Technical Note on the compilation of a Public Sector
Benchmark for a Public Private Partnership Project
January 2007
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The Public Sector Benchmark and the PPP Procurement Steps within the Capital
Appraisal Guidelines framework
Capital Appraisal Guidelines
1. Preliminary Appraisal
Key
Responsible party
2. NDFA assistance
Project
Assessment
Sponsoring Agency
/ Project Board
Approval
Sanctioning
Authority
Audit
Process Auditor /
Sponsoring Agency
3. Approval to Proceed if
Significant Staff Resources
Involved in Detailed Appraisal
4. Detailed Appraisal (including
PPP Procurement Assessment)
5. Approval to proceed and appoint
client advisors
6. Establish Project Management
Structure
PPP Guidelines
Design Brief
Costs of Project
Changes in Circumstances /
Timescale
8 Compile Output Specifications
and Public Sector Benchmark
(PSB)
Planning Stage
7. Accountable Officer appoints a
Process Auditor. PA reports
directly to the Accountable Officer.
Pre-Tender Review
Approval to Procure
Procurement
9. Procurement Process
10. Tender Evaluation (including
Value for Money Comparison)
Approval to Implement if Tenders
Exceed Appraisal Limits
11. Award of Contract
Contract Placement
Monitoring & Evaluation
13. Ongoing Contract Management
12. Post Project Review
1
Implementation stage
Review Using Tender Price
CONTENTS
SECTION I – POLICY OVERVIEW
1.1 PURPOSE OF THE PUBLIC SECTOR BENCHMARK (PSB) ...............................................................4
1.2 SCOPE OF THESE GUIDELINES .............................................................................................................5
1.3 DETAILED FUNCTIONS OF THE PUBLIC SECTOR BENCHMARK ...............................................5
1.4 PROPORTIONALITY IN COMPILING A PUBLIC SECTOR BENCHMARK ...................................5
1.5 ROLE OF THE NATIONAL DEVELOPMENT FINANCE AGENCY (NDFA) ....................................5
1.6 RESPONSIBILITY FOR THE PUBLIC SECTOR BENCHMARK ........................................................6
1.7 “PROJECT” IN THE CONTEXT OF A PUBLIC SECTOR BENCHMARK ........................................6
1.8 PUBLIC SECTOR BENCHMARK IN THE PPP PROCUREMENT PROCESS...................................7
1.8.1 ON RECEIPT OF APPROVAL IN PRINCIPLE ................................................................................................... 7
1.8.2 OUTPUT SPECIFICATIONS .......................................................................................................................... 7
1.8.3 COMPILATION OF THE PUBLIC SECTOR BENCHMARK ............................................................................... 8
1.9 FINALISING THE PUBLIC SECTOR BENCHMARK .............................................................................8
1.9.1 ITERATIVE PROCESS .................................................................................................................................. 8
1.9.2 TIMING OF FINALISATION: GENERAL RULE .............................................................................................. 8
1.9.3 EXCEPTION TO THE GENERAL RULE: APPROVED PROGRAMME OF SIMILAR PROJECTS ............................. 9
1.9.4 EXCEPTION TO THE GENERAL RULE: TIMING OF FINALISATION ............................................................ 10
1.9.5 SUBMISSION TO SANCTIONING AUTHORITY ............................................................................................. 10
1.9.6 HANDOVER OF A PPP PROJECT TO THE CENTRE OF EXPERTISE............................................................. 11
1.9.7 COMMUNICATION WITH THE MARKET AND THE PSB .............................................................................. 11
1.10 REVISIONS TO THE PUBLIC SECTOR BENCHMARK ....................................................................12
1.10.1 REVISING THE PSB: GENERAL RULE .................................................................................................... 12
1.10.2 REVISING THE PSB: EXCEPTIONS TO THE GENERAL RULE ................................................................... 12
1.11 PSB AND AFFORDABILITY ....................................................................................................................13
1.12 PSB AND VALUE FOR MONEY ..............................................................................................................14
1.13 THE IMPLICATIONS OF THE OUTCOME OF THE VALUE FOR MONEY COMPARISON .....15
1.13.1 ON EQUALLING OR BEATING THE PSB ................................................................................................... 15
1.13.2 FAILURE TO EQUAL OR BEAT THE PSB .................................................................................................. 15
1.14 TAXATION, RATES AND LEVIES ..........................................................................................................16
1.14.1 TAXATION .............................................................................................................................................. 16
1.14.2 RATES AND LEVIES ................................................................................................................................ 16
1.15 DISCLOSURE OF THE PUBLIC SECTOR BENCHMARK ...............................................................16
SECTION II – COMPILING THE PUBLIC SECTOR BENCHMARK
2. STANDARD COMPONENTS ........................................................................................................................18
2.1 INTRODUCTION .......................................................................................................................................... 18
2.2 CAPITAL COSTS ......................................................................................................................................... 18
2.3 OPERATING, MAINTENANCE AND LIFECYCLE COSTS .............................................................................. 19
2.4 THIRD PARTY INCOME .............................................................................................................................. 21
2.5 RISK............................................................................................................................................................ 21
2.5.1 Introduction ....................................................................................................................................... 21
2.5.2 Identification of Risks........................................................................................................................ 22
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2.5.3 Quantification of the Impact of Risks ............................................................................................... 22
2.5.4 Probability of Risks Materialising ..................................................................................................... 23
2.5.5 Calculating the Price of a Risk .......................................................................................................... 23
2.5.6 Timing of the effect of Risks.............................................................................................................. 23
2.5.7 Allocation of Risks ............................................................................................................................. 23
2.5.8 Risk Matrix ........................................................................................................................................ 25
2.5.9 Risk Database .................................................................................................................................... 26
3. PROJECT CASH FLOWS .............................................................................................................................26
3.1 OVERVIEW ................................................................................................................................................. 26
3.2. DISCOUNT RATE AND DISCOUNT FACTOR ............................................................................................... 27
3.3 BASE DATE ................................................................................................................................................. 27
3.4 CALCULATING A DISCOUNTED CASH FLOW (DCF) ................................................................................. 27
3.5 NET PRESENT VALUE ................................................................................................................................ 27
3.6 TREATMENT OF INFLATION IN CASH FLOWS ........................................................................................... 28
3.7 CONSISTENCY BETWEEN PSB AND BIDS RECEIVED IN CALCULATING DCFS .......................................... 28
3.8 METHODS FOR ANALYSING CASH FLOWS IN THE PSB ............................................................................ 28
3.8.1 Sensitivity Analysis ............................................................................................................................ 29
3.8.2 Reasonableness Test .......................................................................................................................... 29
3.8.3 Scenario Analysis .............................................................................................................................. 29
4. ESTIMATIONS / VALUATIONS USED IN THE PSB ...............................................................................30
4.1 ESTIMATIONS IN THE PSB ......................................................................................................................... 30
4.2 HYPOTHETICAL PUBLIC SECTOR COST .................................................................................................... 30
4.3 INTERNAL CONSULTATION ON VALUATIONS ............................................................................................. 31
4.4 ENGAGEMENT OF EXTERNAL EXPERT ADVISORS...................................................................................... 31
5. ASSUMPTIONS MADE IN COMPILING THE PSB ..................................................................................31
6. STANDARD PRESENTATION OF THE PSB DOCUMENT ....................................................................32
6.1 SUMMARY OF HIGH LEVEL COSTS ............................................................................................................. 32
6.2 SUMMARY OF COSTS OF EACH MATERIAL CONSTITUENT ELEMENT ........................................................ 33
7. OTHER KEY ASPECTS OF THE COMPILATION OF THE PSB ..........................................................33
7.1 TERM OF CONTRACT ................................................................................................................................. 33
7.2 ACCRUED LIABILITIES............................................................................................................................... 34
A P P E N D I C E S .............................................................................................................................................35
APPENDIX I: ROLE OF THE NATIONAL DEVELOPMENT FINANCE AGENCY IN THE COMPILATION OF THE
PUBLIC SECTOR BENCHMARK ........................................................................................................................ 35
APPENDIX II: CALCULATING A DISCOUNTED CASH FLOW ........................................................................... 38
APPENDIX III: EXAMPLE OF A DISCOUNTED CASH FLOW FOR A PUBLIC SECTOR....................................... 40
BENCHMARK .................................................................................................................................................... 40
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SECTION I – POLICY OVERVIEW
1.1 Purpose of the Public Sector Benchmark (PSB)
The PSB is a key tool in the PPP procurement process. It is presented as a single monetary
value that represents the full estimated cost, taking income and risks into account, to the
Sponsoring Agency of delivering the project using “traditional” public sector procurement1.
This single monetary value is underpinned by a financial model2 and other relevant
supporting documentation. The PSB must comprehensively address all costs, income and
