Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

adjustments for Competitive Neutrality, Retained Risk and Transferable Risk to achieve the required service deliveryoutcomes, and is used as a benchmark for assessing the potential value for money of private party bids.The PSC should:- be expressed as the Net Present Cost of a projected cash-flow based on the specified government discount rateover the required life of the contract;- be based on the most recent or efficient form of public sector delivery for similar infrastructure or relatedservices;- include Competitive Neutrality adjustments so that there is no net financial advantage between public and privatesector ownership;- contain realistic assessments of the value of all material and quantifiable risks that would reasonably be expectedto be transferred to the bidders;- include an assessment of the value of the material risks that are reasonably expected to be retained by thegovernment.The assessment requires a number of steps:Raw PSC. First of all a raw PSC has to be estimated, which provides a base costing under the public procurementmethod where the underlying asset or service is owned by the public sector. This includes all capital and operatingcosts, both direct and indirect, associated with building, owning, maintaining and delivering the service (orunderlying asset) over the same period as the term under the Public Private Partnership, and to a definedperformance standard as required under the output specification. One of the keys to constructing a PSC is theidentification of the Reference Project. The Reference Project is the most likely and efficient form of public sectordelivery that could be employed to satisfy all elements of the output specification.Figure G.1 Public Sector ComparatorCompetitive Neutrality adjustments remove any net advantages (or disadvantages) that accrue to a governmentbusiness simply by virtue of being owned by the government. This allows a fair and equitable assessment between aPSC and the bidders.Transferable risk Estimate of the value of those risks (from the government’s perspective) that are likely to beallocated to the private party.Retained risk Estimate of the value of those risks or parts of a risk that the government proposes to bear itself.Risk adjustment bids may propose different levels of risk transfer. Before the PSC can be compared against theaccepted variant bids, the level of risk transfer proposed in each bid should be analysed to reflect the level of risktransfer proposed by the government.This is achieved by adjusting the relevant bids through the following method:- where a bid offers a greater level of risk transfer to the private sector than proposed by the government, theadjustment to the bid cost will be negative (reduce the total bid cost); or232