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Single Assessment Framework –Business Case Guidance Notes (all tiers) Page 1

ContentsThe Capital Framework (TCF).................................................................................................................1

Single Assessment Framework...............................................................................................................1

Contents.................................................................................................................................................2

A. Introduction....................................................................................................................................4

i) Background.................................................................................................................................4

ii) Objectives...................................................................................................................................5

iii) Policy Statement.........................................................................................................................6

B. Business Case Preparation..............................................................................................................7

1. Executive Summary........................................................................................................................9

2. Project Outline.............................................................................................................................10

2.1 Description of the Project.....................................................................................................10

2.2 Review 1 (PCW): Status of Functional Brief/Output Specification........................................10

3. Needs Analysis..............................................................................................................................12

3.1 Problem................................................................................................................................12

3.2 Benefits.................................................................................................................................13

3.3 Options Analysis...................................................................................................................14

3.4 Review 2 (Treasury): Needs Analysis....................................................................................15

4. Cost and Contingency...................................................................................................................17

4.1 Preliminary Cost Estimate.....................................................................................................17

4.2 Contingency..........................................................................................................................18

4.3 Whole of Life........................................................................................................................21

4.4 Budget / Funding Strategy....................................................................................................24

5. Cost and Economic Analysis.........................................................................................................25

Purpose............................................................................................................................................25

Framework.......................................................................................................................................25

5.1 Cost-Benefit Analysis (Economic Efficiency Analysis)............................................................25

5.2 Wider Economic Benefits (where applicable).......................................................................30

5.3 Cost-Effectiveness Analysis...................................................................................................31

6. Delivery Model Analysis...............................................................................................................32

6.1 Outline of Delivery Models...................................................................................................32

6.2 Outline of Key Risks..............................................................................................................38

Single Assessment Framework –Business Case Guidance Notes (all Tiers) Page 2

6.3 Commercial Principles..........................................................................................................38

6.4 Delivery Model Assessment..................................................................................................41

6.5 Recommended Delivery Model............................................................................................44

6.6 Review 3 (PCW): Delivery Model Selection...........................................................................46

7. Financial Analysis (PPP & DCMO only)..........................................................................................47

Economic Infrastructure...................................................................................................................47

Social infrastructure.........................................................................................................................49

7.1 Financing Assumptions.........................................................................................................51

7.2 PPP/DCMO Payment Stream................................................................................................51

7.3 Incremental Procurement/Transaction Costs.......................................................................52

7.4 Public Sector Comparator (“PSC”)........................................................................................52

7.5 Review 4 (Treasury): Financial..............................................................................................53

8. Project Governance......................................................................................................................55

8.1 Governance and Stakeholder Management.........................................................................55

8.2 Key Roles & Responsibilities.................................................................................................55

8.3 Typical Governance Structure for Tier 1 Projects.................................................................58

8.4 Typical Governance Structure for Tier 2 Projects.................................................................59

9. Stakeholder Engagement Plan......................................................................................................60

9.1 Stakeholder Identification....................................................................................................60

9.2 Stakeholder Involvement and Interest.................................................................................60

9.3 Stakeholder Engagement Plan..............................................................................................61

10. Advisor Engagement Plan.........................................................................................................63

10.1 Proposed Advisors Roles.......................................................................................................63

11. Timelines..................................................................................................................................67

11.1 Project Timetable.................................................................................................................67

Appendix A: Economic Analysis Guidelines..........................................................................................68

Appendix B: Risk & Contingency Management....................................................................................73

i) Risk Management Process........................................................................................................73

ii) Risk Workshops........................................................................................................................74

iii) Risk Management.....................................................................................................................77

iv) Contingency Management.......................................................................................................77


A. Introduction

i) Background

The ACT Government (“the Territory”) has developed The Capital Framework (“TCF”), which outlines the capital works review process. Stage 3 (Prove) of TCF includes a pre-funding business case review referred to as the Single Assessment Framework (“SAF”). This provides a structured basis for the review of capital works projects prior to funding. This framework does not intend to replicate the complex “multi-gate” capital works review processes utilised by other jurisdictions, however it aims to develop a streamlined and fit –for-purpose review process with a single “gate” prior to funding. The new business case process is a critical part of TCF.

The business case process is designed to achieve a number of practical outcomes. These are:

Prevent poorly developed output specifications/functional briefs going to market Ensure risks are allocated to the party that can best manage them Embrace a broader range of delivery models Realise improved value for money outcomes in capital works procurement

The SAF will enable the Territory to embrace a broader range of delivery models and facilitate a more appropriate allocation of risk. The level of analysis required escalates in complexity based on the value and risk profile of the project in accordance with the following three tiers. The tiers are indicative only and flexible based on risk and scope of the particular project. The three tiers are:

Tier 1: >$50mTier 2: $10m - $50mTier 3: <$10m

Each tier has an associated template and each template contains a series of questions under each section of this guide. It is important that each of the questions in the template is addressed when preparing the full Business Case. An overview of the TCF is provided in Figure 1:


Figure 1: The Capital Framework Process

ii) Objectives

The SAF aims to be a one-step pre-funding assessment of capital works proposals supported by further initiatives in relation to programming and post-implementation reviews. The purpose of the SAF is to provide an upfront business case driven rigor to capital project evaluation. It also enables Treasury to make an informed assessment of the investment proposal prior to forwarding it to Budget Committee of Cabinet. The objectives of the SAF are aligned with the overall objectives of the TCF which are:

Funding Objective: to provide qualitative and economically measurable information to assess and prioritise capital funding. This will ensure that scarce funds are rationed to projects in order of economic merit. This is primarily defined through needs analysis and economic assessment.

Spending Objective: to place a far greater emphasis on up-front analysis where savings per dollar spent are greatest. A formalised and consistent approach will be applied to:

Risk assessment; Risk quantification; Development of commercial principles; and


Delivery model selection.