risks that the private sector will be invited to tender for in the PPP contract. The compilation
of the PSB will build on the Detailed Appraisal carried out under the Capital Appraisal
Guidelines3.
The PSB is not a prediction of the actual outturn cost of the project.
For this reason,
Sensitivity and Scenario Analyses, as outlined in section 3.8, are important aspects of the
compilation of the PSB. The valuations used in the PSB should represent the best estimate
available, at the time of compilation, of all of the costs, income and risks associated with a
given PPP project.
The ultimate purpose of the PSB is to act as a reference throughout the PPP procurement
process. It will also play an important role in the assessment of whether the highest ranking
bid received4 has the potential to offer value for money.
“Traditional” public sector procurement is a realistic public sector alternative to procuring a project using a
PPP arrangement, employing the normal procurement method used in the relevant sector.
2
The calculation of a PSB is a complicated exercise that is carried out with the assistance of a series of interrelated spreadsheets amalgamated into one “financial model”.
3
“Guidelines on the Appraisal and Management of Capital Expenditure Proposals in the Public Sector”,
Department of Finance, February 2005, referred to throughout this document as the Capital Appraisal
Guidelines.
4
The “highest ranking bid” is the bid that scores highest when evaluated against the published evaluation
criteria.
1
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1.2 Scope of these Guidelines
These guidelines apply to all PPP projects, regardless of whether they are to be funded by
direct Exchequer funding, by deferred annual payments from the Exchequer (in respect of
projects funded by the private sector and/or the National Development Finance Agency
(NDFA)), by user charges, by local authority own resources, or by any other means.
1.3 Detailed Functions of the Public Sector Benchmark
(a)
To provide a structured approach to the costing of a PPP project at an early stage, before
invitations to tender are issued.
(b)
To re-assess5, at an early stage, prior to the initiation of the tendering process, whether
the project and the procurement method chosen has the potential to offer value for
money.
(c)
To inform any discussions and negotiations, as appropriate, held with private sector
bidders, particularly through the prior identification, quantification and initial allocation
of the risks associated with the project in the PSB.
(NB: Under current policy, the
PSB itself is not disclosed to bidders – see section 1.15.)
(d)
To be used as a quantitative benchmark against which the highest ranking bid can be
evaluated in the formal Value for Money Comparison6 (see section 1.13).
1.4 Proportionality in compiling a Public Sector Benchmark
The investment of time and resources in developing a PSB should be proportionate to the
monetary value of the project. However, care must be taken to ensure that the work done on
the PSB is not so cursory as to diminish the credibility of the exercise.
1.5 Role of the National Development Finance Agency (NDFA)
The advice of the NDFA must be sought on all financial, risk and insurance aspects of
compiling a PSB for: (i) major PPP projects and grouped PPP projects having a capital cost in
excess of the limit set by the Department of Finance (currently €20 million, but under
5
When PPP procurement is being considered, a prior assessment of whether the project and the procurement
method has the potential to offer value for money is made as part of the PPP Procurement Assessment (carried
out at Detailed Appraisal stage and before the PSB is compiled).
6
The Value for Money Comparison exercise is carried out after the highest ranking bid has been identified. The
purpose of the exercise is the determine whether or not the highest ranking bid represents a “value for money”
outcome by reference to the overall impact on the Exchequer of the bid as compared to the impact of the PSB.
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review); or (ii) PPP projects and grouped PPP projects having a capital cost less than this
limit, where the Sponsoring Agency is of the opinion that it does not have sufficient internal
expertise to compile the PSB; or (iii) PPP projects and grouped PPP projects that are being
procured by the Centre of Expertise on behalf of the Sponsoring Agency7.
As set out in circular letter S430/10/03, where a Department, State authority or Agency
employed financial/risk/insurance advisors to provide advice for an individual project or a
programme of projects prior to 14th February 2003, these arrangements will be honoured.
References to the role of the NDFA throughout these Guidelines should be read in this
context.
NB: Notwithstanding what has been stated earlier in this section, the NDFA must always
be consulted regarding the appropriate discount rate (see section 3.2) and inflation
rate(s) (see section 3.6) to use in compiling each PSB.
1.6 Responsibility for the Public Sector Benchmark
Overall responsibility for developing the PSB lies with the Sponsoring Agency. The NDFA
will be responsible for compiling the structure and content of the financial model
underpinning the PSB and for entering data into this model. While the NDFA will provide
advice on the appropriate values to use in the model, responsibility for the actual values used
remains with the Sponsoring Agency.
1.7 “Project” in the context of a Public Sector Benchmark
There may be elements of a project that are procured independently of the PPP arrangement.
For example, the Department of Education and Science may purchase a site for a school,
secure outline planning permission, etc., and then invite the private sector to tender to design,
build, maintain and finance a school on that site.
The PSB does not include any costs / incomes / risks that will be retained by the Sponsoring
Agency itself, irrespective of the procurement method used, and which are not part of the PPP
7
Irrespective of the capital value of the project, when the Centre of Expertise in the NDFA is procuring a project
on behalf of the Sponsoring Agency, the Sponsoring Agency must seek the technical assistance of the NDFA to
help establish project budgets and compile the PSB on its behalf.
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contract. In this way, the PSB can serve as a direct like-with-like comparator against the
highest ranking bid received. (However, a record will be kept of all aspects of the overall
project retained by the Sponsoring Agency and this will be updated, as appropriate,
throughout the PPP procurement process.)
In the example above, the PSB would include the cost to the Department of Education and
Science of designing, building, maintaining and financing the school using traditional
procurement but would not include the costs associated with acquiring the site and securing
outline planning permission. (These costs would be included in the overall project budget.)
1.8 Public Sector Benchmark in the PPP Procurement Process8
The Capital Appraisal Guidelines set out the major stages that must be undertaken in the
appraisal and procurement of all public infrastructure projects. However, some of the steps
followed in PPP procurement, following appraisal of the project and approval in principle (i.e.
after completion of Stage 1 of the Capital Appraisal Guidelines) differ from those set out in
Stage 2 Planning Stage of the Capital Appraisal Guidelines. One such step is the requirement
that a PSB be compiled for all PPP projects.
1.8.1 On receipt of approval in principle
On completion of Stage 1 of the Capital Appraisal Guidelines and having received approval
in principle from the Sanctioning Authority to proceed with the project using a PPP
arrangement, the Sponsoring Agency establishes an appropriate project management structure
and a Process Auditor9 is appointed. The Sponsoring Agency will then draw up detailed
Output Specifications for the project.
1.8.2 Output Specifications
Output specifications focus on what the Sponsoring Agency seeks to achieve in
undertaking a PPP project rather than on the specifics of how the project is to be
More detailed information on the PPP Procurement Process is set out in the Department of Finance’s
Guidelines for the Provision of Infrastructure and Capital Investments through Public Private Partnerships,
available on www.ppp.gov.ie – referred to throughout these guidelines as the Main PPP Guidelines
9
For more information on the Process Auditor’s role in a PPP project see “Guidelines for the Reporting
Arrangements, Role and Function of a Process Auditor in a Public Private Partnership project” available on
www.ppp.gov.ie
8
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delivered. Output specifications are used in PPP projects to give the private sector a range of
flexibility in how to deliver the required outputs. They are similar to the “Project Brief”
envisaged for traditionally procured projects in the Capital Appraisal Guidelines, but the
focus is on outputs rather than inputs. For example, an output specification might state that
the windows in a building should meet current building regulations and keep the window
opening wind- and weather-tight. However, an input specification might detail how many
windows there are to be, where they are to be situated, what the dimensions are to be, how
they are to be glazed, what materials are to be used in window frames, etc.
When drawing up output specifications, due regard must be had to sectoral norms and public
health and safety requirements. The Sponsoring Agency should not assume that a different
(i.e. higher or lower) level of specification will be achieved through the use of PPP
procurement. While end users may be consulted on the specifications, responsibility for the
determination of specifications and standards rests with the Sponsoring Agency.
1.8.3 Compilation of the Public Sector Benchmark
Once the output specifications for a project have been completed, the PSB can be compiled; it
is derived from the outputs specified. The Sponsoring Agency decides how it would achieve
what has been requested of the private sector if it used traditional procurement approaches
instead of a PPP arrangement, i.e. it identifies the “inputs” necessary to deliver the project
traditionally. These inputs are then costed and included in the calculation of the PSB.
1.9 Finalising the Public Sector Benchmark
1.9.1 Iterative Process
Finalising the output specifications and the associated PSB will commonly involve an iterative
process, as the costing associated with the first draft of the output specifications may prove to
be higher than the Sponsoring Agency had originally budgeted for. This may require a
downward assessment of requirements (output specifications) and a consequential reduction in
the estimated value of the PSB.
1.9.2 Timing of Finalisation: General Rule
As a general rule, the output specifications and associated PSB should be finalised, agreed and
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up to date before any tender invitations are issued. This is important in order to ensure that,
when costed, the final output specifications being issued with the tender invitations can be
delivered within the available budget for the project. Output specifications should not be
issued to the tenderers until they have been finalised, otherwise tenderers could submit bids
based on inaccurate or out of date output specifications. Significantly changing the output
specifications after tenderers have started preparing their bids can result in additional costs for
all tenderers and may infringe EU procurement procedures.
1.9.3 Exception to the General Rule: Approved programme of similar projects
In the case of an approved programme of similar projects, involving similar output
specifications, it may be agreed with the Sanctioning Authority and/or the Department of
Finance that the Sponsoring Agency may commence the early stages of the tendering process
for the second and subsequent projects in the programme in parallel with the compilation of
each project-specific PSB. This approach is workable in these circumstances because, while a
project-specific PSB will be required for each individual project in the programme, the
projects will be similar and therefore the resultant PSBs should also be similar. In addition,
