Public-Private
Contents
Preface 5
Introduction 7
Module 1: initiation report 11 Action 1A: specifying PPC process, stakeholder analysis and communication 12 Action 1B: listing preconditions from the preliminary stage 15 Action 1C: delineating scope, duration and implementation scenarios 15 Action 1D: listing non-financial considerations 19 Module 2: qualitative analysis 23 Action 2A: describing receipts and expenses and risk items 24 Action 2B: making a qualitative assessment of both implementation scenarios 28
Module 3: quantitative analysis 31
Action 3A: preparing for the drafting of cash flow statements 33 Action 3B: quantifying the public implementation scenario 34 Action 3C: quantifying the private implementation scenario and any other implementation
scenario 35 Action 3D: calculating the net cash value and conducting a sensitivity analysis 37
Module 4: final report 41
Action 4A: describing the results 43
Action 4B: drawing conclusions and making recommendations 44
Appendices 45
Appendix 1: Glossary 46
Appendix 2: Scope of PPC 49
Appendix 3: Model overviews of receipts and expenses 53
Appendix 4: Risk analysis 58
Appendix 5: Model overviews of pure risks 63
Appendix 6: Discount rate 65
Appendix 7: Determining differences between the public and the private implementation
scenarios 68
5 Preface
Preface
It is with great pleasure that I present to you the updated Public-Private Comparator Manual (PPC). We updated the manual so that the advantages and disadvantages of the various implementation scenarios may be analysed even better for even more large government projects.
The central government continuously strives for service provision which is as cheap, as flexible and as efficient as possible. Especially in these times of budget cuts, we have to grasp every opportunity to offer the same level of service provision with less budget. And the PPC may prove to be a helpful aid in achieving this, because you can use the manual to assess and calculate, step by step, which implementation scenario offers the best opportunities. This may help you with making a choice between contracting out an activity, cooperating with other government parties, or performing an activity on your own.
The PPC Manual has been in use for more than ten years in the areas of housing and physical infrastructure and has proved to be more than useful in these sectors. Much more added value may also be achieved outside these sectors by carefully considering the various implementa-tion scenarios. Therefore, the PPC Manual can now be more widely used. Based on this consideration, we decided to extend the manual.
The updated PPC Manual is widely applicable, for instance also when choosing an implementa-tion method for operaimplementa-tional management activities, wind farms or the purchase and mainte-nance of new ICT systems. I am pleased to see the manual already being more widely used. For instance, the Ministry of Defence has been using the PPC Manual for projects in which a sourcing decision has to be made, such as for security systems. Furthermore, the PPC Manual is also useful for authorities other than the central government. Hopefully, the updated manual will be widely used by these government bodies.
Many people, both at and outside the Ministry of Finance, have contributed to the making of this document, to whom I am very grateful.
This PPC Manual may help you make good and well-founded choices which serve the public interest, and I hope it lives up to your expectations.
Richard van Zwol Secretary-General The Hague, March 2013
7 Introduction
Introduction
This is the Public-Private Comparator Manual (PPC). The PPC is intended to provide you with insight into the advantages and disadvantages of the various implementation scenarios in which large government projects can be executed, namely in a public or a private scenario, or another (mixed) scenario. In this manual, you will find information on how to compare the various implementation scenarios, so that the authorities can select the best scenario. The PPC has been in use since 2002 and has resulted in a more conscious consideration of the implementation scenarios, resulting in significant added value for the central government.
Target group: parties involved in drawing up a PPC.
The manual explains which steps have to be taken so that an extensive user group can independently conduct the PPC. The main target group of this manual comprises the people who will be applying the PPC, which usually takes place in a team. In addition, the manual may also give other users such as decision-makers and auditors insight into the methodology and process regarding the PPC, even though they are more indirectly involved in drawing up a PPC. The manual has been mainly drawn up for central government bodies, but it can also be applied to projects of local authorities and semi-public institutions.
Objective: selecting the best implementation method for large government
projects
This manual can also be used in any large government project in which various forms of contract are considered. The central government is obliged to conduct a PPC in central government projects in the areas of housing and infrastructure which exceed a threshold of twenty-five million euros and sixty million euros, respectively. However, the PPC can be applied in many more sectors, such as:
• housing, including facilities services;
• infrastructure, such as roads, railways, sluices and tunnels; • sustainable material, such as means of transport;
• other large investment projects, such as new ICT systems and wind farms;
• ‘make-or-buy decisions’ in operational management activities, such as security, catering and ICT support.
Over the years, much experience has been gained with PPCs, particularly in housing and infrastructure projects. This has led to a standardisation of the manner in which the steps of the PPC Manual have to be followed. The Government Buildings Agency has detailed its PPC experience in the reader 'PPC in housing projects', and has been using this reader to conduct PPCs. The Directorate-General for Public Works and Water Management and the Ministry of Defence have also translated their experience in a standardisation of the manner in which PPCs are followed, or have plans to do this.
Place of PPC in the project phases
With respect to project phases, you generally conduct a PPC in the assessment phase, between the initial phase and the preparation phase. The initial phase aims to clarify the scope of a Project1 in broad outlines. In the assessment phase, a rough variance analysis is conducted with
the help of the PPC, which ultimately results in the selection of the Project's implementation scenario. You generally detail the implementation scenario in the preparation phase2.
Place of the PPC on the timeline as part of the total project lifecycle
3Manual and Reader's Guide
This PPC Manual consists of four modules which describe the steps you have to take to draw up a PPC. The PPC results in two end products: an initiation report and a final report.
1 In this manual, all activities which are necessary to supply a particular product of service up to and including the final phase are referred to as 'Project".
2 The PPC should not be confused with the Public Sector Comparator (PSC). If a private implementation scenario has been selected after the PPC, a PSC should be drawn up in the preparation phase. The PSC contains a more detailed assessment of expenses, receipts and risks. Please consult the PSC Manual for more information about the PSC (see www.ppsbijhetrijk.nl).