This will ensure that scarce funds are spent in a manner that optimises value for money outcomes by allocating risk to the party than can best manage it.

Process Objective: to be fit-for-purpose to meet the Funding and Spending objectives. The proposed three tiered approach helps ensure that the level of analysis is proportional to scale of the project.

iii) Policy Statement

The SAF will operate in, and support, the existing legislative and policy parameters of Territory Procurement. The primary legislation is the Government Procurement Act 2001 which defines and requires adherence to the procurement principle – value for money. At section 22A (3) that Act requires regard be given to probity and ethical behaviour; management of risk; open and effective competition; and optimising whole of life costs. A suite of other Territory enactments are relevant to interpreting this requirement, including:

1. The Financial Management Act 1996, which requires at section 31 that the director-general of a directorate is accountable to the Minister of the directorate for the efficient and effective financial management of the directorate;

2. The Public Sector Management Act 1994 which at Part 2 sets out the operating values and principles of the ACT Public Services, including at sections 6 accountability to the government for the ways in which functions are performed, fairness and integrity and efficiency and effectiveness;

3. The Environment Protection Act 1997, the objects of which include to achieve effective integration of environmental, economic and social considerations in decision-making processes; and

4. The Work Health Safety Act 2011, the object of which is to provide for a balanced and nationally consistent framework to secure the health and safety of workers and workplaces.

In line with optimising whole of life costs, consideration needs to be given to the medium and longer term costs of maintenance and major upgrades. Consideration also should be given to the broader economic costs of carbon emissions. The Government's stated targets for greenhouse reduction also need to be accounted for in the cost and design of these assets. Often this will mean examining a suite of environmentally sustainable features, and appropriate cost to benefit analysis being undertaken to determine the least-cost path to achieving the government stated green building standard.

The SAF is consistent with the goals set out in the overarching policy direction of the Territory as set out in The Canberra Plan: Towards Our Second Century. The Canberra Plan's vision is that Canberra will be recognised as:

A truly sustainable and creative city; An inclusive community that supports its vulnerable people and enables all to reach

their potential; A centre of economic growth and innovation;


The proud capital of the nation and home of its pre-eminent cultural institutions; and A place of natural beauty.

The SAF will provide a structured system to help meet the Government’s priorities with rigorous risk assessment, prioritisation and optimal management of the Government’s resources.

The SAF is also consistent with the ACT Government Infrastructure Plan: 2011–2021, which identifies a series of future directions in the strategic infrastructure planning and prioritisation processes including:1. Implementing strategic asset management and service planning across Government

agencies;2. Exploring strategic opportunities across all agencies to support innovation and quality

infrastructure design;3. Consulting on the need for a climate change vulnerability assessment framework for ACT

Government infrastructure;4. Strengthening strategic infrastructure planning by developing closer links with

Government prioritisation processes; and5. Engaging in continuous improvement of the planning and delivery of new infrastructure

investment in the Territory.

The SAF is consistent with the objectives of this Plan.

B. Business Case Preparation

The complexity of the business case required under the SAF varies according to the value and risk profile of the project. The three tiers are based on the total project value; however a project’s tier can be escalated by exception i.e. higher risks. The purpose of this document is to provide a single reference point providing guidance on the preparation of business cases under the SAF.

The tiers under the framework are broadly outlined in the following diagram:


Financial Analysis (PPP & DCMO)

Tier 3<$10m

Tier 2$10m - $50m

Tier 1>$50m

Project Outline

Needs Analysis

Options Analysis

Cost Estimates

Project Outline

Needs Analysis

Economic CBA

Delivery Model Analysis (internal)

Project Governance

Project Outline

Needs Analysis

Economic CBA with WEBs

Delivery Model Analysis (external) with PPP Assessment over $50m

Project Governance

Advisor Engagement Plan

Options Analysis

Cost Estimates

Timelines

Options Analysis

Cost Estimates

Timelines

Timelines

1 2 3

1 2 3

Tiers 1 and 2Applicable

1 2 3

Tier 1 business cases generally apply to projects over $50m or those selected by exception with high levels of risk. A Tier 1 business cases involve the greatest detail and technical complexity. It is strongly recommended that Tier 1 business cases involve the use of external advisors to assist in completion. The Procurement and Capital Works (PCW) maintains a panel of infrastructure commercial advisors to provide assistance in this area. This can be located at:

http://www.procurement.act.gov.au/contracts/contracts_register/contracts_register_functionality/panel_contract_search?queries_pcs_query=20254.110

The following icons advise which sections of these guidelines are applicable to the project tier.

These Guidelines are particularly tailored to support directorates in the internal development of business cases for Tier 2 and 3 projects.




All TiersApplicable 1 2 3

Template Instructions

For Tier 1 and High Risk Projects- Complete all sections of the consolidated Tier 1 and Tier 2 Template. For Tier 2 Projects - Complete all sections of the consolidated Tier 1 and Tier 2 Template except.

Section 5.2 Wider Economic Benefits, Section 7 Financial Analysis (PPP and DCMO only) Section 9 Stakeholder Engagement Plan Section 10 Advisor Engagement Plan

For Tier 3 Projects - Complete all sections of the Recurrent/ Capital/ICT Template- Read this guidance in conjunction with guidance provided for the above Template

1. Executive Summary

The Executive Summary should provide a concise overview of the entire Business Case drawing on the most significant points from each section, rather than only providing a description of the scope of the project. The Executive Summary should be the last part of the business case to be completed and should not introduce new information.



2. Project Outline

2.1 Description of the Project

2.1.1. Overview This section should provide a background to the project and outline any prior

work or studies previously undertaken. A description of the project and a summary of the project’s objectives should be

included here.

2.1.2. Scope of Works Outline the scope of the capital works to be undertaken including location,

nature of construction, known issues and risks, and nature of work environment.

