12.1.1 The objective of performing risk analysis is to:
o allow the Board to understand the project risks and put in place mitigation measures to manage those risks;
o assess the likely total outturn cost to the public sector of the PFI investment option under consideration;
o ensure that the allocation of risks between the Board and the private sector is clearly established and demonstrated within the contractual structure; and
o demonstrate value for money.
12.1.2 A risk is defined as an event which affects the cost, quality or completion time of the project that may or may not occur. There are a number of such events that could arise during the design, construction, commissioning and operation of the new facilities. 12.1.3 Risks are assessed and valued to ensure that the Conventional Procurement Assessment
Model (CPAM) can be compared with the Private Finance Initiative (PFI) option on a “like for like” basis, ensuring that the value of risk retained by the Board under both options is quantified and understood.
12.1.4 Whether under a traditional design, build and operate format (the CPAM) or under a PFI contract, the Board is exposed to risk in project delivery and maintenance.
12.1.5 Under the CPAM, publicly funded option, virtually all risks remain with the Board. Therefore the Board is exposed to a greater degree of risk in terms of price variations, poor performance, late delivery etc. The PFI scheme enables a large proportion of these risks to be transferred to the private sector where they are best able to manage them; with the Board remaining responsible only for those risks it is best able to manage.
12.1.6 There are two core principles that should govern risk transfer in PFI projects:
o Risk should be allocated to whoever is best able to manage and control it; and
o The aim is to secure optimal risk transfer (it should be noted that optimal risk transfer is not maximum risk transfer).
12.1.7 These principles have been incorporated into the methodology underpinning the risk analysis for the project.
12.1.8 A full risk analysis was undertaken, as part of the OBC in order to identify and assess the impact of risks to the scheme during all stages of the project and after it has been completed. This comprised a series of workshops involving Board staff and advisers as well as representatives from Clackmannanshire Council and the local health community.
12.2. Project Risks
12.2.1 Since OBC stage the risk register has been further developed to identify and record the project risks taking into account the specifics of the project. This has been informed by the NHS standard risk matrix and the risk matrix identified at OBC stage. This has developed the risks into more specific and manageable risks for practical management. 12.2.2 The project risks identified used the following risk classifications.
o Planning;
o Design;
o Construction and Development;
o Performance;
o Operating;
o Revenue variability;
o Project Management;
o Market & Commercial;
o Financial; and
o Other.
12.3. Approach to Risk Analysis
12.3.1 The Board has undertaken a robust process in identifying, quantifying and allocating risk in its evaluation process. This has been carried out in order to:
o identify specific risks relating to the project;
o create a risk management process that can be used as a management tool when actually undertaking the project; and
o assist in demonstrating value for money comparing the CPAM and PFI options.
12.3.2 Risk workshops have been carried out frequently throughout the project. These risk workshops have had widespread attendance from the Project Team and Advisors.
12.3.3 The approach adopted by the Board has followed a recognised and proven method of risk evaluation. For each risk identified in the risk register an impact and likelihood (both before and after mitigation) has been agreed to allow a risk contingency to be derived. 12.3.4 Each of these risks are classified as either public (retained by the public sector) or private
12.3.5 The output of the quantitative risk evaluation is a percentage risk adjustment that should be applied to the PFI unitary charge to give a best estimate of the likely outturn cost to the Board.
12.4. Optimism Bias
12.4.1 Since completion of the OBC for this project, HM Treasury has introduced a revised methodology for quantifying cost estimating uncertainty to be used in assessing the value for money of PFI projects relative to CPAM comparators1. This methodology seeks to quantify an “optimism bias” that has been historically demonstrated in cost estimating for various types of project. The approach of adjusting estimates for “optimism bias” rather than using detailed quantified risk adjustments has been endorsed in the Scottish Executive’s Value for Money Practical Application Note.
12.4.2 Optimism Bias has been evaluated for this project using a health sector specific methodology developed by the Department of Health in England. This approach seeks to use high level indicators in the structure of the project to quantify an upper bound for the optimism bias, and then look at project specific factors that have led to mitigation of that bias.
12.4.3 The Project Team has compared the outputs form the optimism bias calculation to the detailed risk quantification undertaken and found them to be similar. This has acted as a cross-check to the project specific applicability of the generic Department of Health optimism bias calculation methodology. Having undertaken this comparison, the quantitative results from the optimism bias approach have been used in the value for money assessment discussed in more detail in Chapter13.
12.4.4 The percentage adjustments applied are shown in table C12/1 below. Table C12/1: Service Payment Summary
CPAM Cost element Optimism Bias
percentage
Capital Costs - optimism bias upper bound - mitigation factor
- Optimism Bias Lifecycle Costs
Operating costs - optimism bias upper bound - mitigation factor - Optimism Bias ….. ….. ….. …..….. ….. ….. …..
12.4.5 The risk adjustment applied to the PFI Service Payment has been assessed to be zero as all quantifiable risks have been passed to the private sector provider. The only risk retained by the Board is the risk of movements in interest rates up to financial close
1
The Green Book – Appraisal & Evaluation in Central Government, HM Treasury; Supplementary Green Book Guidance – Optimism Bias, HM Treasury; Value Form Money Assessment Guidance, HM
which is allowed for through the inclusion of the interest rate buffer discussed in Chapter 11. no further adjustment for this risk is therefore required.
12.4.6 Under the PFI procurement model, the Board is undertaking elements of enabling works for grouting and ground stabilisation as capital works prior to the commencement of the PFI contract. This work has been assessed as being analogous in structure and risk allocation to the CPAM, and therefore the CPAM Capital works optimism bias uplift of …..% has been added to this element of the works in the VFM comparator.
12.4.7 The expected value of all risks and the classification between the public, private and shared is a key component in assessing the value for money of the PFI option, as detailed in Chapter 13.
12.5. Risk Management Strategy
12.5.1 The Board will retain or share responsibility for certain risks as set out in the risk register and these risks need to be actively managed by the Board. These risks will be monitored through the Project Team with regular reports to the Project Board to ensure that appropriate and timely action is taken to minimise them through the implementation of appropriate mitigation measures.
12.5.2 The principles supporting the development of the project risk strategy are to:
o identify all retained risks and apply a suitable allocation of risk during the planning phase in accordance with the standard form of contract;
o allocate responsibility to a lead person, identified on the risk register, within the Board who is the designated "risk owner"; and
o ensure that the risk owner identifies and implements the proposed mitigation measures.
12.5.3 Development of the risk management plan is an iterative process and changes as the project develops, and involves constant monitoring and updating as risk exposures change and risk events occur.
12.5.4 Risks that have transferred to Robertson Healthcare are not included within the risk register as the Board is not responsible for their management.
12.5.5 There are a number of risks, such as changes in working practice, which are not specific to this project. These are being managed through other processes within the Board and are not therefore included in this strategy.
13. ECONOMIC APPRAISAL