3 See module 2, action 2a for a description of the various phases.
Final report Initiation report 1. Initiation report 2. Qualitative Analysis 3. Quantitative Analysis 4. Final report
Starting points of the PPC Overview of expenses, receipts and risks. Assessment of differences between implementation scenarios Quantified differences
implementation scenarios PPC
Initial phase Assessment
phase Preparationphase Transaction phase Realisationphase Operational phase Final-phase
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9 Introduction
Module 1: Initiation report
In this module, you get an overview of all elements which are necessary in order to make a financial comparison of the various implementation scenarios. Components of the initiation report are a description of the PPC process and a description of the Project in broad outlines, such as the scope and the duration. The initiation report also comprises all implementation scenarios which you will compare as well as the non-financial considerations which may be relevant to the selection of the implementation scenario.
Module 2: Qualitative analysis
In this module, you are going to draw up a list of all expected expenses, receipts and risks for the entire duration of the comparison. You then document any differences between the implementation scenarios for each expense, receipt and risk item.
Module 3: Quantitative analysis
In this module, you quantify the differences between the implementation scenarios and you calculate the Project's cash value (current value) per implementation scenario.
Module 4: Final report
The results are summarised in the final report. Based on these results, you formulate conclu-sions and recommendations for the further approach. Optionally, you may add a policy advice for the decision-makers to the final report.
Appendices
There are a number of appendices at the back of this manual. Among other things, they comprise a definition of the most important concepts, the theory of risk analysis, an explana-tion of discount rate, and model overviews of the scope, expenses, receipts and risks.
The four modules of the PPC with the associated actions
Module 1 Initiation reportActions:
• Specifying the PPC process, stakeholder analysis and communication
• Listing the preconditions from the preliminary stage
• Delineating scope, duration and implementation scenarios
• Listing non-financial considerations Module 2 Qualitative analysis
Actions:
• Describing the expenses, receipts and risks
• Making a qualitative assessment of the differences between the implementation scenarios Module 3 Quantitative analysis
Actions:
• Preparing for the drafting of cash flow statements
• Quantifying the public implementation scenario
• Quantifying the private implementation scenario and any other implementation scenario
• Calculating the net cash value and conducting a sensitivity analysis Module 4 Final report
Actions:
• Describing the results
• Drawing conclusions and making recommendations
Contact possibilities
If you have any questions about this PPC Manual, or if you have a question about public-private partnership (PPP) at the central government level in general, please contact the Public-Private Investments Department (PPI) of the Ministry of Finance. You can contact a separate service desk with questions about public-private partnership at the level of local authorities and semi-public institutions, called PPSsupport. The contact details of the PPI and PPSsupport can be found on www.ppsbijhetrijk.nl.
Module 1
Module 1 Initiation report
Your client has asked you to conduct a PPC. You now face the task of drawing up an initiation report to this effect. An initiation report can be seen as a plan of action for drawing up a PPC. The plan of action must clearly state what is assessed in the PPC and how, with which parties and under which precondi-tions. A sound plan of action prevents delays and/or misunderstandings in conducting the PPC (see modules 2 to 4).
Objective
Agreement between all parties involved about the manner in which the PPC is conducted.
Output: initiation report
The initiation report must always comprise the following: 1 which parties have an interest in the PPC;
2 which communication strategy is adopted;
3 under which preconditions from the preliminary stage the PPC is conducted; 4 which scope, duration and implementation scenarios apply to the Project4 which are
assessed in the PPC;
5 which non-financial considerations are relevant to the decision about the implementation scenario.
Module structure
Module 1 consists of four actions: 1A up to and including 1D. Action 1A is about the organisa-tion of the PPC process. It is recommended you start this acorganisa-tion before you deal with the more substantive, professional aspects of the comparator (see actions 1B up to and including 1D).
The organisation of the PPC process concerns the detailing of the PPC process, identifying that which is necessary to properly conduct the PPC and who should be involved in this in what way and when.
4 In this manual, all activities which are necessary to supply a particular product of service up to and including the final phase are referred to as 'Project".
Action 1A Specifying the PPC process, stakeholder analysis and communication Action 1B Listing preconditions from the preliminary stage
Action 1C Delineating scope, duration and implementation scenarios Action 1D Listing non-financial considerations
Module 1 Initiation report Module 4 Final report Module 2 Qualitative analysis Module 3 Quantitative analysis
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13 Module 1 Initiation report
Getting an overview of the PPC process
First, you must outline the decision-making process and the implementation process.5 The
steps and the products to be achieved, the initiation report and the final report in this manual may serve as starting points for these processes. You must detail how you are going to follow the steps in this process, how much time, money and capacity this will take, and which data, knowledge and expertise are needed to properly execute these steps.
It depends on the Project how much time is needed to draw up the PPC. This partially depends on the type of project, the complexity of the project and the organisation's experience in drawing up PPCs. If an organisation draws up a PPC for the first time, the processing time is usually two to four months. Organisation which have experience in PPCs mostly conduct a PPC much more rapidly. The indicative division of the time required per module is as follows: • Initiation report 1 - 2 weeks
• Qualitative analysis 3 - 5 weeks • Quantitative analysis 5 - 8 weeks
• Final report 1 - 2 weeks
In order to be able to properly conduct a PPC, you need experience in contracting out as well as knowledge of your organisation and of the market for the product or service concerned. If you do not have this knowledge and experience, you may hire external specialists, or parties from the central government which have experience in conducting PPCs. The PPI Department of the Ministry of Finance can provide you with advice in these matters.
Integrity and confidentiality risks may play a role in the PPC process, for instance when a party is involved in drawing up the PPC who runs the risk of losing his job if it is decided to have the service provided by an external party. Please be advised to take this into account when organising the PPC process.
The Directorate-General for Public Works and Water Management and the Government Buildings Agency have standardised the decision-making process within the framework of the PPC Manual6. The Government Buildings Agency has defined these agreements in
collabora-tion with the Ministry of the Interior and Kingdom Relacollabora-tions (DGOBR) and with the Ministry of Finance7. In addition, the Government Buildings Agency uses a standard reporting format,
which can be retrieved from 'PPSsupport'8.