2.1.3. Scope of Services Where services are included in the specification such as for DCM, DCMO and PPP

delivery models, list out what services will be included in the procured outcome. These services will need to be included in any modelled financial outcomes. Services are defined as services delivered by the project (e.g. education for

students aged 12 to 16). The scope of services is not referring to the services required to deliver the project (e.g. architects).

2.2 Review 1 (PCW): Status of Functional Brief/Output Specification

This is the first review point for PCW and is an assessment of the status of the functional brief/output specification.

Sign off should only occur if the PCW officer is confident that the functional brief/output specifications are sufficiently progressed in order to go to market under the delivery model selected, and within the procurement timeline outlined in the business case.

If not, an alternative delivery model should be selected or the business case should be returned to the Directorate.

Risk workshops and quantification of project risks is mandatory for Tier 1 and 2 projects.

Disclaimer: This review does not represent an endorsement or agreement by the signing officer as to the contents of the section or a certification that the work was correctly performed.


PurposeThe Functional Brief/Output Specification is prepared when a Directorate has identified the need for a potential capital works project. A Functional Brief/Output Specification is a summary of the needs and outcomes that the Directorate is seeking to achieve from their project, and as such, is a key element in the successful outcome of capital works projects. It is not relevant for projects where detailed design has already been completed (Construct Only).

The Functional Brief/Output Specification is a written statement of the functions to be accommodated and the inter-relationships of these functions for a proposed capital works project. This document should be in sufficient detail to both facilitate procurement and initiate the design process.

The Functional Brief/Output Specification outlines the Government’s design principles for the project and the understanding of, and approach to, design that forms the basis of the design requirements.

It should establish the optimum solution to meet service requirements and outline the total scope of works to be undertaken. It should describe the services to be provided, activities to be performed and clearly identify how the project meets the organisation’s objectives and policies.

Wherever possible, the Functional Brief/Output Specification should also be supported by any specific directorate design guidelines, policy documents and other relevant information pertaining to the project.

The Directorates are responsible for preparing a Functional Brief/Output Specification but where necessary, may be assisted by an external Consultant.

RequirementsA Functional Brief/Output Specification needs to be prepared prior to commencement of a Feasibility Study. The Functional Brief/Output Specification is the basis from which the time and costing data are prepared and a Feasibility Study is completed.

The document should contain sufficient detail to initiate the design process. A Functional Brief/Output Specification for any capital works project should include, but not limited to the following information:

Directorate or agency role statement Directorate or agency expectations and user requirements An estimated program schedule and timeframe / key milestone dates Details of any proposed staging or phasing Required deliverables Management and operational policies Type and level of facilities or services to be provided Existing and future trends Overall project objective Project background (including Master Plan outcomes) Description of any existing facilities, use and current condition



Departmental functions associated with the project Departmental and functional relationships – “bubble diagrams” Accommodation requirements on a departmental or functional area basis General design considerations, “generic layouts” and “room data sheets” Equipment needs FF&E requirements Services facilities & services management Recurrent cost statement if applicable

The review should ensure the list of requirements (relevant to the size/scale of the project) is included in the Functional Brief/Output Specification. The review should also ensure that the Functional Brief and Output Specification are sufficiently progressed in order to go to market under the delivery model selected, and within the procurement timeline outlined in the business case.

3. Needs Analysis

This section should present the outcomes of the Investment Logic Workshop (“ILW”) (if one was undertaken).

Please detail all participants who attended the workshop and attach a copy of the Investment Logic Map (“the Map”) produced as an Appendix to the Business Case.

Ensure that feedback from Procurement and Treasury officials from the ILW workshop(s) is addressed in this section.

3.1 Problem

This section should outline the problem that you are aiming to address. The “3 Problem Questions” below should be answered in this section:

What is the problem? What is the evidence to confirm there is a problem? Does the problem need to be addressed now?


For example, in relation to a hypothetical set of problems in the justice sector:

1. Problem 1: Extensive delays at the Magistrates Court are undermining access to justice: The demand for justice exceeds the capacity of the current court facilities.

2. Problem 2: A lack of modern justice services is driving recidivism and the high cost of justice: The design and functionality of the heritage listed Courts does not‐ support modern justice standards, operational efficiency and current user needs.

3. Problem 3: All court users face safety risks because of the out dated design of ‐the court rooms: The heritage listed Court fails to meet current court health and ‐safety standards leading to increased risk of assault and unnecessary strain on the health of the public and judiciary.

This section should include the evidence to support the existence of the problem. The evidence should draw on experience of interventions in other jurisdictions or pilots. Remember to show how and why the problem exists.

3.2 Benefits

3.2.1. Benefits to be DeliveredThis section should outline the benefits you are trying to achieve by addressing the problem. The “3 Benefits Questions” should be answered in this section:

What are the benefits of addressing the problem? Are the benefits of high value to the Territory? Are there measurement mechanisms (KPIs) to provide evidence that the benefits

have been delivered?

The benefits need to be realistic and achievable.

For example, if the problem were those above in the justice sector, benefits could be:

1. Cost savings for courts and the public: Cost savings will be achieved through a reduction in rescheduling and transfer to other courts and the use of alternative justice services.

2. Increased effectiveness of justice system: Reduced delay in justice services measured by the waiting time for cases heard being reduced.

3. Safety of all court users: would improve with a decrease in the incidents of violence and improved security reflected in the willingness of witnesses to attend hearings.

3.2.2. Importance of benefits for GovernmentThis section should outline why the benefits are important to the Territory. Some questions to ask:

How does this proposal align with strategic objectives and priorities of the Territory?


How does the proposal enhance existing Territory policies or programs or deliver new ones?

Is this proposal associated with a Government election commitment or legislation change?

3.3 Options Analysis

3.3.1. Strategic Solutions AnalysisThis section should address the strategic solutions explored to address the problem and deliver the benefits. Strategic solutions are about differing approaches to solving the problem. It should be noted that Strategic Solutions are different to Project Solution Analysis in section 3.3.3 of this guide.