experience gained in compiling and finalising the PSB for the first project should speed up the
process of compiling subsequent PSBs.
Parallel processes for the second and subsequent projects in a programme are only permitted
after the tender responses for the initial project have been received, and only if the costings
used in these tenders justify the use of the initial PSB as a base. If the difference between the
costings used by the public and the private sector calls into question the use of the initial PSB
as a base, the tendering process for the second and subsequent projects in the programme
should not commence until the specific PSB for the second project has been finalised and
agreed.
In other words, parallel processes cannot be implemented until the Sponsoring
Agency is satisfied that an appropriate “base PSB” has been identified.
In any event, the PSB for each project in the programme must be finalised before the
tenders for each project are received.
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1.9.4 Exception to the General Rule: Timing of Finalisation
Notwithstanding the above, there may be exceptional circumstances where some
information10 critical to the finalisation of the PSB may not be available before the issue of
tender invitations, with the result that it is not possible to produce a final, robust PSB at this
stage, in accordance with normal practice. In these exceptional circumstances, subject to the
Accountable Officer being satisfied that there are clear and substantial grounds to depart from
the general rule, the PSB may be finalised, agreed and supplied to the Sanctioning
Authority, after invitations to tender are issued but prior to receipt of the tenders. The
agreement of the Accountable Officer to depart from the general rule in this regard, and the
rationale for so doing, must be recorded in writing and maintained on file. This is imperative
because the key test of value for money in PPP procurement is the comparison of highest
ranking bid received with the PSB and this comparison should be carried out in the most
objective manner possible.
1.9.5 Submission to Sanctioning Authority
The finalisation of the output specifications and associated PSB for PPP projects will be a
matter for the Sponsoring Agency, within the approval / delegated sanction granted to them
by the Sanctioning Authority. Provided that the terms of the approval / delegated sanction are
not breached or are not likely to be breached, it will not be necessary to seek specific approval
from the Sanctioning Authority for the detailed output specifications or the PSB for individual
projects. However, before any tender invitations are issued (subject to the exceptions set out
in section 1.9.3 and section 1.9.4 above), the Sponsoring Agency should submit the agreed
PSB to the Sanctioning Authority for information. The Sponsoring Agency’s submission to
the Sanctioning Authority should be accompanied by: (a) the PSB documentation; and (b) a
statement from the Sponsoring Agency endorsing the PSB and confirming that it has
been compiled in compliance with these Guidelines.
If the terms of the Sponsoring Agency’s approval / delegated sanction are breached or are
likely to be breached, the Sponsoring Agency will have to seek the specific approval of the
relevant Sanctioning Authority for the PSB. The submission seeking sanction should be
accompanied by (a) and (b) above.
10
For example, archaeological information for projects such as roads that cover a large geographical area.
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If the PSB is not wholly consistent with the advice of the NDFA, the NDFA should supply a
statement to the Sanctioning Authority outlining the aspects of its advice that have not been
followed and the effect this has had on the value of the PSB11.
1.9.6 Handover of a PPP Project to the Centre of Expertise
When the Centre of Expertise is procuring a PPP project on behalf of the Sponsoring Agency,
the project should not be handed over to the Centre of Expertise until the PSB has been
finalised and agreed.
If the exceptions regarding an approved programme of similar projects (section 1.9.3) or the
timing of finalisation of the PSB (section 1.9.4) apply, the PSB should be progressed as far as
possible prior to handover of the project to the Centre of Expertise. In such circumstances,
the Sponsoring Agency should ensure that appropriate liaison procedures are in place with
regard to the finalisation of the PSB.
1.9.7 Communication with the Market and the PSB
The PSB should be finalised before any communications with the private sector specific to a
published invitation to tender are commenced12 (referred to in section 2.8.2 of the Main PPP
Guidelines as “tender-related communications”).
When using the Competitive Dialogue procedure, in accordance with the procedures of the
relevant Directives, the Sponsoring Agency can open a dialogue with candidates following
publication of a contract notice. Given the nature of the projects that this procedure applies to
and the manner in which the procedure is implemented, it would often not be possible to fully
finalise a PSB before the Competitive Dialogue is commenced with the private sector. While
the PSB should be advanced as far as possible pending the finalisation of dialogue with the
candidates, it should be finalised following determination of the final requirements and before
candidates are invited to submit their final tenders.
This applies when the NDFA is acting as financial advisor for the project – see section 1.5 above.
Under EU procurement law, the nature and level of communication permissible with bidders / potential
bidders will be determined by the procurement procedure chosen.
11
12
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Legal advice should always be sought on the appropriate level of communication allowable
with the market in each instance.
Current policy requires that neither the PSB nor any element of it is to be disclosed at any
point – see section 1.15 below. Care should be taken to ensure that this policy is adhered to at
all times, particularly when discussing tender-related issues with the market.
1.10 Revisions to the Public Sector Benchmark
1.10.1 Revising the PSB: General Rule
As a general rule, no changes should be made to the output specifications / PSB once they
have been finalised and agreed.
1.10.2 Revising the PSB: Exceptions to the General Rule
Having been finalised and agreed, it may emerge that changes need to be made to some of the
costings underpinning the PSB in the light of new information. Where factors external to the
Sponsoring Agency (e.g., An Bord Pleanála, a Railway Order) give rise to changes to project
specifications that have a material impact on that project, a consequent change to the PSB
may be permitted. However, if any such changes are contemplated, the cost implications and
effects on the timing of the project have to be fully appraised before being made. The Centre
of Expertise should not make any changes to an agreed PSB without the express written
permission of the Sponsoring Agency. In the interests of transparency and objectivity, the
PSB / output specifications must be finalised and agreed before tenders are received and
no changes made thereafter.
Material changes to the PSB may also require a review of both the original cost-benefit
analysis and the approval to proceed with the project, as changes in the original specifications
may affect the project’s viability. The Sanctioning Authority must be consulted if these
changes would result in a departure from the conditions of approval / delegated sanction.
If, in the exceptional circumstances outlined above, changes to the finalised and agreed output
specifications / PSB are unavoidable after the tender invitations have issued, a detailed audit
trail of any such changes must be maintained by the Sponsoring Agency / Centre of Expertise,
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as appropriate, together with a clear rationale for each change required. This audit trail should
be available to the Sanctioning Authority. If any such changes are made, the modifications in
the output specifications must be communicated to the participating tenderers without delay.
The Sponsoring Agency / Centre of Expertise should ensure (seeking legal advice, as
appropriate) that it does not modify output specifications so significantly that EU procurement
procedures are infringed.
The final agreed PSB should never be amended. The PSB is a tool in the PPP procurement
process; it is not an end in itself. The procedure set out in section 1.13.2 below can be used to
address circumstances where, following the finalisation of the PSB, material and significant
issues come to the attention of the Sponsoring Agency that need to be taken into account in
the like-with-like comparison of the PSB with the highest ranking bid (i.e. the Value for
Money Comparison).
1.11 PSB and Affordability
As stated in the Main PPP Guidelines “(a)t project level, the issue of affordability is
addressed in the context of the overall capital envelope amount available to the Sponsoring
Agency, and by the setting of a project budget and the compilation of a PSB.13” The
guidelines also require that “…when approving a PPP project the Sanctioning Authority
should convey its approval subject to an overall project budget, to include both PPP and nonPPP elements of the project…14.”
On completion of the PSB, the Sponsoring Agency must confirm to the Sanctioning Authority
that the costs of the project, including both PPP and non-PPP elements of the project, are still
within the overall project budget sanctioned by the Sanctioning Authority and that the capital
cost of the project is still within the limits of the Sponsoring Agency’s capital envelope (both
the Exchequer allocation and the PPP/NDFA target).
13
14
See Main PPP Guidelines, Section 1.13, page 12
See Main PPP Guidelines, Section 2.4, page 20
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1.12 PSB and Value for Money
Securing value for money is an overarching concern throughout the PPP procurement process.
Four formal value for money tests are carried out at various stages of the PPP process – at
PPP Procurement Assessment, on completion of the PSB, at Tender Evaluation stage and
finally, at Financial Close. The PSB plays a major role in three of these four tests, as
illustrated in Figure 1 below:
Figure 1: Role of the PSB in assessing Value for Money
1. Preliminary Appraisal
2. NDFA Assistance
3. Approval to Proceed
(if significant staff resources
involved in Detailed Appraisal)
VALUE FOR
MONEY TEST
Pre- PSB
4. Detailed Appraisal (including
PPP Procurement Assessment)
5. Approval to proceed and
appoint client advisors
6. Establish Project Management
Structure
7. Accountable Officer appoints a
Process Auditor. PA reports
directly to the Accountable
Officer.
VALUE FOR
MONEY TEST
In light of the
quantifications in the
PSB should the
project still proceed
using a PPP
arrangement?
8 Compile Output Specifications
and Public Sector Benchmark
(PSB)
VALUE FOR MONEY
TEST
The “Value for Money
Comparison” - Does the
highest ranking bid
compare favourably with
the PSB from a
quantitative perspective
in terms of the impact
each would have on the
Exchequer?
9. Procurement Process
10. Tender Evaluation
(including Value for Money
Comparison)
11. Award of Contract
12. Post Project Review
13. Ongoing Contract
Management
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VALUE FOR MONEY
TEST
What impact has changes
in the following on the
outcome of the
comparison of the highest
ranking bid and the PSB:
interest rates, the
discount rate and/or the
contract terms, (as
appropriate)?
A technical note on Value for Money in the PPP Procurement Process is to be issued by the
Central PPP Unit.
1.13 The implications of the outcome of the Value for Money Comparison
In the Value for Money Comparison exercise the highest ranking bid is compared to the PSB
to assess, from a quantitative perspective, whether a value for money outcome could be
achieved by awarding the tender to the highest ranking bidder. The steps to be taken when
the outcome of this quantitative exercise is known are set out below:
1.13.1 On equalling or beating the PSB
If the highest ranking bid equals or beats the PSB in the Value for Money Comparison
exercise and the following conditions are fulfilled:

the terms of the Sponsoring Agency’s delegated sanction / approval are adhered to;
and

the capital cost of the project is consistent with the available Capital Envelope
allocation / target of the Sponsoring Agency,
the Sponsoring Agency / Centre of Expertise, as appropriate, may then move to award the
contract to the tenderer who submitted the highest ranking bid.
1.13.2 Failure to equal or beat the PSB
If the highest ranking bid fails to equal or beat the PSB, the Sponsoring Agency should
examine why. The general principle is that the matter should be referred to the Sanctioning
Authority and the appropriate Minister / the Government by the Sponsoring Agency. The
Sanctioning Authority / appropriate Minister / Government should be advised of the factors
leading to the failure of the highest ranking bid to equal or beat the PSB, including anything
that may have come to light after the PSB was finalised that should be taken into account in
the like-with-like comparison of the PSB with the highest ranking bid.
If this issue arises when the Centre of Expertise is procuring a project on behalf of the
Sponsoring Agency, the Board of the NDFA should examine why the PSB has not been
equalled or beaten by the highest ranking bid received. In addition to advising the Sponsoring
Agency, the NDFA should report the matter to the Minister for Finance. The Sponsoring
- 15 -
Minister will refer the matter to Government for decision, unless the Minister for Finance
agrees that this is not necessary or appropriate. The Minister for Finance would, in due
course, convey the decision reached by the relevant Minister or the Government, as
appropriate, to the Board of the NDFA.
1.14 Taxation, Rates and Levies
1.14.1 Taxation
The PSB represents the full cost to the Sponsoring Agency, over the proposed contract term,
of delivering the project by traditional means, including all of the taxation costs that the
Sponsoring Agency would be liable for under traditional procurement. The full cost of the
project to the Sponsoring Agency must be evaluated for affordability purposes, in the context
of the overall budget limit approved for the project. However, in the Value for Money
Comparison the evaluation of the highest ranking bid against the PSB will be done on a VATexclusive basis and therefore the VAT costs should be identified separately in the PSB, as
illustrated in Table 5 on page 31. For further information on the treatment of VAT in PPP
project please see Central Guidance Note No. 5 – The Treatment of VAT in PPP Projects15.
1.14.2 Rates and Levies
If the Sponsoring Agency would be obliged to pay rates and/or local levies if it delivered the
project using traditional procurement, these should be included in the Public Sector
Benchmark.
1.15 Disclosure of the Public Sector Benchmark
Current policy is that the PSB, or any elements thereof, is / are not made public during the
tendering process on the basis that revealing the amount that the State is willing to pay may
give tenderers an opportunity to increase their asking price above what they might otherwise
seek. Where the public sector is likely to procure a similar project in the same or other
sectors in the foreseeable future, the PSB (or any elements thereof) should not be released,
even after the completion of the tendering process.
15
Available on www.ppp.gov.ie
- 16 -
In the case of a once-off project, where it is not likely that there will be any similar
procurement in the future, the release of the PSB after the contract has been signed could be
considered, subject to the non-disclosure of risk valuations (see below). However, before
releasing any of the PSB documentation, the Sponsoring Agency must be satisfied that none
of the information being released could diminish the potential to secure value for money bids
when procuring future projects.
If the Sponsoring Agency is satisfied that it is in order to disclose the PSB, it must advise the
Sanctioning Authority of its intention to do so and of the basis for disclosure.
In no circumstances should the individual risk valuations set out in a PSB be disclosed
and no information should be released in a format that would permit the identification of risk
values. To do so would provide information on how the public sector values risk, which
would prejudice the ability of the public sector to secure value for money in current and future
projects through risk transfer. Similarly, it is important to ensure that information relating
to the demand projections used in the development of a PSB for a Concession project
(e.g., the Sponsoring Agency’s traffic forecasts for a toll road) is not disclosed.
Disclosure of any aspect of the PSB could have an adverse effect on the conduct by the
Sponsoring Agency of PPP contract negotiations, particularly as information contained in the
PSB could disclose positions taken in past or current negotiations and, indeed, positions that
may be taken in future negotiations. Disclosure of the PSB, or elements thereof, may also
give rise to an unwarranted loss to the Sponsoring Agency and/or an unwarranted gain to the
private sector as access may be given to financial, commercial, industrial, scientific or
technical information that belongs to the Sponsoring Agency.
The PSB, like other confidential and similar information relating to projects, is of course
available to the Comptroller and Auditor General for inspection in connection with any
reports his / her office may be progressing.
- 17 -
SECTION II – COMPILING THE PUBLIC SECTOR BENCHMARK
2. STANDARD COMPONENTS
2.1 Introduction
The PSB must comprehensively address all costs, income and risks that the private sector will
be invited to tender for in the PPP contract. These must be presented as estimated annual
values arising over the whole lifetime of the project. These values will then be discounted
back to a present day value16.
Depending on the type of PPP arrangement17 being pursued, some or all of the following
components will be included in each PSB: (i) Capital Costs, (ii) Operating, Maintenance and /
or Lifecycle Costs, (iv) Third Party Income and (v) Risks.
Table 1: Standard Components of the PSB for a DBFOM project
Capital Costs
Operating, Maintenance and / or Lifecycle
Costs
Third Party Income
Transferred Risk
(including the transferred portion of Shared Risks)
2.2 Capital Costs
Capital costs are the upfront costs of providing a capital asset for the project. This can mean
either the costs associated with the construction of the capital asset or the cost of the
conversion/refurbishment of an existing capital asset to meet the output specification. If the
PPP arrangement includes the transfer of a capital asset to the private sector partner as part of
16
17
See section 3 – Project Cash Flows.
For example, Design Build and Maintain (DBM), Design Build Finance Operate and Maintain (DBFOM), etc.
- 18 -
the PPP deal and the asset would have been disposed of if the project were procured using a
traditional procurement arrangement, the PSB should take account of the capital receipt that
would be generated by the disposal of the asset. If the capital asset (being transferred under
the PPP deal) would not have been disposed of under traditional procurement, a capital
receipt should not be included in the PSB. However, the Sponsoring Agency should seek the
advice of the NDFA on how to address the inclusion of the capital asset in the PPP deal in the
Value for Money Comparison, having regard to the relevant policy implications.
An
indicative list of capital costs is set out in the following table. This is not an exhaustive list;
there may be other project-specific capital costs that should be included in the PSB.
Table 2: Examples of Capital Costs