5 In certain cases, standard processes and standard methodologies are already in place in external policy documents or manuals. For instance, the PPP knowledge pool of the Directorate-General for Public Works and Water Management has specifically concentrated its PPC methodology on infrastructure projects. Similarly, the PPP knowledge pool of the Government Buildings Agency has focused on government buildings projects (see the reader 'PPC in housing projects').
6 The decision-making process in projects of the Government Buildings Agency is in accordance with the 'PPC policy line for government buildings projects' (2005).
7 See Final report of work group 'Inclusion of DBFMO in operational management in central government', 21 September 2011.
Three groups of stakeholders important in the PPC process
At the start of the PPC, the PPC Team conducts a stakeholder analysis and determines the communication objectives and communication actions for each target group based on this analysis. Stakeholders are all parties which are directly or indirectly involved in the PPC, which influence the PPC, or have an interest in the PPC. Involvement, influence and interest may apply to the drawing up of the PPC and to the decision-making process regarding the PPC (choice of implementation scenario). Based on the stakeholder analysis, the PPC Project Leader also determines the composition of the project group. The analysis may also prompt the Project Leader to propose to the client(s) any changes to the group of decision-makers regarding the PPC.
There are roughly three groups of stakeholders in the PPC process: Decision-makers
They receive all information relevant to the decision-making process in time. Decision-makers are mainly interested in the quality and costs of the service provision envisaged in the Project, and how the implementation scenario influences the quality and costs.
Members of the PPC Team
The PPC Team in its entirety is involved in the PPC process. This means that all team members must be informed in a timely manner as well as at the same time about anything that may be relevant to the team. The relevant information roughly consists of all data and assumptions with the associated substantiation which are necessary for understanding the result of the PPC. Interested parties
In general, interested parties are (groups of ) persons or institutions which may have to deal with the PPC and with the consequences of the chosen implementation scenario. The composition of the group of interested parties differs per PPC. This may concern: purchasers of the envisaged service or product;
parties which have to provide the product or service, or which are responsible for the provision;
parties which have a policy-related interest in the implementation scenario. For instance, the human resources department may be interested in the transfer of staff, and facilities services may be interested in housing projects;
market players.
Designing communication per target group
Since the group of stakeholders is so heterogeneous, you determine the communication design for each target group. You should always take account of the confidentiality regulations for PPCs. Certain parties, particularly external parties, are not informed about the implementa-tion scenario until the PPC has been completed and a decision about the implementaimplementa-tion has been made.
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Only when the initial phase of a project has been concluded, are you able to decide to conduct a PPC. This is because the project's preconditions have to be sufficiently clear in advance in order to be able to determine the scope, duration and implementation scenario in the PPC phase. No later than at the end of the initial phase, it must also be determined if there is sufficient support and, in principle, financing for the Project.
In order to be able to conduct a PPC, you must have answered the following questions beforehand:
1 What is the benefit of the Project?
2 Are there sufficient means available for the Project, or will there be sufficient means available?
3 Is there sufficient administrative commitment? 4 Is the scope of the Project clear in broad outlines? 5 Is the desired output of the Project clear in broad outlines?
With this action, you can unequivocally delineate the PPC. Since this delineation is of major influence on the result of the PPC, you must make sure to substantiate it carefully.9 Sound
substantiation can prevent delays in the PPC at a later stage caused by discussions about the delineation.
The PPC must at any rate be delineated in the following areas: • the scope of the PPC;
• the duration of the PPC;
• the implementation scenarios which have to be assessed in the PPC;
Delineating the scope of the PPC
This concerns the scope of the PPC. Make sure to formulate the scope in such a way that the added value which may be achieved is maximal. For this reason, it is wise to keep the scope sufficiently wide, so that market players have room to achieve efficiency benefits by aligning activities more closely. The starting point is the scope in broad outlines, as provided to the PPC Team by the client at the start of the PPC. Since the scope determines the result of the PPC, the PPC Team must always investigate how the scope may be optimised.
9 In some cases, the starting points are already uniformised and laid down in policy documents, such as in the new building and renovation projects of the Government Buildings Agency.
Action 1B Listing preconditions from the preliminary stage
Determining the scope in a five-step plan
The scope is determined and delineated in five steps. The first three steps are taken by the client, and fall outside the scope of the assignment of the PPC Team. However, the PPC Team must have a full understanding of the results of these steps in order to be able to delineate the scope. In case of ambiguities, the PPC Team must contact the client. The plan comprises the following five steps:
1 Describe the public objective to which the Project contributes. 2 Describe the Project in broad outlines.
3 Describe in broad outlines the desired output of the Project. Which results must the Project yield? Lay down this output with the public objective in mind.
4 List and analyse which activities are necessary to realise the desired output. Do not only include the direct activities, but also the indirect activities, such as facilities services and human resources management. Then, consider which mutual connections there are and list the activities which cannot be outsourced, for instance because only the government is allowed to perform them (military activities, the administration of justice), or because they have to be performed by the government itself in order to safeguard the continuity of core duties (access to critical databases).
5 Determine the scope of the PPC by combining all activities which could be
outsourced.10Include all related activities in the scope. You can increase the chances of
financial added value by combining activities. Furthermore, combining activities offers private parties more options for optimisation.
Submitting the determined scope to the decision-makers
The result of this five-step plan may be an amended scope or even an entirely different scope from the one provided at the start of the PPC. You must submit this amended or new scope and the initiation report to the decision-makers as advice. If the decision-makers wish to deviate from the scope which potentially provides the most added value, they are obliged to state their reasons in the PPC for doing so.
Appendix 2 lists examples of how you can determine the scope of the PPC in concrete project situations.
10 If you do not include a particular activity in the PPC, you must substantiate this exception. If outsourcing a separate activity in itself does not provide added value, this does not constitute a reason for leaving it out of the scope, because added value is often achieved by a better harmonisation of activities. A valid reason for excluding an activity from the scope may be that the market does not offer good solutions.
Example, combining activities offers private parties more options for optimisation.
One private contractor designs and realises a building and is also responsible for cleaning during the operational phase. This combination means that this contractor can already take the cleaning activities into account in designing the building by making sure that the rooms in the design are easy to clean.