For example, if the problem was a regional water shortage the strategic solutions could look like:

1. Build a water pipeline to the region2. Build a desalination plant3. Provide water grants to enhance storage and conservation

The “3 Strategic solutions analysis questions” should be answered in this section:

What different approaches to the problem have been identified? What is the evidence to demonstrate that the strategic options are feasible? Is the preferred strategic option the most effective way to address the problem

and deliver the benefits?

3.3.2. Recommended Strategic SolutionThis section should outline the recommended strategic solution and provide justification as to why this solution has the most merit.

3.3.3. Project Solutions AnalysisThis section should address the project options explored to address the problem and deliver the benefits. The Project Solution Analysis should outline the different ways in which the Recommended Strategic Solution can be implemented successfully. Note: Options should also give consideration to non-infrastructure based solutions.

For example, if the problem was a regional water shortage and the preferred strategic solutions was option 1 (build a water pipeline) then the project solutions could look like:

1. Build a water pipeline from location X or Y to the region2. Build a water pipeline with or without a local reservoir 3. Build a water pipeline using material A, B, or C

The “3 Project solutions analysis questions” should be answered in this section:


What different approaches to the solution have been identified? Quantify the costs and benefits of each option Demonstrate exploration of alternative options All realistic options should be considered including:

o Refurbishing existing facility/assetso Private sector involvement, rental optionso Various locations/shared facilities

Link suitable options to the business case need identified as listed above Identify the preferred option including the preferred physical location Outline key advantages and disadvantages, and identify all whole-of-life

benefits and costs of each option Is the recommended project option the best value for money way to address the

problem and deliver the results? Can the recommended project option be delivered (cost, risk, timeframe etc)?

Note: Consideration should be given to immediate project requirements versus those components of the project that could be done later in the project timeline.

3.3.4. Base CaseThis section should outline the do nothing/do minimum option. In some cases “do nothing” may be a viable option. In some cases, however, a “do minimum” option is the more realistic approach.

For example, a building is at the end of its useful life and the proposal is to build its replacement. The Base Case may well be a do minimum option with a combination of:

Building a limited extension to the existing building Enhanced periodic maintenance program Refurbish existing facilities Modify rostering and usage to enhance capacity

The Base Case as such is therefore likely to involve a combination of interim and partial solutions that would likely have to be put in place if the proposed solution was not undertaken. The Base Case should consider public and workplace safety issues and how these might be addressed if capital funding is not made available.

3.3.5. Recommended Project SolutionThis section should outline the recommended project solution.

3.4 Review 2 (Treasury): Needs Analysis

This is the first review point for Treasury and is assessment of the needs analysis. Sign off should only occur if the Treasury officer is confident that the needs analysis is

robust, is based on evidence and an Investment Logic Workshop (ILW) has been undertaken (if applicable).

Note that Tier 1 business cases anticipate review and signoff by the Under Treasurer. An assessment of the needs analysis should be undertaken here


Procurement will provide feedback to Treasury on the needs analysis and the merit of the Recommended Project Solution.

The documentation should only proceed to the next part of the process if the Treasury officer is confident that the needs analysis is robust and is based on evidence




4. Cost and ContingencyThe scope, risk and delivery model of the Recommended Project Solution will have a bearing on the cost and associated need for contingency funding. This section will assist both Treasury and Procurement to understand the funding implications, and assess the Value for Money, of the Recommended Project Solution and its proposed Delivery Model (see Sections 4.2.2 and 6).

4.1 Preliminary Cost Estimate

The business case should present a preliminary cost estimate prepared by an appropriately qualified technical advisor / quantity surveyor. When providing cost estimates please ensure you provide both the source of the costing and the year the costing occurred.

o Note that in Tier 3, or where appropriate this may be an internal estimate or be based on real cost analysis from completed projects of a similar nature.

The preliminary cost estimate should include any line item contingencies. It should also include the Shared Services Management Fee (four per cent of capital

cost), Insurance (one per cent of capital cost) and all costs managed by the Directorate.

Note that advice on the development of design and construction cost estimates is NOT within the scope of the business case guidance material.

For example, a preliminary cost estimate would be derived on the basis of: Benchmarking with similar sized facilities based on likely scope of the

project. Contingencies and Directorate costs included within each cost line. Costs set out in nominal dollar terms and include additional ongoing

operational costs.

Item Estimated Cost ($m)CapexDesign, project management, other fees ~5 to ~7Land ~6 to ~10Demolition ~1Building works ~30 to ~45Refurbish existing ~5 to ~7OpexIncrease in staff costs (net present cost) ~3 to ~5Design, develop and implement IT system ~5 to ~8Total ~$55m to $83m


4.2 Contingency

For Tier 1 and Tier 2 business cases, the cost estimate should also incorporate a project level contingency and a delivery model contingency.

Contingency for design and construction (including commissioning) stages should be stated separately.

Other contingency allowances should be provided along with any associated assumptions.

The nature of how project contingencies should be developed is outlined in the following diagram:

Delivery Model Contingency

Description: a total cost/budgeting contingency based on the ability of the delivery model to transfer price risk

Risk Purpose: Certain delivery models specific address situations where price risk cannot be transferred. Some construction elements cannot always be reliably estimated by the procurer or the contractor. Fixed price outcomes cannot be achieved. Examples include geotechnical instability, complex operational requirements including decanting functional facilities, asset conditions of concealed items i.e. buried water pipes, etc.

Project Level Contingency

Description: a contingency for a project as a whole

Risk Purpose: Known uncertainties; is the scope complete, are elements of scope uncertain, allows for the possibility of errors and omissions in design, varies with type of project

Line Item Contingency

Description: a contingency for an individual cost line

Risk Purpose: The material specified, quantities, or price is not fully known

Delivery Model Contingency

Description: a total cost/budgeting contingency based on the ability of the delivery model to transfer price risk

Risk Purpose: Certain delivery models specific address situations where price risk cannot be transferred. Some construction elements cannot always be reliably estimated by the procurer or the contractor. Fixed price outcomes cannot be achieved. Examples include geotechnical instability, complex operational requirements including decanting functional facilities, asset conditions of concealed items i.e. buried water pipes, etc.