Design Costs
VAT
Cost of Raw Materials
Off Site Works
Professional Fees (e.g., legal,
financial, surveyor)
Equipment
Furniture, Fixtures and Fittings





Stamp Duty
Building/Construction Costs
(including imputed rolled up
interest18)
External Works/Site Services Costs
Site Conditions
Service Connections
2.3 Operating, Maintenance and Lifecycle Costs
Operating, maintenance and lifecycle costs are the costs that are associated with the daily
running of the capital asset. They relate directly to the operation, maintenance and upkeep of
the asset and the provision of related services to meet the output specifications over the
contract period.
Operating costs are those costs that would be associated with the operation of the asset /
service to the standard set out in the output specification. Similarly, maintenance costs are
those costs associated with maintaining the asset to this required standard. Lifecycle costs are
those costs arising over the proposed contract term in relation to replacing/refurbishing a
18
This is a technical adjustment required to ensure that cash flows are discounted correctly. The National
Development Finance Agency (NDFA), as financial advisors, will advise in this regard.
- 19 -
capital asset to enable it to continuously meet the standard set out in the output specification19.
A Department’s Asset Register may be a source of information on lifecycle costs.
Historically, PPP contracts that were classified as Design, Build, Operate and Finance
(DBOF) also included a requirement that the asset be maintained. Sometimes a decision is
taken to segregate the Operate and Maintain elements in projects and the private sector may
be requested to Design, Build, Maintain and Finance (DBMF) an asset while the public sector
retains responsibility for some or all operations.
In many cases, PPP procurement will result in a more structured approach to operating,
maintaining and replacing physical assets than might have prevailed under traditional
procurement. Historical data on such costs may not be readily available within Departments.
The Sponsoring Agency should address any such information deficit by establishing realistic
norms, based on best practice, and by costing these appropriately. The assumptions used in
establishing and costing these norms should be clearly specified in the PSB documentation.
In most instances, this information is actually available in the Sponsoring Agency but will
need to be collated in a structured way. Each sector should develop and maintain a cost
database that can be used in compiling PSBs.
Some examples of Operating, Maintenance
and Lifecycle Costs are set out in the following table (again, this is not an exhaustive list).
Table 3: Examples of Operating, Maintenance and Lifecycle Costs







Cost of consumables
Utility and energy management
Waste Management
Security
General overheads
Rates
Asset refurbishment
19