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Determining the duration: carefully and substantiated
The duration selected in the PPC is usually the same as the duration of the contract in the private implementation scenario, although this is not always the same. Carefully choose the duration, because it influences the outturn of the PPC. In determining the optimal duration several factors come into play, such as the duration of an object's lifecycle, the predictability of demand and the customary contract terms for the product or service in the market. Therefore, the optimal duration is not always unambiguous. In these cases, the choice for a particular duration is a strategic decision which you have to substantiate well.
Assessment of lifecycle and investment expenses
In determining the duration, you must take into account the period in which reasonably can be provided for the demand for the product and/or the service from the Project. On the other hand, it is important to harmonise the duration in the PPC with the lifecycle of the necessary investments in order to optimise the financial results. This enables private parties which have to make investments first before they can provide the products and/or services to have sufficient time to recover investment expenses and to stimulate them to minimise the total costs across the entire lifecycle.
You may also decide you want the duration of the PPC to be longer than the duration of the investments which have to be made. By making the duration of the contract longer than the lifecycle of certain investments, private parties are stimulated to take account of replacement investments. They will strive to minimise the replacement investments or to extend the lifecycle by using sustainable materials and by providing optimal maintenance.
Customary contract terms: sometimes a good indicator for duration
In actual practice, a good indicator for the optimal duration is usually found in the contract terms customary in certain sectors. However, you must take account of project-specific situations.
Sometimes, the customary contract term gives the wrong indication, particularly if you have to determine a duration for operational management activities. In case of operational manage-ment activities, services do not terminate after expiry of the contract, but they are put out or 'in' for tender again. The risk in this is that the outturn of the PPC are strongly determined by the contract term chosen, particularly when the transition costs are high. The shorter the
Example, Duration in relation to investment lifecycle
A PPC of 31 years has been chosen for the project involving the widening of a road. The duration is divided into a preparation phase of 1.5 years, a transaction phase of 1.5 years, a realisation phase of 3 years, followed by a maintenance phase of 25 years.
A 25-year maintenance phase has been chosen because all important components of the contract, such as the layer of asphalt, will have at least been replaced one in the course of the contract.
contract term, the less time private parties have to recover the transition costs, and the more expensive the private implementation scenario becomes. In these cases, it is often forgotten that the costs in private implementation scenarios may structurally be lower after the contract term due to cost-saving measures. This advantage is not factored in when the contract term is applied as the duration in the PPC. In order to prevent this situation, the duration in the PPC in case of structural operational management activities such as catering or ICT support for workstations is at least twenty years. You are free to deviate from this duration, but only if you can substantiate this decision.
In the PPC, allow for the fact that upon expiry of a contract, activities have to be put out to tender again. This entails extra expenses, but the organisation also has to be prepared for this. Include an estimation of these costs in the PPC.
Three implementation scenarios in the PPC
Before you start the qualitative and quantitative comparison of the implementation scenarios (see modules 2 and 3), it has to be clear which implementation scenarios you are going to compare. Therefore, it is important that you describe the various scenarios in great detail. In the PPC, three implementation scenarios are assessed and compared.
The public implementation scenario
This is the implementation scenario in which the Project is executed in accordance with current practice. A desired implementation scenario in principle cannot be used as a public implementation scenario11. If a public implementation scenario which deviates from current
practice is still selected, this must be clearly substantiated, for instance by means of already approved and implemented change processes. It is recommended to take a critical look at the expected results of these change processes.
In the public implementation scenario, a government agency does not have to do everything on its own, because certain elements may have already been outsourced in the existing situation. In case of new products or services, make sure to link up with the implementations scenario of any previous, similar projects assigned by the client. Contract with external parties in the public implementation scenario are usually shorter than the selected duration of the PPC. Also make sure to include future contracts which will be concluded within the duration of the PPC. Otherwise you will not be able to properly compare the public implementation scenario with the private implementation scenario.
Private implementation scenario
The private implementation scenario is based on activities being outsourced in an integrated manner based on output specifications. The starting point is that all activities which fall within the scope are contracted out to the private party. In the private implementation scenario, the central government, as the client, determines the 'what' and the private contractor determines
11 Often, there are plans to improve the existing practice, but the implementation does not take place, or the results fall short of expectations. Therefore, a desired implementation is often unsuitable as a reference for the public implementation scenario.
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the 'how'. The private contractor therefore has the freedom the optimise the implementation. The private contractor is remunerated based on performances agreed on beforehand. The agreed on performances are not products, but obligations of result such as high customer satisfaction. The central government uses the DBFM(O) contract form (Design-Build-Finance-Maintain-Operate) as the private implementation scenario for investments in buildings amounting to more than twenty-five million euros and for investments in infrastructure amounting to more than sixty million euros.
Other (interim) scenarios
If you wish, you may include more scenarios in the PPC in addition to the public and private implementation scenarios.12 These may be public-private interim scenarios, but also other
private scenarios or other public scenarios. You do need sufficient reliable data in order to identify and quantify the relevant differences between these scenario(s) and the public and private implementation scenarios.
You must take into account that it takes more time to conduct the PPC with each extra scenario you decide to include. A critical assessment of the financial added value each possible
implementation scenario may yield saves time in the rest of the process.
The PPC is essentially a financial comparison tool. However, the decision-makers also allow for non-financial matters, which therefore form a part of the PPC. In the PPC, financial and non-financial considerations are not balanced against each other, but the decision-makers determine to what extent the non-financial considerations are weighed.13
Non-financial considerations may influence the selection of the scenario with the highest financial added value, but they may also form a decisive argument against a particular implementation scenario. Therefore, it is important to clearly formulate and substantiate the non-financial considerations so that the decision-makers are informed about the arguments, which may result in them selecting another scenario, despite the financial added value of a particular implementation scenario (public, private or other). In order to prevent too much attention being placed on the scenario with the most financial added value, the identification of the non-financial considerations takes place before the financial calculation.
12 It is also possible to compare the public and private scenarios in the PPC first. Only when the private implemen-tation scenario does not yield added value, may the public implemenimplemen-tation scenario be compared to other scenarios. This is the current practice for government buildings projects.
13 For investments in buildings and infrastructure, such as roads, railways and sluices, the government has decided that the central government must in principle choose DBRM(O) when this would yield added value (28753-23, Government's view on DBRM(O)).
