Scenario

• The purpose of discounting is to bring future cash flows to a present day value • The selection of a discount rate for the NPV calculations needs care • The price level and treatment of costs should be consistent across all options

Contents (4) Preliminary Assessment of Value for Money • Value for money must be demonstrated to Ministers for any proposed expenditure • The preferred approach must be the most cost effective of the options available • The PPP procurement route must be shown to offer the opportunity for better value for money than the public sector comparator

Contents (4) Preliminary Assessment of Value for Money

• The calculation of an indicative PPP cost is typically done in one of two ways ▫ Identifying the likely level of annual charge, normally through discussion with a potential partner ▫ Converting the cost profile of the public sector comparator to take account of private sector assumptions

Contents (4) Affordability

• Unless the project is financially free standing, there will be a cost to the Ministry of a PPP project • An assessment of this cost must be made as early in the process as possible so that Ministers can approve the procurement

Contents (5) Project Management Plan • • The PPP Business Case should include a draft Project Management Plan The Project Management Plan should include ▫ Outline project timetable or programme ▫ A definition of the roles of the Project Team members including any advisors ▫ ▫ ▫ An estimate of resources/officer time required at each stage Plans, procedures and control processes Cost control and risk management processes

Contents (6) Risks and benefits • The appraisal of options and scenarios should include a thorough assessment of the allocation of risk • The extent of risk for each project option/scenario should be identified, clarified and, where feasible, quantified using a risk matrix

Contents (6) Treatment of Specific Risks • Costs which have already been incurred or are irrecoverably committed should be ignored in an appraisal • Wider economic benefits, such as tax flowbacks to the exchequer should not normally be counted as economic benefits or costs

Content (6) Risk Transfer • All projects are subject to uncertainty and risk • At the PPP Business Case stage three levels of risk must be addressed ▫ Strategic Risk ▫ ▫ Project Risk Sensitivity Analysis

Contents (6) Strategic Risk • Must be identified as part of the overall analysis of business need • This will enable high level threats to be assessed and responses developed

Contents (6) Project Risk • The Business Case should include a draft catalogue or register of identifiable risks associated with the project • Will be developed as the project proceeds to list all the identified project risks • Will contain assessments of likely impact and cost consequences and mitigating strategies

Contents (6) Project Risk

• Only broad assessments of likely impact of risks and consequences may be possible • Risk assessment needs to be sufficiently detailed to distinguish between options • Risk assessment should outline in broad terms the risk management strategies which will need to be developed

Contents (6) Project Risk

Impact of Risk ($)

• • • • High indicates that the event will have a significant impact on the project Medium indicates that the event will impact on the project Low indicates that the impact on the project will be relatively minor None indicates that the risk will not impact on the project

Contents (6) Project Risk

Probability of Risk (%)

• • • High indicates that the event is highly likely to occur Medium indicates that the event is likely to occur Low indicates that the event is not likely to occur

Contents (6) Project Risk

Expected Value ($) is the weighted average of dollar value impacts High ∑High Impact ($) x Probability (%) + P = low High ∑Medium Impact ($) x Probability (%) + P = low High ∑ Low Impact ($) x Low Probability (%) P = low = Expected Value ($)

Contents (6) Project Risk

Allocation

• • • Government – Government retains responsibility for managing the risk.

Private Sector – Risk is transferred to the Private Sector. They are responsible for managing the risk.

Shared – Government and Private Sector shares responsibility for managing the risk

Contents (6) - Project Risk

Risk

PPP

Risk 1 / Risk 1 Mitigation Risk 2 / Risk 2 Mitigation Risk 3 / Risk 3 Mitigation Etc.

Traditional

Risk 1 / Risk 1 Mitigation Risk 2 / Risk 2 Mitigation Risk 3 / Risk 3 Mitigation Etc.

High Impact ($) Medium Low High Probability (%) Medium Low Expected Value ($) Allocation

Contents (6) Sensitivity Analysis • The appraisal of options will be affected by uncertainty, for example projections of future demand for services • Such uncertainties should be dealt with through sensitivity analysis • I.E. identify main variables and uncertainties, assess potential range of feasible outcomes and build them into the evaluation of options

Contents (6) Sensitivity Analysis

• In this way the impact of uncertainty on the ranking of options may be tested • The best option will be the most flexible one which continues to deliver the outputs and gives value for money

Contents (6) Sensitivity Analysis

• Where small variations change the results of the appraisal, the risks are likely to be significant • Risk management action should be focused on the most sensitive factors and assumptions • Any significant differences in the capacity of the short-listed options to respond to risk should be brought out in the Business Case

Contents (6) Sensitivity Analysis

Description of assumption to be changed Assumption Change 1 (e.g. credit spread) Assumption change 2 ….

Etc.

Base Case VFM %VFM Assumption Change A (e.g. debt/equity ratio) VFM %VFM Assumption Change B (e.g. debt/equity ratio) VFM %VFM

Contents (6) Benefits

• It may also be relevant to introduce social costs and benefits • Wherever possible, benefits should be quantified, valued in monetary terms and included in the appraisal as a cost saving

Contents (6) Benefits

• Benefits that cannot be measured and valued may be included by using weighting and scoring techniques • The scoring and weighting exercise should be as objective as possible to eliminate bias

Contents (7) The costs of the proposed solution

Capital costs

• Capital costs include land and property, new construction, upgrading, adaptation or refurbishment of existing facilities and assets and major equipment purchases • Where land has to be acquired for a project option its market value/purchase price including fees should be included in the appraisal

Contents (7) The costs of the proposed solution Capital costs • The cost of land and property should be included in cash flows when purchase is expected • The costs of any new construction, including site preparation and infrastructure, should be included in the appraisal

Contents (7) The costs of the proposed solution Running costs • Running costs will be a significant cost component over the whole life of the project • The appraisal should show running cost elements to highlight the differences between options/scenarios and the proposed solution

Contents (7) Summary cost/benefit template

Summary of Quantitative Cost/Benefit Public Sector Comparator PPP Solution Capital Items Annual Items Leases Programme Building operations Cyclical items Receipts Residual value Total NPV over 25 years

Quantitative Analysis – Option 1 Capital Items: Annual Operating Items: Cyclical Items: Receipts: Residual Value: Net Cost (Revenue) Net Present Value (X%)

Contents (7) Template for each option

Year 0 Year 1 ………….

Year 25

Contents (6 & 7) Qualitative Analysis - Benefits

• Improved service quality • Increased innovation  more effective and/or efficient delivery of service • Additional social and/or economic benefit • Risk transfer as a benefit

Contents (6 & 7) Qualitative Analysis - Costs

• Loss of control or accountability • Changes associated with partnering • Loss of in-house expertise • Risk transfer as a liability

Contents (8) Implementation Strategy

• Major project phases • High-level work plan, deliverables and target dates for completion • Costs required to carry out the plan • Personnel (departments, roles, competencies) required

Contents (8) Implementation Strategy

• Outside resources required (advisers, consultants, etc) • Proposed implementation project structure • Implementation and monitoring of risk mitigation strategies • Post-implementation review approach

Contents (9) Review and Approval

• • • • • Who will review the business case?

What is the approval process and who is involved?

Business case should be signed and dated by the approving person(s) If applicable, approval conditions should be identified If not approved, reason(s) should be documented