Facilities Management
Catering
Administration
Cleaning
Insurance
Relevant Staffing costs
IT-related lifecycle costs can be particularly difficult to forecast due to the rate at which advances are made in
technology over the lifetime of a typical PPP project. For this reason, IT is not normally part of a long term PPP
contract. Where IT is likely to be an integral and material part of the project, it may be necessary to consult
specialist advisors on the appropriate IT costings to use.
- 20 -
2.4 Third Party Income
Third Party Income is income that can be generated by charging third parties for the use of an
asset / service. A revenue stream from third party income can reduce the overall cost of
funding a project and the potential to generate such income should always be considered, on a
realistic basis.
The level of income realisable will differ depending on the type of project
being pursued. For example, a road project could be substantially funded by tolls, whereas an
accommodation project may have limited opportunities to generate income (e.g., from letting
rooms to third parties, etc). If it is included in the PSB the estimate of realisable third party
income must be based on reasonable analysis and assumptions and a proportionate amount of
time should be expended on assessing it.
Third party income is costed by considering the price that users would be charged and
multiplying this by the projected number of users (quantity). Both price and quantity should
be estimated using industry norms, based on the current and/or historic market. All costs
related to generating, collecting and managing third party income, should also be included in
the PSB.
As a general rule, third party income should only be included in the PSB where there is a
clear policy that third parties can be charged for using a public sector asset or service. There
should also be a reasonable expectation that third parties would be willing to pay to use the
proposed asset/service and that the relevant authority would consent to third parties using the
proposed asset/service and being charged to do so. The basis for including third party income
should be stated in the PSB document.
2.5 Risk
2.5.1 Introduction
Risk is inherent in the management of all projects and relates to the possibility that more than
one outcome could occur at any given point and that these outcomes could impact, either
positively or negatively, on the project in terms of overall cost, time or quality. In compiling
the PSB, risk analysis is undertaken in order to identify and quantify risks and to consider
how best to allocate them between the public and the private sector. The NDFA must be
consulted regarding all aspects of risk analysis.
- 21 -
All risks associated with a given project should be identified and priced for the purposes of
assessing affordability, i.e. they should be taken into account in the overall project budget.
However, only those risks that will be transferred to the private sector are included in the
PSB. Generally, if the price that the Sponsoring Agency assigns to a risk (see section 2.5.5) is
greater than the price that the Sponsoring Agency would pay to transfer that risk to a private
sector partner or an insurer, that risk should be included in the PSB (i.e. the Sponsoring
Agency should seek to transfer it). All risks identified should be presented as separate cash
flow items (see section 3 below) in nominal terms, i.e., the impact of inflation of the risk
valuations must be considered.
The time and resources dedicated to analysing risks should be proportionate to the impact that
they could have on the cost of a project if they materialised.
2.5.2 Identification of Risks
The first step in risk analysis is to identify of all of the risks inherent in the project. The
knowledge and expertise of the Sponsoring Agency are key in this aspect of the process. A
risk workshop provides a structured forum for identifying the relevant project risks. The
NDFA will act as facilitators for risk workshops. Attendees should include those responsible
for the management of the project, individuals directly involved in the project, and other
internal experts (with previous experience in the delivery, costing, operation and maintenance
of a similar project).
A wider workshop, attended by external experts (e.g., engineers,
insurance professionals, legal advisors, risk experts, etc.), may be necessary in certain
circumstances e.g., for the identification of risks inherent in novel or particularly complex
projects.
2.5.3 Quantification of the Impact of Risks
Once all of the specific risks associated with the project are identified, they are separately
assessed in order to determine the impact/consequences, in monetary terms, for the project of
the materialisation of each risk, i.e. the risks are quantified.
- 22 -
2.5.4 Probability of Risks Materialising
The Sponsoring Agency then considers the probability / likelihood of each individual risk
materialising. Probabilities are expressed as percentages (%): if it is very probable that a risk
will materialise, the risk might have a probability of, say, 95%; if it would be very unlikely
that a risk will materialise it might have a probability of, say, 3%.
2.5.5 Calculating the Price of a Risk
Once the impact of each risk has been quantified and an associated probability has been
determined, the price of each risk can be calculated. This is done by multiplying the cost of
the impact of the risk by the probability of the risk materialising, as illustrated below.
Table 4: Calculating the Price of Risks
Price of Risk = Impact (€) x Probability (%)
For example, if the Sponsoring Agency would have to pay €300,000 to temporarily
accommodate students if the opening of a school is delayed, and the probability of such a
delay occurring is 5%, the Sponsoring Agency’s price for the risk of delay is:
€300,000 x 5% = €15,000
2.5.6 Timing of the effect of Risks
As the price of each risk is included as a cash flow in the PSB, the timing of when risks are
likely to materialise must be considered. For example, construction risks impact on project
costs at the early stages of the project, whereas operating risks could impact across the whole
operating period.
2.5.7 Allocation of Risks
Each of the risks identified and priced should be categorised into one of three categories:
retained, transferable, or shared. This is done with a view to allocating responsibility for risks
in the ultimate PPP deal to the party best placed to manage them.
Retained risks are those risks for which the best value for money option is for the Sponsoring
Agency to retain responsibility for the risk rather than pay for it to be passed to a private
- 23 -
sector partner. Because retained risks will be the responsibility of the Sponsoring Agency
regardless of the procurement method chosen, they are not included in the tender for the PPP
aspect of the project and consequently, are not included in the PSB. They are however, part
of the overall cost of the project (i.e. the total cost of the PPP and non-PPP aspects) and will
have an impact on the setting of the overall project budget that is agreed with the Sanctioning
Authority.
Transferable risks are those risks for which the private sector will be asked to tender. These
risks are included in the PSB so that a like with like comparison can be made between the
highest ranking bid and the PSB. In PPP projects, risk transfer is one of the key means of
securing value for money.
Shared risks are those risks for which responsibility is shared between the Sponsoring Agency
and the private sector partner; these risks are partly-retained and partly-transferred. For
example, the Sponsoring Agency may retain responsibility for 80% of a risk and transfer 20%
to the private sector partner. The value for a shared risk that should be included in the PSB is
the proportion that will be transferred to the private sector partner.
In allocating risks, the Sponsoring Agency should work towards the optimum level of risk
transfer rather than the maximum level. This is because the private sector partner will charge
for each risk that it assumes responsibility for and there is a point at which risk transfer ceases
to represent value for money. This is represented graphically in Figure 2 below:
Figure 2: Optimum Level of Risk Transfer
Value
for
Money
Optimum
level of
Risk
Transfer
Risk Transfer
- 24 -
In carrying out this allocation exercise, Sponsoring Agencies should be aware that in
negotiations (e.g., where it is appropriate to use Negotiated Procedure to procure the PPP
project) the private parties may indicate that they will accept more or less risk than proposed
and included in the PSB. With individual risk valuations to hand, the Sponsoring Agency can
decide, based on value for money, whether the changes proposed by the private sector are
acceptable. The PSB will have to be adjusted to reflect any change in the risk transfer from
that originally proposed in the tender documentation. This issue will be dealt with in further
detail in the technical note on Value for Money in the PPP Procurement Process.
It is important that, in making any such adjustments, the Sponsoring Agency / Centre of
Expertise, as appropriate, confirms whether the adjustments have the potential to cause a
breach of the overall project budget or the Sponsoring Agency’s capital envelope allocation /
target. Any potential breach must be reported to the Sanctioning Authority.
2.5.8 Risk Matrix
The information gathered in the risk analysis process should be held in a project-specific risk
matrix. The risk matrix should be as comprehensive and detailed as possible. In addition to
being an aid to the risk analysis process, the information held in this matrix can be used to
inform the negotiation process (where it is appropriate to use Negotiated Procedure) and will
also provide the basis for the contractual provisions in the Project Agreement, including in
particular, the Payment Mechanism. The Sponsoring Agency must formally approve the final
version of the project-specific risk matrix. This approval should be finalised prior to the
initiation of the tendering process.
A document setting out a list of the risks identified and the allocation of these risks (as
between the public and the private sector) reflected in the draft project agreement can be
appended to the tender documentation issued to bidders. However, under no circumstances
should the actual risk quantifications or associated probabilities be disclosed in any format.
Where the Negotiated Procedure is used, the Sponsoring Agency / Centre of Expertise, as
appropriate, must track any changes in risk allocation and / or changes to the contract to
- 25 -
ensure that the PSB and the highest ranking bid can be compared on a like with like basis – in
this context, please see the final paragraph of section 2.5.7.
2.5.9 Risk Database
Each Sponsoring Agency should develop and maintain a Risk Database containing aggregate
details for all projects it has procured using PPP arrangements.
This database should
assemble, over time, details of all of the risks identified for projects, the costings and
probabilities attributed to those risks and any modifications to these that may emerge. A
Central Risk Database, amalgamating all other risk databases, will be maintained by the
NDFA. It will be the responsibility of each Sponsoring Agency to keep the NDFA advised of
changes and updates in their individual risk databases.
3. PROJECT CASH FLOWS
3.1 Overview
The Sponsoring Agency should have quantified the financial costs20 associated with the
project as a whole at the Detailed Appraisal stage.
It should then be a relatively
straightforward exercise to isolate those elements of these costings that relate to the PPP
project.
The timing and incidence of these financial costs, i.e., each cost, income and risk element of
the PSB, should be presented in the PSB as individual cash flows. In all instances, the
relevant timing is an estimate of when the cost / income / risk would affect the Sponsoring
Agency, i.e. when the Sponsoring Agency would be expected to receive the income or incur
the expenditure.
In the Value for Money Comparison, these cash flows will be compared with the cash flows
in the financial model underpinning the highest ranking bid. The cash flows in this bid will
differ from those in the PSB both in quantum and timing. In order to facilitate a like with like
comparison with the PSB, it is necessary to analyse cash flows in a format that will take
account of differences in timing. To take full account of costs which occur at different
See page 14 of the Capital Appraisal Guidelines where “financial costs” are defined as the “ongoing capital
and life cycle costs relating to the operation and maintenance of the project, and receipts generated by the use of
capital asset, as well as the costs involved in their creation”.
20
- 26 -
points in time, the PSB is expressed in Net Present Value (NPV) terms. This can be done by
using the Present Value Method; the methodology for this is set out in section 3.4 below.
The NDFA will assist in the NPV calculations.
3.2. Discount Rate and Discount Factor
Project cash flows are expressed as Present Values by adjusting them by the relevant discount
factor. The source of the appropriate discount factor will be identified by the NDFA in line
with the provisions of Central Guidance Note No. 7 Discount Rate Principles for Public
Private Partnership Capital Investment Projects.21 It is essential that the Sponsoring Agency
keep a constant dialogue open with the NDFA on all aspects of the discounting process.
The Sponsoring Agency must ensure that the discount rate used in determining the
discount factor22 has been updated no more than ten working days prior to finalisation