General and project-specific non-financial considerations
Non-financial consideration may be general (e.g., effects on a sector or region) or project-specific (e.g., consequences for the organisation's identity). Include all relevant non-financial considerations in the initiation report.
Continuing insights into non-financial considerations
Even if the initiation report has already been released, new non-financial considerations may be identified during the rest of the PPC process. It may also become transparent that non-financial considerations may be translated into non-financial considerations after all. The amendments ensuing from the continuing insights must be included in the final report (see module 4).
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Examples of non-financial considerations
Non-financialconsideration
Explanation
Flexibility of products and services
Since future developments are hard to predict, supporting activities must be flexible in responding to the latest demands and wishes of the organisations, particularly in case of long-term contracts. It depends on the implementation scenario chosen how these demands and wishes can be achieved. In case of the public implementation scenario, the government is responsible itself for adapting the supporting activities in a timely manner. In case of the private implementation scenario, the responsibility for the implementation lies with an external party, and it has been stipulated in the contract how changes in the demands and wishes should be dealt with. Which implementation scenario scores best on flexibility depends on several things, such as the extent to which a public party is able to anticipate new needs, and how certain or uncertain future developments are.
Core duties of the government
A non-financial consideration may be that the management wants to focus as much as possible on the organisation's core duties and to leave the non-core duties to a private party. In the private implementation scenario, the contracting out of non-core duties is maximal, because the private party both manages the implementation and is responsible for attuning the various activities as well as possible, such as design, construction and maintenance of a new office building. This leaves the government party to manage compliance with the agreed on performances.
Budget flexibility In case of a long-term contract between the government and a market player for construction, financing and maintenance, for instance of a road, these parties make agreements beforehand about the quality of said road. If the market player complies with the agreements, it receives periodic compensa-tion with which it may recover the investment and the maintenance expenses. The agreements and the compensation are laid down in a contract. This makes it more difficult for the government to adjust the budget for management and maintenance downwards in case of future cutbacks. (This is only possible after amending the contract.) In this case, the disadvantage of the private implementation scenario is the limited budget flexibility. The advantage is that quality is guaranteed for the entire duration of the contract and is not influenced by short-term cutbacks.
For both the public and the private implementation scenario, the PPC starts from the premise that there is sufficient budget for the anticipated maintenance costs.
Innovation Innovation is stimulated when the request is result-oriented and when the contractor has sufficient room to determine how to achieve these results. The contractor has the most freedom in the private implementation scenario. On the other hand, risk transfer may result in private parties being wary of pursuing break-through and therefore high-risk innovations.
Module 2
Module 2 Qualitative analysis
Whereas in module 1, the focus lies on determining the manner in which the PPC is conducted, this module explains how you can identify and list the expected expenses, receipts and risks of the Project. This module also explains how you can draw up the expected differences between the public and private implementation scenarios. During the various phases of a project, various expenses are made such as design expenses, education expenses and investments in equipment. In the course of time, project risks may arise, for instance construction risks, setbacks in maintenance or difficulties in recruiting staff. On the other hand, there may be receipts. In this module, you map identify and list the sources of these expenses, receipts and risks.
In this module, you only describe the expenses, receipts and risks, and in module 3 you learn how to calculate them.
Objective
Gaining insight into the qualitative differences between the implementation scenarios.
Output
a Overview of expenses, receipts and risk items.
b Overview of the qualitative differences between the public and private (and any other) implementation scenario per item.
Module structure
In action 2A, you learn how you can identify and list the relevant expenses and receipts of the Project, and how to describe the associated risks. In action 2B, you learn how you can make a qualitative assessment of each of these items or if there is a difference between the various implementation scenarios.
The first step in making a qualitative analysis is a description of all expenses, receipts and risk items in the various project stages of the Project.
Action 2A Describing receipts and expenses and risk items
Action 2B Making a qualitative assessment of both implementation scenarios
Module 1 Initiation report Module 4 Final report Module 2 Qualitative analysis Module 3 Quantitative analysis
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Comparing the implementation scenarios in broad outlines
You should take into account that you are only comparing the implementation scenarios in broad outlines when you are determining the items and collecting the financial data. The PPC is not intended to determine the absolute financial level of the implementation scenarios, but only sheds light on the differences between the scenarios. Furthermore, you conduct a PPC when the project details have not been fully described yet. This means that you do not have to add much detail to the expenses, receipts and risks, because this would lead to apparent accuracy and duplication rather than a reliable result.
Clustering expenses, receipts and risks per lifecycle phase
If you want to have a good overview, it is important that you cluster the expenses, receipts and risks in a practical manner. You can divide the expenses, receipts and risk items in various ways. A well-thought out division offers a practical tool with which you can list all relevant expenses, receipts and risk, and it prevents duplication. We therefore advise you to divide these items according to the relevant lifecycle stages. The diagram below depicts the various lifecycle stages of a Project, of which the expenses, receipts and risks are mapped out in the PPC. Any expenses incurred during the initial phase or assessment phase, including the expenses incurred in drawing up the PPC, have not been included. This is because these expenses do not differ per implementation scenario.
In the PPC, you divide the expected expenses, receipts and risks in a Project's following five lifecycle phases:
a Preparation phase
This includes expenses up to the start of the call for tenders or in preparation of a reorgani-sation, for instance expenses incurred in drawing up a Schedule of Requirements. b Transaction phase
This includes expenses of (a) call(s) for tenders or expenses incurred in entering internal service provision agreements (for instance, tying in with a government-wide shared service centre). This concerns all tender-related expenses for the entire duration of the Project. If short-term contracts for certain components are concluded in the public implementation scenario, you must also include all retender-related expenses within the selected duration. c Realisation phase
This includes all expenses for constructing a new object or for the transition to a situation in which an operational management activity has been outsourced, for instance in the construction of a road/railway, a government office building, a barracks facility, a new supporting ICT system, or reorganisation expenses for the transition of staff to a new employer.