Project Level Contingency

Description: a contingency for a project as a whole

Risk Purpose: Known uncertainties; is the scope complete, are elements of scope uncertain, allows for the possibility of errors and omissions in design, varies with type of project

Line Item Contingency

Description: a contingency for an individual cost line

Risk Purpose: The material specified, quantities, or price is not fully known


All Tiers All Tiers Applicable 1 2 3

4.2.1. Project Contingency

Risk workshops should be conducted to generate quantified risk based project contingencies.

PCW uses RiskOrganizer along with other risk software to undertake this analysis and the submitted project contingencies should be based on the RiskOrganizer P90 figure; an example of a RiskOrganizer histogram is shown below

Please see Appendix B: Risk for further details on RiskOrganizer.

If a commercial advisor has been engaged to undertake risk analysis, the methodology and tools used to quantify the risk contingency should be outlined.

The project contingency is managed by the PCW project officer in consultation with project sponsor Directorates.

Risk workshop documents should be attached to the final business case (see Appendix B)


Tiers 1 and 2Applicable 1 2 3

4.2.2. Delivery Model Contingency

Under the SAF process, certain flexible delivery (relationship contracting) models are required to have contingencies in addition to line item and project level contingencies to reflect delivery models where price certainty cannot be achieved.

The specified flexible delivery models for use have delivery model contingencies of: Managing Contractor 30% Alliance 50% PMA

o Fixed scope 5%o Open scope 40%

Whilst there have been some studies into project overruns under varying delivery models 1, these figures are largely heuristic and intended to address uncertainty (“unknown unknowns”) in providing delivery where there may be issues such as:

Latent asset condition issues Complex operation requirements Geotechnical uncertainty Incomplete scope

Where commercial factors justify higher or lower delivery model contingencies to the default these should be outlined here.

Delivery Model Contingency is managed by Treasury. Access would need to be applied for through Treasury under the existing process for supplementary budget appropriations and released based on forecasts.

Please see Appendix B: Risk for further details.

1 The three notable studies in this area are: In Pursuit of Additional Value: A benchmarking study into alliancing in the Australian Public Sector. Department of Treasury and

Finance, Victoria, October 2009. Performance of PPPs and Traditional Procurement in Australia, Infrastructure Partnerships Australia, 2008. National PPP Forum – Benchmarking Study, Phase II. Report on the performance of PPP projects in Australia when compared

with a representative sample of traditionally procured infrastructure projects. Assoc Prof Colin Duffield. The University of Melbourne, December 2008.


4.3 Whole of Life

The business case should include a financial evaluation of the whole of life costs of the options. This section provides guidance on the importance of assessing the whole of life financial impacts and how whole of life cash flows can be calculated and evaluated. The section concludes by providing guidance in relation to analysing the sensitivity of the evaluation to changes in key assumptions and variables.

While it is important to evaluate the level and timing of the project’s up-front capital investment cost, often the operating and maintenance costs for the life of the asset have an equally large financial cost. Indeed an option with a larger up-front investment cost may result in reduced whole of life costs.

The purpose of this whole of life financial evaluation is to: Assess the incremental whole of life financial value or cost of the shortlisted

project options when compared to the base case Assess any funding requirements or subsidies from other Government bodies Assess the commercial viability of the shortlisted project options (where

applicable) Assess the affordability of the shortlisted options.

The financial analysis provides a set of baseline whole of life cash flows (including for the base case). This can be used in the development of cost comparators which are used in the value for money assessment.

For further information on best practice in determining the Whole of Life Cost or Life Cycle Cost of an asset, please refer to:

Life-Cycle Costing – Better Practice Guide, Australian National Audit Office, 2001

The Whole of Life costing provides a comparison between different solutions: A typical process for the financial evaluation of the project options is illustrated in the figure below.

Framework for the financial evaluation of options

Forecast project cash flows

Evaluate the project cash flows using

financial methods

Undertake a sensitivity analysis

Step 1 Step 2 Step 3

Each step is examined in turn below.


Forecast project cash flowsTo understand the financial impact of a project, the forecast cash flows should be estimated for each project option. This will enable the Directorate to:

Understand the annual net cash flow generated from the project option (if any) Identify the net financial cost or benefit of the project option in present value terms

Cash flows for the shortlisted options should comprise only those things which are an incremental result of the option when compared with the base case - they do not include the cash flow associated with the base case. Types of cash inflows include revenues, avoided cash flows, productivity savings, residual value and release of capital. Types of cash outflows include capital expenditure, operating expenditure and one-off costs.

The typical components of a forecast cash flow for a capital project are outlined in the Table below:

Table: Components of a project cash flowComponents DescriptionEstimated capital cost The cash outflows associated with the capital development phase of

the project option, including expected risks or contingencies.Forecast revenue generated

The revenue expected to be generated from the project option. Some project options may leverage revenue to the ACT Government. The increase in expected revenue should be captured as part of the financial analysis.

Forecast operating expenditure incurred

The operating expenditure to be incurred as a result of the investment made, including staff costs, direct operating costs, overheads, and operating risk adjustments.

Annual net cash flow Represents the sum of all cash outflows and inflows for a particular year.

Key assumptions Assumptions are used to project the capital cost, revenue and operating expenditure of the project option. They may include activity growth assumptions, price indexation rates and timing assumptions.

Key considerations when developing a cash flow forecast are:

o Forecast period: The forecast period of cash flow may vary. It is recommended the forecast cash flow period reflects the ACT Government’s investment horizon, as long as it does not exceed the life of the asset.

o Impact on existing revenue and expenditure: It is important to consider the impact that a proposed capital investment will have on existing services.

o Cash flow period adopted: Depending on the degree of accuracy required in the analysis, cash flows may be forecast on a monthly, quarterly or annual basis.