and agreement of the PSB.
3.3 Base Date
All cash flows must be discounted back to the same day or “Base Date” to ensure consistency.
The Base Date to be used in the PSB is the estimated date of financial / contract close for the
project.
3.4 Calculating a Discounted Cash Flow (DCF)
Once the appropriate discount factor is applied to the project cash flows they are referred to as
Discounted Cash Flows (DCF).
The DCF should cover the entire construction and
operational periods proposed in the contract. The formula for the calculation of a discounted
cash flow and a simplified example of how to use it are set out in Appendix II.
3.5 Net Present Value
Because all of the project cash flows will be expressed in present value terms, using the same
Base Date and Discount Rate, they can all be added together. When the present values of all
of the project cash flows are added together they are referred to as the Net Present Value
21
22
Available on www.ppp.gov.ie
Appendix II sets out the formula that shows the interplay between the discount rate and the discount factor.
- 27 -
(NPV) of the project. This is a “bottom line” figure for the overall cost of the project,
discounted back to the Base Date.
The present value of individual annualised (or other periodic) payments is only meaningful
when presented in context, i.e., as part of the calculation of the project’s Net Present Value.
Presenting individual present values in isolation could be misleading and should not be done.
3.6 Treatment of Inflation in Cash Flows
Cash flows must be presented in nominal (i.e. adjusted for future inflation) terms. Short term
construction price inflation may vary from general price inflation.
The NDFA, having
consulted with the Department of Finance, will advise on the appropriate inflation rate(s) to
use in each PSB.
3.7 Consistency between PSB and bids received in calculating DCFs
It is important that the relevant key assumptions used in calculating DCFs are consistent as
between the PSB and the private sector bids submitted. This is achieved by providing specific
information regarding these assumptions to bidders, as part of the bid documentation.
Bidders should be provided with details regarding the contract term (see section 7.1), the
discount rate (see section 3.2) and the inflation rate(s)23 (see section 3.6) that will be used in
the Value for Money Comparison.
The specific assumption regarding the basis of
discounting, i.e. end, start, mid year etc., and the timing of the application of the inflation
rate(s) should also be provided to bidders to ensure they are consistently applied.
3.8 Methods for Analysing Cash Flows in the PSB
The following methodologies are used in various contexts and at various stages in the
procurement process (e.g., at tender evaluation stage). The following paragraphs only address
the roles that they may play in the compilation of the PSB.
23
Only the long term inflation rate(s) should be provided to the bidders. For example, the rate used for
construction inflation should not be given to the bidders.
- 28 -
3.8.1 Sensitivity Analysis
Sensitivity Analysis measures the impact of a change in one or more values, included in the
cash flows, on the overall cost of the project. It demonstrates how sensitive the cost of the
project is to changes in these values. This type of analysis should be carried out on each of
the significant cost/income/risk values when the PSB has been compiled, as part of the
assessment of whether or not to proceed with the procurement of the project. If a small
change in a given value results in a large change in the overall cost of the project, then the
project is said to be very sensitive to this value. Sensitivity analysis can also be used to
identify the most significant exposure (e.g., the most sensitive values) and to prioritise those
values that require further examination in terms of data collection and research. In this
context, it is recommended that the ten most sensitive values in the PSB should be identified
and recorded in the PSB documentation. Analysis of the sensitivities inherent in the material
risks/groups of risks identified for the project is particularly important in order to give a full
understanding of the risk profile and the financial effects of various changes.
3.8.2 Reasonableness Test
The compilation of a PSB is a complex and relatively lengthy process and it is useful to apply
a reasonableness test as a “reality check” on the assumptions and calculations used in the
PSB. All costs, income and risks should be examined from time to time throughout the
compilation process to assess whether they are reasonable in light of the outputs envisaged at
the outset of the project. The Sponsoring Agency should avail of information on precedent
projects in Ireland and internationally (where this information is available) when assessing
whether costs, incomes and risks are “reasonable”. The costs can also be reviewed from
different perspectives, e.g., cost per user, rate per hour, etc. and compared to market norms, if
available.
3.8.3 Scenario Analysis
Scenario Analysis is a tool that examines possible outcomes based on different scenarios.
This type of analysis focuses on the areas of greatest uncertainty and systematically develops
several plausible alternatives and determines how they would affect the project’s success. In
carrying out scenario analysis, the focus moves away from past experience to future
possibilities, offering a different perspective on the project. For larger projects, the major
- 29 -
technical, economic and political uncertainties upon which the success of a project depends
should be examined. It may be useful to carry out some sensitivity analysis within pertinent
scenarios.
The Sponsoring Agency should consider two additional figures that will support and inform
the single monetary value of the Public Sector Benchmark: (i) the cost of the project assuming
a best case scenario (all of the risks going in the Sponsoring Agency’s favour) and (ii) the cost
of the project assuming a worst case scenario (all of the risks going against the Sponsoring
Agency).
4. ESTIMATIONS / VALUATIONS USED IN THE PSB
4.1 Estimations in the PSB
Estimates of values to be included in the PSB should be based on the detailed and robust
output specifications developed for the PPP project.
Each value should be estimated
reasonably and accurately, having regard to precedent projects, where possible.
The
Sponsoring Agency must seek to ensure that the values included in the PSB are neither
underestimated nor overestimated; however, spurious accuracy should be avoided. The best
approach for the valuation of costs, income and risks is to use empirical evidence, wherever it
is available. Where such evidence is not available, common sense approximations should be
used.
4.2 Hypothetical Public Sector Cost
In exceptional circumstances, where there are no precedent projects (comparative or
otherwise) in Ireland to inform the compilation of the PSB, the Sponsoring Agency should
prepare a “hypothetical” public sector cost. The Sponsoring Agency should develop a PSB
that represents its best estimate of the public sector cost of delivering the project, having
regard to current market technologies or methodologies. Experience with similar projects in
other countries may be a valuable source of information for this exercise.
This approach should only be used when there is no alternative means of compiling a PSB.
While it may not be possible to estimate all values to a high degree of certainty, it is essential
that a best estimate is made in order to ensure that the PSB associated with the final output
- 30 -
specifications is consistent with the overall budget approved for the project by the
Sanctioning Authority.
4.3 Internal consultation on valuations
Individuals directly involved in the project and other internal experts with experience in
procuring similar projects should be consulted when considering the valuations (including
risk valuations) to be included in the PSB.
4.4 Engagement of external expert advisors
As stated in the Capital Appraisal Guidelines24, “(d)epartments should try to anticipate their
likely needs for consultancy services for project appraisal and planning purposes.
Allowances for such services should be included in annual Departmental budgets.” When
considering the overall project budget the Sponsoring Agency should assess whether it will be
necessary to include the cost of engaging expert advisors to assist with aspects of the PSB.
The cost of engaging such advisors should not be included in the calculation of the PSB as to
do so would distort the comparison as between the PSB and the highest ranking bid.
External advisors should only be engaged by the Sponsoring Agency to provide those skills
that are necessary for the compilation of the PSB that are neither available internally nor
provided by the NDFA. It should be noted that the NDFA has statutory authority to engage
external advisors to assist it in the performance of its role and to cross-charge State
Authorities for the cost of such advisors. This will be of particular relevance when the Centre
of Expertise is procuring a PPP project on behalf of the Sponsoring Agency.
5. ASSUMPTIONS MADE IN COMPILING THE PSB
All assumptions made regarding costings, risk elements and income projections should be
clearly set out in the PSB document so that a record is kept of the reasoning behind all figures
used in the PSB that can be referred to at any stage. Assumptions made should be realistic,
reasonable and robust; unrealistic bases or spurious accuracy in the compilation of the PSB
should be avoided.
24
Appendix 2, page 43.
- 31 -
Assumptions should reflect current policy regarding specifications, including any agreed
improvements, e.g., larger accommodation norms recently agreed, and recent actual practice
in public procurement.
Sensitivity Analysis should be carried out on all significant assumptions made in the PSB.
Where the value of a project is found to be sensitive to particular assumptions, the
validity/robustness of these assumptions should be reviewed and the details of the sensitivity
analysis should be highlighted to the Project Board – see section 3.8.1.
6. STANDARD PRESENTATION OF THE PSB DOCUMENT
Each distinct material value (be it cost, income or risk) identified in the PSB should be
presented as a separate cash flow item. These cash flows should be grouped into categories
and, in turn, into high level costs.
6.1 Summary of high level costs
A summary of the high level costs in the PSB should be presented on the front page of the
discounted cash flow documentation for the PSB in the format set out in Table 5 below. All
of the figures in the PSB should be VAT-inclusive and should be accompanied by details of
the amount of VAT included in each figure. This table should detail each figure in both
Nominal and Present Value terms.
Table 5: Summary of high level costs
NOMINAL
€m
VAT included in
Nominal Value
column
(VAT inclusive)
(A)
(A)
(B)
Capital Cost
Operating, Maintenance
and Lifecycle Costs
Third Party Income
Risk
TOTAL
- 32 -
NPV
€m
VAT included in
NPV
column
(VAT inclusive)
(C)
(C)
(D)
6.2 Summary of costs of each material constituent element
Other summary tables which break each of these high level costs down further into their
material constituent elements (categories) should be completed and appended to this front
page. An example for Capital Cost is set out in Table 6. All figures included in this table
should be VAT-inclusive.
Table 6: Discounted Cash Flow – Summary of sample Capital Costs
Total in
Nominal
Terms
Total in
NPV
Terms
Nominal
Year
1
Nominal
Year
2
Nominal
Year
3
Nominal
Year
…..
Nominal
Year
25
€m
€m
€m
€m
€m
€m
€m
Design Costs
Construction
Costs
Cost of Raw
Materials
Site Costs
Furniture and
Equipment
TOTAL
7. OTHER KEY ASPECTS OF THE COMPILATION OF THE PSB
7.1 Term of Contract
Under a PPP procurement arrangement the Sponsoring Agency seeks to procure a service for
a specified length of time, e.g., 15 years, 20 years, 25 years, 30 years, etc. This length of time
is referred to as the term of the contract. All PSBs should address the costs, income and risks
that are expected to arise over the whole contract term.
For some projects, the Sponsoring Agency may consider allowing the private sector to submit
variant tenders with alternative durations, as well as that specified in the base tender
documentation, but in such cases the contract notice must authorise variants and give
minimum specifications. (Appropriate legal advice should be sought before considering
inviting any variant tenders.)
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In these cases, the Sponsoring Agency must prepare the PSB based on the specified term (25
years in the example above) and prepare information on the additional costs, income and risks
related to subsequent years, e.g., the additional operating and maintenance costs for years 26
to 30. Information relating to shorter contract terms, say 20 years, will be available within the
25-year PSB, i.e. the costs, income and risks associated with years 21 – 25 could be
subtracted from the 25-year PSB to derive a 20-year PSB.
7.2 Accrued Liabilities
Accrued liabilities that would be incurred by the Sponsoring Agency over the term of the
contract, such as pensions, should be valued and included in the PSB. Departments should
avail of in-house expertise in determining the potential for and the implications of relevant
accrued liabilities. The NDFA will assist in valuing these.
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APPENDICES
Appendix I: Role of the National Development Finance Agency in the
compilation of the Public Sector Benchmark
1. Projects for which NDFA acts as financial advisor only:

The advice of the NDFA must be sought on all financial, risk and insurance aspects of
compiling a PSB for: (i) major PPP projects and grouped PPP projects having a capital
cost in excess of the limit set by the Department of Finance (currently €20 million, but
under review); or (ii) PPP projects and grouped PPP projects having a capital cost less
than this limit, where the Sponsoring Agency is of the opinion that it does not have
sufficient internal expertise to compile the PSB; or (iii) PPP projects and grouped PPP
projects that are being procured by the Centre of Expertise on behalf of the Sponsoring
Agency (section 1.5).

The NDFA must always be consulted regarding the appropriate discount rate (see section
3.2) and inflation rate(s) (see section 3.6) to use in compiling each PSB (section 1.5).

The NDFA will be responsible for compiling the structure and content of the financial
model underpinning the PSB and for entering data into this model (section 1.6).

While the NDFA will provide advice on the appropriate values to use in the model,
responsibility for the actual values used remains with the Sponsoring Agency (section 1.6).

In all cases, when the PSB is not wholly consistent with the advice of the NDFA, the
NDFA should supply a statement to the Sanctioning Authority outlining the aspects of its
advice that have not been followed and the effect this has had on the value of the PSB
(section 1.9.5).

The Sponsoring Agency should seek the advice of the NDFA on how to address the
inclusion of the capital asset in the PPP deal in the Value for Money Comparison, having
regard to the relevant policy implications (section 2.2).

The NDFA must be consulted regarding all aspects of risk analysis (section 2.5.1).

The NDFA will act as facilitators for risk workshops (section 2.5.2).
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
A Central Risk Database, amalgamating all other risk databases, will be maintained by the
NDFA. It will be the responsibility of each Sponsoring Agency to keep the NDFA
advised of changes and updates in their individual risk databases (section 2.5.9).

The NDFA will assist in NPV calculations (section 3.1).

The source of the appropriate discount factor will be identified by the NDFA in line with
the provisions of Central Guidance Note No. 7 Discount Rate Principles for Public
Private Partnership Capital Investment Projects (section 3.2).

It is essential that the Sponsoring Agency keep a constant dialogue open with the NDFA
on all aspects of the discounting process (section 3.2).

The NDFA, having consulted with the Department of Finance, will advise on the
appropriate inflation rate(s) to use in each PSB (section 3.6).

The NDFA has statutory authority to engage external advisors to assist it in the
performance of its role and to cross-charge State Authorities for the cost of such advisors
(section 4.4).

The NDFA will assist in valuing accrued liabilities (section 7.2).
2. Projects for which the NDFA acts as financial advisor and that the Centre of
Expertise also procures on behalf of the Sponsoring Agency
All of the points raised at 1 above also apply when the project is being procured by the Centre
of Expertise as the NDFA will still be the Sponsoring Agency’s financial advisor.

Irrespective of the capital value of the project, when the Centre of Expertise in the NDFA
is procuring a project on behalf of the Sponsoring Agency, the Sponsoring agency must
seek the technical assistance of the NDFA to help establish project budgets and compile
the PSB on its behalf (footnote 7, section 1.5).

When the Centre of Expertise is procuring a PPP project on behalf of the Sponsoring
Agency, the project should not be handed over to the Centre of Expertise until the PSB
has been finalised and agreed. If the exceptions regarding an approved programme of
similar projects (section 1.9.3) or the timing of finalisation of the PSB (section1.9.4)
apply, the PSB should be progressed as far as possible prior to handover of the project to
the Centre of Expertise (section 1.9.6).
- 36 -

The Centre of Expertise should not make any changes to an agreed PSB without the
express written permission of the Sponsoring Agency (section 1.10.2).

If, in the exceptional circumstances outlined, changes to the finalised and agreed output
specifications / PSB are unavoidable after the tender invitations have issued, a detailed
audit trail of any such changes must be maintained by the Centre of Expertise together
with a clear rationale for each change required (section 1.10.2).

The Centre of Expertise should ensure (seeking legal advice, as appropriate) that it does
not modify output specifications so significantly that EU procurement procedures are
infringed (section 1.10.2).

When the Centre of Expertise is procuring a project and the PSB has not been equalled or
beaten by the highest ranking bid, the Board of the NDFA should examine why this is so.
In addition to advising the Sponsoring Agency, the NDFA should report the matter to the
Minister for Finance (section 1.13.2).

It is important that, in making any adjustments to the risk allocation, the Centre of
Expertise considers whether the adjustments have the potential to cause a breach of the
overall project budget or the Sponsoring Agency’s capital envelope allocation / target.
Any potential breach must be reported to the Sanctioning Authority (section 2.5.7).

Where the Negotiated Procedure is used, the Centre of Expertise must track any changes
in risk allocation and / or changes to the contract to ensure that the PSB and the highest
ranking bid can be compared on a like with like basis (section 2.5.8).
- 37 -
Appendix II: Calculating a Discounted Cash Flow
The formula for the calculation of a discounted cash flow and a simplified example of how to
use it are set out below.
Ct
PV =
Where:
(1 + r)t
PV = Present Value
C=
Cash flow
r=
Discount Rate
t=
Year (i.e. Year 1, Year 2, etc.)
For example, assume that construction costs for a project are €100m and that 50% is paid in
Year 1, 30% in Year 2 and 20% in Year 3 and the NDFA has advised that the appropriate
discount rate is 5.25%. Your cash flow will look like this:
Construction
Costs
Present Value
Year 125
50,000,000
Year 2
30,000,000
Year 3
20,000,000
47,505,938
27,081,770
17,153,932
Workings:
Year 1:
PV =
50,000,000
C1
(1 + r)1
=
(1 + 5.25%)1
= 47,505,938
The costs included for ‘Year 1’ are discounted as, at the time the PSB is being constructed, Year 1 of the
project may be 12 months away and the costs included must be expressed in today’s terms, i.e., as a present
value.
25
- 38 -
Year 2:
PV =
30,000,000
C2
(1 + r)2
=
(1 + 5.25%)2
= 27,081,770
Year 3:
PV =
20,000,000
C3
(1 + r)3
=
(1 + 5.25%)3
= 17,153,932
The NPV of the Construction Costs in this example is €91,741,640 (which is less than the
total amount of €100,000,000 which will be expended, i.e. the present value of future
expenditure is less than the value of expenditure today).
Appendix III sets out an example of a DCF for a sample PSB.
- 39 -
Appendix III: Example of a Discounted Cash Flow for a Public Sector
Benchmark
NPV Nominal
Total
€m
Construction
Period
Operating Period
Total Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12
€m
€m
€m
Indexation
€m
€m
€m
€m
€m
€m
€m
€m
€m
€m
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
Capital Costs
Building Costs
93.0
100.0
50.0
50.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Equipment / F&F
11.0
12.0
2.0
10.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
103.9
112.0
52.0
60.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Building
11.4
16.4
0.0
0.0
1.5
1.5
1.6
1.6
1.6
1.7
1.7
1.7
1.8
1.8
Equipment / F&F
13.9
20.9
0.0
0.0
1.0
1.0
1.0
1.1
6.1
1.1
1.1
1.1
1.1
6.2
25.4
37.4
0.0
0.0
2.5
2.6
2.6
2.7
7.7
2.7
2.8
2.8
2.9
8.0
76.1
109.5
0.0
0.0
10.0
10.2
10.4
10.6
10.8
11.0
11.3
11.5
11.7
12.0
7.6
10.9
0.0
0.0
1.0
1.0
1.0
1.1
1.1
1.1
1.1
1.1
1.2
1.2
FM Costs
22.8
32.8
0.0
0.0
3.0
3.1
3.1
3.2
3.2
3.3
3.4
3.4
3.5
3.6
Insurance
4.7
6.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.6
0.6
0.6
0.6
0.6
111.2
159.8
0.5
0.5
14.5
14.8
15.1
15.4
15.7
16.0
16.3
16.7
17.0
17.3
Third Party Income
(3.8)
(5.5)
0.0
0.0
(0.5)
(0.5)
(0.5)
(0.5)
(0.5)
(0.6)
(0.6)
(0.6)
(0.6)
(0.6)
Risk Valuation
29.6
38.2
6.2
7.0
2.2
2.2
2.3
2.3
3.0
2.4
2.4
2.5
2.5
3.3
Total PSB Cash flows
266.3
341.9
58.7
67.5
18.7
19.1
19.5
19.9
25.9
20.5
20.9
21.4
21.8
28.0
Discount Rate
(Nominal)
5.0%
1.0
1.1
1.1
1.2
1.2
1.3
1.3
1.4
1.5
1.6
1.6
1.7
1.8
266.3
55.9
61.2
16.2
15.7
15.3
14.8
18.4
13.9
13.5
13.1
12.7
15.6
Lifecycle Costs
Operating and
Maintenance Costs
Wages & Salaries
Consumables
Discount Factor
Discounted Cash flows
(NPV)
- 40 -