Transaction
phase Operational phase Final-phase
Preparation phase Initial phase Assessment
phase
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Realisation>
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phase
d Operational phase
This includes all costs of operations, maintenance costs and any receipts for the duration of the Project, such as repair costs, replacement investments and amendment costs.
e Final phase
This includes all expenses and receipts borne by the public client at the expiry of the contract, including costs connected to a transfer or a dismantling, or any receipts from sales for the public client.
Based on this division in lifecylce stages, you determine which expenses, receipts and risks are important to the selection of the implementation scenario. Module 3 will show you how to quantify these items. Appendix 3 contains model overviews of expenses and receipts. Appendix 4 explains how you can draw up a list of relevant risks, and Appendix 5 lists examples of pure risks.
Expenses
When drawing up expenses, it is important to pay attention to hidden expenses and transition expenses. You must include these hidden expenses in the PPC, otherwise you cannot make a proper comparison of the implementation scenarios. For instance, the costs of the public implementation scenario are not always fully estimated, because not all Project-related expenses incurred are borne by the Project alone but by the entire organisation. For example, this may be general expenses for managing services.
If duties are contracted out, this leaves your own organisation with more capacity, or you save on this capacity. Therefore, in this phase of the PPC, you decide which supporting services, such as human resources management and accounts, require less capacity because they will be contracted out.14Make an estimation how much less capacity is needed and state if this saved
capacity can be used within your own organisation, or if it is expected that expenses have to be made to reduce this capacity.
Transition expenses are all expenses which are necessary to prepare and extract the product and/or service from the existing organisation. Transition expenses are only made if the product or service can be outsourced to another party and may continue until after the actual
extraction. Receipts
In the PPC, you must make a distinction between two types of receipts: a Receipts during operations
The general guideline is that only receipts are included in the PPC which are relevant for the public implementation scenario. You must base the estimations of these receipts on previous projects or on realistically expected receipts and not on potential receipts. You may only include potential receipts if you can make them plausible based on a clear
substantiation.
14 A much-used division of supporting services is PIOFACH: Personnel, Information provision, Organisation, Finances, Administrative organisation, Communication and Housing.
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b Receipts after operations
At the end of the Project's lifecycle, there may be receipts from the residual value of certain assets, for instance from the sale of land, sustainable materials, production resources, buildings and inventory and equipment. It is not always easy to determine the residual value, because things will not be effected until at a (much) later date. Therefore, you should only include this residual value if it is relevant to the comparison, meaning if it significantly differs per implementation scenario.
Risks
After including and dividing the expenses and receipts, you identify and list the risks. These are events or factors which have a substantial financial influence on the extent of the expenses and receipts determined by you. For instance, in a construction project, you may encounter delays on account of heavy rainfall or hailstorms, which leads to higher expenses. The starting point is that risks only the client can influence, such as decision-making risks, remain the responsi-bility of the client. This means these risks are not transferred to the contractor. You do not need to make these risks financial, because they are virtually the same in each implementation scenario and therefore not distinctive.
It is not necessary to conduct an extensive and detailed risk analysis in the PPC phase; this will be done at a later stage in the Project. However, for the PPC, you must identify which events or factors pose the biggest risks to the Project's financial results. The risk analysis is conducted in the following steps:
1 Brainstorm about the biggest risks in each phase of the lifecycle. The PPC Team participates in the brainstorm, assisted by internal and external legal, financial and technical risk experts, if necessary.
2 The PPC Team draws up a list of the biggest risks of the Project and describes them briefly. Since the PPC concerns a general risk analysis, this list does not have to be exhaustive. You may limit it to the ten identified biggest risks.
The list with identified risks is the same by definition for all implementation scenarios. However, the probability (chance) and scope (impact) of the identified risks may differ per implementation scenario15. These differences will be addressed at a later stage when you will
quantify the risks (see module 3).
Appendix 4 contains a more detailed description of a risk analysis.
15 For instance, in case of contracting out existing operational management activities, transition risk is not present in the public implementation scenario (chances are zero), because in the public implementation scenario operational management activities are not transferred to another contractor, thus no transition takes place.
If you have created an overview of the expenses, the receipts and the risks, it is time to analyse the differences per item and per risk between the private and public implementation scenario. Once again, this concerns a qualitative analysis and not a quantitative analysis. You answer the question for each expense, receipt and risk if the level in one implementation scenario is higher than expected, lower than expected or the same as in the public implementation scenario. You also state why this is expected. At a later stage, you will quantify the differences (see module 3).
This qualitative assessment of the differences between the implementation scenarios is done as follows:
a Describe the unique characteristics of the Project. For instance, if the Project concerns the realisation of a new office building, the requirements will most likely be comparable to those for an office building of another government body. Naturally, there may be unique characteristics for the office building for which you are drawing up a PPC, if it has to comply with higher security regulations because state secrets will be saved there, for instance. b When assessing the differences between the implementation scenarios, we suggest you start
top-down. By describing the differences in broad outlines first it will be easier to assess the differences between the public and the private implementation scenario per item and per risk (see Appendix 7 for the determining differences).
c Research how big the impact of these differences on the Project is, and check if any major differences are lacking in the description. If you have included extra scenarios in the PPC, you must also describe the differences between the extra scenario(s) and the public implementation scenario.
d Determine the qualitative difference to the public implementation scenario for each expense, receipt and risk. Below, you can read how to do this.
Substantiating a qualitative variance analysis
In order to substantiate the expected differences implementation scenarios, you use all available preliminary studies, estimates and other relevant material about the Project. You are also advised to make use of useful information about similar projects from the central government or from the market. If there is little data available, request market players to explain how they would achieve the desired output in the public implementation scenario. Hopefully, you will be able to get a clear image of the differences between the implementation scenarios with the information gained from such market consultations.
Analysing risks based on manageability
Regarding the risks, the qualitative difference between the scenarios lies in the extent to which the risks are managed. This depends in part on the party which bears the risk and the party which is able to manage the risk. In case of the private implementation scenario, the starting point is that risks are placed with the party who is best able to manage them. This means that only those risks are transferred from the public party to the private party, if the private party is better able to manage or bear the risks. In the realisation phase, risks such as delay caused by a Action 2B Making a qualitative assessment of both implementation scenarios
29 Module 2 Qualitative analysis
design flaw will be borne by the private party. The public party usually remains responsible for risks such as delay caused by amended requirements and force majeure, such as an earthquake or a flood.