All modelling prepared to the forecast project cash flows should be included as an attachment to the business case.


Evaluate project cash flowsAn evaluation method needs to be applied to each of the shortlisted project options. The table below provides an overview of the two financial methods required to evaluate a capital investment: net present value and internal rate of return.

Table: Key financial methods to evaluate capital projectsMethod Description Key ConsiderationsDiscounted cash flow methodsNet Present Value (NPV)

The NPV is the present value of an investment's future net cash flows minus the initial investmentA positive NPV represents the immediate increase in financial value to the ACT Government. A negative NPV indicates that a project option will result in a net cost to the ACT Government.

An NPV can be generated from projected cash flowsThe NPV is dependent on the ACT Government discount rate, which will generally reflect the long term bond rate and can be obtained from Treasury.

Internal Rate of Return (IRR)

The IRR is a rate of return used in capital budgeting to measure and compare the implied or intrinsic profitability of investments. It is effectively the discount rate that makes the NPV of all cash flows (both positive and negative) from a particular investment equal to zero. Generally speaking, the higher the internal rate of return of a project option, the more desirable it is to undertake that option

An IRR can be determined from projected cash flowsWhen cash flows are volatile it can generate multiple IRRs which may confuse the analysisIt is useful when capital is rationed and assists in developing an overall portfolio approach

Undertake Sensitivity AnalysisOnce the financial evaluation is complete and the expected financial outcome is generated, a sensitivity analysis should be undertaken for each project option.A sensitivity analysis assesses the change in financial outcomes of the project when one or more variables are changed. For example:

o What is the impact on the NPV if operating costs were 10% higher?o What is the impact on the NPV if capital costs were overrun by 5%?o What is the impact on the NPV if operating cost escalation was 5.0% and not 2.5%?

Sensitivity analysis can provide a greater level of comfort over the likelihood of a proposed project option being delivered within a desired cost envelope. There are a range of techniques to undertake this exercise, the simplest being a ‘single-point analysis’ whereby individual variables are amended to assess the impact on financial results.

The risk analysis undertaken by the Directorate should be used to identify which sensitivities should be analysed. Understanding what the major risk events are can inform the sensitivity analysis undertaken (for example, the effect on financial performance by reducing forecast


http://en.wikipedia.org/wiki/Investment

http://en.wikipedia.org/wiki/Profit_(economics)

http://en.wikipedia.org/wiki/Capital_budgeting

http://en.wikipedia.org/wiki/Capital_budgeting

http://en.wikipedia.org/wiki/Rate_of_return


visitor attendances by 10%). In this way the expected impact on results can be determined (for example a decrease in the revenue generation).

4.4 Budget / Funding Strategy

The purpose of this section is to set out the budget impacts of the preferred option.A budget impact statement analyses the budget impact of the proposed project (savings and costs) and implications for the Directorate, such as additional staff, equipment or any financial impacts on other Directorates where there is a joint proposal.

The Treasury budget summary requires the identification of capital and recurrent costs and also incremental staffing impacts across the budget forward estimate period.




5. Cost and Economic Analysis

The business case for Tier 1 and Tier 2 projects must also consider the broader non-financial impacts of an investment upon the ACT community. These broader considerations include all relevant economic, social and environmental factors (collectively 'non-financial factors') that are of significance in making an investment decision and selecting the preferred project option.

Purpose

Like the financial analysis, the purpose of the non-financial analysis of options is to assess and compare the incremental impacts of each shortlisted project option over and above the base case.

The non-financial evaluation is required to identify and estimate all the likely impacts of a project to the community as a whole.

Framework

The scope of the non-financial evaluation undertaken will vary depending upon the nature of the project, the likely impacts and the level of expenditure involved. The depth of analysis and detail of reporting is expected to be greater for proposals involving significant expenditure or with significant impacts. It also depends on the availability of data and the agreed scope of the analysis (including time, budget and appropriateness) of all three elements. The quantifiable and non-quantifiable costs and benefits of the economic, social and environmental impacts should be addressed in the business case report to fully inform decision making.

The financial analysis is solely quantitative. For non-financial impacts, a range of analysis techniques may be adopted ranging from:

A monetised economic analysis – cost benefit analysis; and An analysis of non-monetised but quantifiable measures – economic impact analysis.

5.1 Cost-Benefit Analysis (Economic Efficiency Analysis)

A cost-benefit analysis is an assessment tool used to determine whether an option is beneficial relative to the base case. The key principle of cost-benefit analyses is to convert the costs and benefits into dollar terms, allowing them to be weighed up against each other. An option will be considered more desirable if it delivers benefits over and above its costs, which is typically expressed in net present value (“NPV”) terms.


The cost-benefit analysis differs from traditional financial analysis in that it is performed from the viewpoint of society; specifically the community of the ACT. For example, it considers the road safety benefits of a road improvement project. It goes beyond just looking at just the fiscal impacts by examining social welfare impacts too.

A Cost Benefit Analysis (“CBA”) quantifies (in monetary terms) all the major costs and benefits of project options. Thus the outcomes for a range of options are translated into comparable terms to facilitate evaluation and decision making. The technique also makes explicit allowance for the many costs and benefits which cannot be valued.

Where supporting data is available, every effort should be made to put a value on the monetary or quantifiable benefits and impacts. For some projects, a combination of the three evaluation techniques (monetary, quantitative and qualitative) may be adopted requiring a weighting of impacts to be applied across the three types of analysis. This enables the complete merits of an investment ranging from financial quantitative impacts to qualitative non-financial impacts to be considered.

Given the role and functions of Government, many proposed projects will be non-revenue generating or revenue-generating proposals which will not reflect positive net present values on the basis of their cash flows alone, but are undertaken to deliver other significant benefits to the community.