This means you assess whether the client or the contractor is better able to bear or manage the risk for each separate risk. It may help to ask yourself the question to what extent either the client or the contractor are stimulated to manage the risk for each implementation scenario. The more they are stimulated, the more strict they will see to the drawing up of and compli-ance with management measures.
Creating a differences matrix
The result of the qualitative analysis is an overview of all expenses, receipts and risk items, with a substantiation of the assessment. For each implementation scenario, you determine if an expense or a receipt is expected to be higher or lower than or the same as those in the public implementation scenario. You do the same for the risks: you assess whether or not they are managed better (positive), worse (negative) or the same (neutral).
Qualitative differences matrix: an example
Mission Phase Difference between
private and public
Substantiation
Costs of external hiring Transaction Negative Due to the longer and relatively new manner of tendering, we expect the need of external hiring to increase. Construction expenses Results Negative Since the maintenance expenses are
transferred to the private party, it is likely that this party will invest more in sustainable materials, which will increase the construction expenses. Staffing costs Operational Positive The wage costs for operational staff is lower in the private implementa-tion scenario, because the design already takes account of a limitation to the deployment of personnel. This means that the Project can be operated with less personnel, leading to less staffing costs. Maintenance expenses Operational Positive Thanks to lifecycle optimisation, a
private party will achieve a design with lower maintenance expenses. Risks of malfunctions
(ICT or other)
Operational Positive Since a private party is directly assessed on availability and since the private party is able to properly manage the risk of malfunctions because it controls the design, realisation and maintenance itself, the private party is expected to be able to minimise the risk of malfunctions, resulting in less malfunctions than in the public implementation scenario.
Module 3
Module 3 Quantitative analysis
After you have made a qualitative assessment of the difference between the implementation scenari-os, you quantify these differences in this module. This creates insight into the financial differences between the implementation scenarios. With the outturn of the quantitative analysis you should be able to make an optimal assessment of the financial added value to be gained. You should take into account that for the phase in which the PPC is conducted, namely the assessment phase of the Project, a variance analysis in broad outlines suffices. A thorough, financial analysis is not required here.
Objective
Gaining insight into the financial differences between the implementation scenarios.
Output
An overview of expenses, receipts and risks of the Project and assumptions with which cash flows can be calculated. These are:
• The cash flow statement of the public implementation scenario • The cash flow statement of the private implementation scenario
• The cash flow statement of any other implementation scenario described in the initiation report
• The net cash differences between the implementation scenarios
Module structure
The figure below shows the steps taken in the quantitative analysis. Steps in the quantitative analysis
Action 3A Preparing for the drafting of cash flow statements Action 3B Quantifying the public implementation scenario
Action 3C Quantifying the private implementation scenario and any other implementation scenario Action 3D Calculating the net cash value and conducting a sensitivity analysis
Module 1 Initiation report Module 4 Final report Module 2 Qualitative analysis Module 3 Quantitative analysis
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Module 2 Action 3A Action 3B Action 3C Action 3D
Module 3
Overview qualitative differences
Preparing for the drafting of cash flowstatements Quantifying the implementa-tion scenarios Quantifying private and other implementation scenarios
Calculating net cash values
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The basis for the quantitative analysis is the outturn of module 2, namely the overview of the qualitative differences between the implementation scenarios.
• Action 3A determines the relevant factors which are important for drawing up the cash flow statement of each implementation scenario.
• Action 3B quantifies the expenses, receipts and risks of the public implementation scenario. The public implementation scenario is the benchmark against which the other implemen-tation scenarios are tested.
• Action 3C quantifies the differences between the private implementation scenario (and any other included implementation scenarios) and the public implementation scenario. In this action, you look at expenses, receipts and risk items.
• In action 3D, the net cash values of the implementation scenarios are calculated. All cash flows per year are restated to their current value, or the net cash value. The difference in net cash value is the financial added or decreased value of a particular implementation scenario. Finally, a sensitivity analysis is conducted to test the robustness of the financial outturn.
In order to be able to conduct the quantitative analysis, you first draw up the framework for the cash flow statement and determine guidelines.
Framework for cash flow statement
a Start the overview with the date on which the preparations for the Project begin and end the overview with the end of the duration of the PPC, as determined in module 1. This start and end date are the same for the public and private implementation scenarios.
b For each year, you must state the net off amounts and you must provide a brief overview of how you have calculated these amounts16. 'Net off' means that the expected receipts are
deducted from the expected expenses, and the value of the risks is added to the expenses. c State in the cash flow statement which receipts, expenses and risks belong to which phase:
preparation, transaction, realisation, operations or termination.
General guidelines
The following general guidelines apply to the quantification of the implementation scenarios: Explanation
Substantiate all choices with as many objectively verifiable data as possible. Show how you have calculated each amount by documenting the source data and the assumptions. This substantiation must be traceable and verifiable after the conclusion of the PPC.
16 Amounts in the cash flow statement have to be traceable. This means that it is clear how the net off cash flows are built up component which the reader finds easy to understand.
Module 3 Quantitative analysis
Inflation
Determine the inflation index (or indices) for which the cash flows have to be corrected, or how they are converted into nominal amounts (amounts including inflation). Explain your choice of index or indices17. Estimate all items from one and the same price level.
Tax aspects
Central government bodies do not include VAT in their calculation of the PPC. On a central government level, VAT is not relevant since payment by the commissioning government body to the Tax and Customs Administration leads to an equal VAT income for the central
government18.
In module 2, you saw how the expenses, receipts and risks were identified in the public implementation scenario. Below you will find information on how to quantify these items and risks.
Quantifying expenses and receipts
In order to quantify the expenses and receipts in the public implementation scenario, you first look at the current situation. Which expenses are made and which receipts are received? It is not necessary to collect all financial data, but you should focus on the items which will probably differ per implementation scenario. In case of a new Project, you cannot base the quantification on an existing situation, so instead you should use historical data from similar projects executed by the government body in the past. You should also make use of the government-wide benchmark data, for instance the standard costs for a workstation.