The business case should seek to place a quantifiable value on the extent of project benefits as much as feasible. That said, it’s acknowledged that some non-financial costs, benefits and risks are difficult to measure given their subjective nature and it’s not expected that all will be quantified or capable of being translated into monetary terms. All significant non-monetary and non-quantifiable costs, benefits and risks relating to each project option should be reported upon in an appropriate form in the business case.

The non-financial evaluation of a project option can be a complex process. Whilst in some instances the Directorate will have the requisite skills to undertake its own evaluation, some project options will require the services of an external consultant. As a minimum the project team should be in a position to identify the type and nature of the likely non-financial impacts which may result from each project option prior to engaging an external consultant.

A suggested framework for the non-financial analysis for a Tier 1 and Tier 2 project is illustrated below.


Framework for non-financial analysis of options

Identify and classify non financial impacts (environmental, social

or environmental)

Review non financial impacts to detect

duplication

Select and apply a tool for the assessment of non-financial impacts

and apply

Step 1 Step 2 Step 3

Guidance on each step is provided in the following sections:

Identifying and classifying non-financial impactsNon-financial analysis in a general sense covers three broad areas: economic, social and environmental impacts. The first step in the non-financial analysis involves the project team identifying and classifying the impacts. This includes the following tasks:

Identify non-financial impacts: Identify all potentially significant non-financial impacts (economic, social and environmental) of each project option should be identified; regardless of how difficult they may be to measure (otherwise only a partial evaluation may be carried out). A further task is assessing the extent to which a project option achieves the broad objectives.

Classify impacts: Allocate all impacts under either an economic, social or environmental impact and further identify under each category whether the impact is a cost or a benefit to the broader community.

The following sections provide an overview of the economic, social and environmental areas of impacts.

5.1.1. Economic A project option may not be seen as 'financially' viable (with a positive net present value) but it may still be 'economically' viable to execute it. On this basis, the option will deliver a return from the perspective of the community. Two key economic considerations for a project option are:

o Whether it is economically efficient (whether the economic benefits of an option exceed the costs)

o The extent to which it contributes to Gross Regional Product (or its impact on the regional economy)

The economic analysis should demonstrate which option offers a greater economic return to the ACT community.

Identify quantifiable costs All economic appraisals should be based on incremental costs and benefits associated with a particular project. Changes which would have occurred anyway should be excluded.


Assumptions underlying all capital and recurrent cost estimates should be made explicit in the evaluation.

The degree of accuracy desirable will vary with the significance of the project, data availability and cost of obtaining missing data. Best estimates are often sufficient but if there is doubt as to whether such will be acceptable, advice should be sought from Treasury.

Identify quantifiable benefits The following may be relevant: Avoided costs-incremental costs which are unavoidable if nothing is done, but may be

avoided if action is taken; Cost savings-verifiable reductions in existing levels of expenditure if a program proceeds; Revenues-incremental revenues from introduction of the project; Benefits to project beneficiaries not reflected in revenue flows-while difficult, attempts

should be made to quantify these, with assumptions and methodologies clearly explained; and

Residual value of asset (if any).

Calculate net benefits Quantifiable costs and benefits over the project life - a 20 year analysis period is recommended for consistency - are expressed in Net Present Value terms.

Costs and benefits should be valued in real terms over the 20 years: that is, they should be expressed in constant dollar terms and not include nominal increases due to inflation. The stream of costs and benefits should then be discounted by a real discount rate of 7%, with sensitivity testing using discount rates of 4% and 10%.

The discounting process takes account of the fact that initial investment costs are borne up-front, while benefits or operating costs may extend far into the future. Discounting the value of future costs and benefits brings these back to a common time dimension - present value - for the purpose of comparison. The process of discounting is simply a compound interest calculation worked backwards.

The process of discounting real costs and benefit values reflects, even in the absence of inflation, the concept of time preference for money. People normally prefer to receive cash sooner rather than later and pay bills later rather than sooner. The existence of real interest rates also reflects this time preference.

Using the discounted stream of costs and benefits the following decision measures should be calculated:

o Net Present Value (NPV)-the sum of benefits minus costs; a project is potentially worthwhile (subject to the availability of funds) if the NPV is greater than zero.

o Net Present Value per $ of capital investment (NPV/I)-the highest NPV may involve very high capital expenditure and capital availability is normally constrained. Projects with the highest ratios would be potentially worthwhile.

o Benefit Cost Ratio-a project is potentially worthwhile if the BCR is greater than 1 i.e., the present value of benefits exceeds the present value of costs). It has become


conventional to deduct ongoing costs from benefits to produce a net benefit stream, and to use initial capital costs as the denominator. This is the required basis on which results should be provided. In cases where BCR calculations are done on another basis, for example to satisfy requirements of other Governments for jointly funded projects, results should be shown on the two bases and clearly identified.

o Internal Rate of Return (IRR)-this is the discount rate at which the Net Present Value of a project is equal to zero (i.e. discounted benefits equal discounted costs). A project is worthwhile if the IRR is greater than the test discount rate.

o Sensitivity analysis should be undertaken to test the robustness of results under different scenarios, using different assumptions about some or all of the key variables.

Identify qualitative factors and summarise results Quantifiable costs and benefits are only part of an economic appraisal. Other aspects such as environmental considerations, social or regional impacts, resource availability, funding, distribution of benefits and costs, etc, will also have to be taken into account in choosing between competing options and projects.

Some of these may be quantifiable to some extent but where they are not, qualitative aspects of options or projects should be discussed in the appraisal.

The report on the appraisal should include a clear summary of results, and indicate the preferred option.

Sensitivity testingSensitivity testing of the cost benefit analysis is a key element of risk assessment. The purpose of the sensitivity analysis is to acknowledge that there is always a degree of uncertainty and ultimately risk surrounding a proposal. Typically there are four sources of uncertainty surrounding a proposal:

o Capital costs; o Construction duration and therefore opening date; o Operating (including maintenance) costs; and o Under and over estimation of the benefits (typically demand for the service).