Quantifying risks
In quantifying risks in the public implementation scenario, you have to distinguish between two types: risks and market-related spread risks. 19Pure risks are special events during one of
the project's phases which negatively influence the net financial results (see Appendix 5 for examples). Spread risks are events which result in deviating assessed amounts, both down-wards and updown-wards. Pure risks are included in the cash flows (by adding them to the expenses of a certain year) and market-related spread risks are included in the discount rate (see
17 You may also choose to leave out inflation in the calculations, in which case you have to start from a real discount rate. The real discount rate is the discount rate without inflation. However, we do not recommend this. In order to determine the real discount rate, you have to assess the inflationary expectations. There are sources which may give an indication, such as the CPB Netherlands Bureau for Economic Policy Analysis, but market data which can precisely determine inflationary expectations are not available.
18 If you are drawing up a PPC for a local authority or a semi-public institution and the VAT is a decisive factor in selecting a particular implementation scenario, you are advised to contact the Tax and Customs Administration, because specific tax agreements have been made for the public implementation scenario for local authorities. 19 Another risk category is formed by technical spread risks. Technical risks relate to insecurity regarding assessed
amounts and prices. These risks may be excluded from the PPC due to the broad and general character of the PPC, but they are included in the PSC.
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Appendix 6 for an explanation of the discount rate and action 3D and Appendix 4 for determin-ing the level of the discount rate).
The most important pure risks are identified with the help of the risk analysis in module 2. You quantify these risks by placing them in a risk matrix for each implementation scenario: how probable is it that these risks will occur, and what financial impact will they have when they happen?20
Appendix 4 contains a detailed description of a risk assessment.
The public implementation scenario forms the bases for calculating the expenses, receipts and risks for the private implementation scenario and any other implementation scenario. The relative deviation is assessed for each item as compared to the public implementation scenario.
Substantiate the differences with historical data or other sources
Determine the differences between the public and private/other implementation scenarios in such a way that you can demonstrate later on that the assessment was a 'best effort'. It is preferred you use historical data. If no historical data are available for certain items, you may make use of other sources, such as:
• market consultations; • expert opinions;
• comparative studies, researches and evaluations.
Use comparable benchmark figures
Bench mark figures are available for certain products and/or services. By comparing the internal cost prices with the external benchmark figures, you can get a good indication of the financial added value in a particular implementation scenario. However, in practice it has turned to be difficult to check which expenses were and which were not included in the benchmark figures. When you compare benchmark figures with internal cost prices, you therefore have to demonstrate that the scope of the benchmark is comparable to that of the internal cost price.
Likewise, if you use prices of internal service providers or benchmark figures from the central government, you have to check if the comparison is fair, and if the same expenses, receipts and risks were included for the services or products in the various implementation scenarios.
20 There are other methods to make a first, rough calculation of pure risks. For instance, calculating the risk profile of the Project with the help of a top-down risk assessment based on historical data without identifying the individual risks.
Module 3 Quantitative analysis
Include transition expenses in the comparison in case of make-or-buy
considerations
If the existing service provision is not continued in its current form, but an implementation scenario other than the public implementation scenario is chosen, transition expenses are usually paid. Include these transition expenses in your comparative calculation in order to properly assess the private implementation scenario(s). See module 2 for an explanation of transition expenses.
Quantifying risks
When quantifying risks, allow for the fact that these risks may be managed differently in each implementation scenario21. It may also be the case that a particular risk does not apply to a
particular implementation scenario.22 The chances of this risk occurring is zero, so please state
0 in the corresponding implementation scenario. You have to add the results of the chances per implementation scenario x the impact of the calculations per Project phase to the cash flows of the implementation scenarios.
Risk matrix for an implementation scenario, a simplified example
Phase Risk Chances of
the risk occurring Impact if risk occurs Value of risk Preparation Ambiguities in output specification 20% 400 80 Preparation Total
Transaction Effect on price as a result of limited market tension
10% 1,000 100
Transaction Total
Results Chances of extra work in the realisation phase
50% 2,000 1,000
Realisation Total
Operational Chances of extra work in the operations phase
50% 1,000 500
Operations Total
Total of phase V - E 1,680
21 For instance, interface risks between design and implementation can be managed better by a contractor who is responsible for both the design and the implementation. In this situation, interface risks occur less rapidly and they have a smaller financial impact if they do occur, which means that they are assessed at a lower amount in the quantification.
22 For instance, transition risks, including possible ICT problems, if ICT systems of the private party are linked to the ICT system of the government party. In the public implementation scenario, an existing activity is contracted out within the organisation, which means that no new links have to be made and no transition risks will occur.
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Quantitative differences matrix: an example
Phase Mission Year Costs of public
implementation scenario % Difference to private implementa-tion scenario Costs of private implementa-tion scenario Preparation Deployment of staff t0+1 0.5 million +20% 0.6 million Other items in preparation phase Transaction Deployment of staff t0+2 2 million +50% 3 million Other items in transaction phase Results Investment in fixed assets t0+3 20 million +10% 22 million Other items in realisation phase Operational Maintenance expenses t0+5 t/m 15 1 million (per year) -25% 0.75 million (per year) Other posts in operational phase
In this last component of this module, you learn how to calculate the cash value of amounts. Money which is currently being spent has a different value than the same amount of money that will be spent next year. Include this in you calculation by restating the cash flows in the different years to the value on the start date. You can do this in two steps:
1 Discount the amounts set out through time (and net off ) to the start date. 2 Add the discounted amounts.
Finally, conduct a sensitivity analysis to check if the results are robust. The net cash value and the sensitivity analysis form the basis for the final report (see module 4).
Setting out cash flows through time
The moment of completion may differ per implementation scenario. These differences may have an effect on the outturn of the net cash value. This value decreases when the expenses lie further ahead in the future. This may mean that the last implementation scenario in which the Project is completed may have the lowest net cash value without this yielding added value. In order to calculate similar net cash values, you have to start from the same start date in each implementation scenario (date on which the provision of the products or services started) and the same end date.
Module 3 Quantitative analysis