A risk assessment should be undertaken to estimate the typical variations around these inputs with the sensitivity testing undertaken based on the variations.

5.1.2. Social AnalysisMost investments are undertaken to deliver services and, as a result, will have some social consequences. The business case should analyse social outcomes, unless it is clear that the external impacts are minimal.

Social analysis identifies and quantifies social issues and opportunities arising from a project option. The analysis should explain the nature and extent of the social impact (and, where possible, quantify them). This might include:

Policy implications;


Tier 1Applicable

Employment opportunities or likely redundancies/termination of existing contracts; and

Community.

5.1.3. Environmental AnalysisLegislative requirements and community concerns drive the need for an environmental analysis. The environmental analysis should assess the extent and nature of environmental consequences and opportunities surrounding each project option. Issues include:

The extent to which a project option requires a departure from the ACT Government’s environmental policies;

Known environmental issues arising from the option (e.g. contaminated site); Consents or approvals required; and Whether an Environmental Effects Statement (EES) or a Commonwealth

Environmental Impact Statement (EIS) is required and issues arising from such requirements.

Tools for assessing non-financial impactsThe second step of the financial analysis requires the project team to select a tool for assessment of the non-financial impacts of each project option. An overview of three such assessment tools is set out below.

Further technical guidance on undertaking a CBA is provided in Appendix A: Economic Analysis Guidelines.

Additional guidance material on how to undertake cost benefit analysis can be found at the following links:

o the Department of Finance and Deregulation website at http://www.finance.gov.au/obpr/cost-benefit-analysis.html

o Department of Finance, Handbook of Cost Benefit Analysis, January 2006 which can be found at: http://www.finance.gov.au/publications/finance-circulars/2006/01.html

o Department of Finance, Introduction to Cost Benefit Analysis and Alternative Evaluation Methodologies, January 2006 : http://www.finance.gov.au/publications/finance-circulars/2006/docs/Intro_to_CB_analysis.pdf

o The Green Book – Appraisal and Evaluation in Central Government, Treasury Guidance, London 2004 : http://www.hm-treasury.gov.uk/data_greenbook_index.htm

5.2 Wider Economic Benefits (where applicable)


http://www.hm-treasury.gov.uk/data_greenbook_index.htm

http://www.finance.gov.au/publications/finance-circulars/2006/docs/Intro_to_CB_analysis.pdf

http://www.finance.gov.au/publications/finance-circulars/2006/docs/Intro_to_CB_analysis.pdf

http://www.finance.gov.au/publications/finance-circulars/2006/01.html

http://www.finance.gov.au/obpr/cost-benefit-analysis.html


Wider economic impact studies look at the impact of a project option in terms of changes to macroeconomic aggregates such as Gross Regional Product, Gross State Product or Gross Domestic Product and employment – that is the ‘economic impacts’. Economic impacts should not be confused with economic costs and benefits described above.

5.3 Cost-Effectiveness Analysis

Cost effectiveness analysis is used to compare the costs of alternate ways of delivering the same project, whereas cost-benefit analysis are used to quantify the costs and benefits of a proposal including where those costs and benefits are not necessarily market based.

A cost effectiveness analysis is applicable to projects that have strong social welfare objectives or where the benefit of building an asset has already been established, or cannot be established, and the information being required relates more to the different delivery options (ie the objectives of the project are the same but there are different ways to deliver the outcome).

For example, this may be used for schools, where the benefits of education have been established as part of broader public policy efforts, and the decision to construct a school is based more on demand modelling. Unlike health, there is a greater homogeneity of service in a school, and costs are much less sensitive to “models of care”.

In these cases, what needs to be established is the most cost-effective option, based on scenarios where differing methods/options can be used to deliver broadly the same outcome.

While Cost Effectiveness Analysis is a valid option for agencies, agreement from Treasury should first be obtained before it is used instead of a cost-benefit analysis. Treasury would need to be assured that either:

the benefits have already been sufficiently decided on or understood; or the benefits cannot be reliably measured with enough confidence to make a CBA

reliable.



6. Delivery Model Analysis

The business case needs to justify the procurement decision based on facts and analysis. For Tier 1 and Tier 2 projects this includes a procurement options analysis, which should demonstrate how the recommended procurement approach represents value for money. It would be beneficial to contact PCW for early input in selecting a suitable delivery model.

When evaluating different procurement options, the Directorate should:

Develop a framework for the comparative analysis of the different procurement options, which incorporates evaluation criteria and a system for rating each option against the criteria

Identify the different procurement options to be considered Identify key project risks and desired risk allocations Set timeframes associated with each procurement option and provide an assessment of their

achievability Engage the market through market soundings to:

- Identify key players;- Determine market capacity;- Determine market appetite; and- Consider whether there is sufficient competition to drive value for money outcomes.

Assess the potential value for money associated with each procurement option Assess and rank each of the procurement options against the evaluation criteria Recommend the preferred procurement approach Identify potential commercial structure and associated issues related to the recommended

procurement approach.

6.1 Outline of Delivery Models

There are a broad range of delivery models available for capital works projects. The suitability of any one model will be driven by the project’s risk profile and characteristics. Under the SAF there are nine prescribed delivery models for use. This does not preclude other delivery models being used; however the nine proposed should be sufficient to deal with most project risk profiles. It’s anticipated that existing models will still be used for Tier 3 projects. Tiers 1 and 2 offer a broader range of models.

The following graph approximates where the various models sit against an axis of integration and risk transfer (note Government Works is provided for explanatory purposes only – it is not an option for delivery outside Property Group small value works):


These models can be broken down into three classes as outlined in the following table (note that “Flexible” delivery models are also referred to as relationship contracting models):


Inte

grati

on

Risk TransferConstruct Only

Managing Contractor

AllianceDesign & Construct

Design Construct Maintain

Design Construct Maintain Operate

BOOT PPPAvail. PPP

PMA

Govt. Works

Traditional: these are delivery models that envisage the transfer of price risk and with low to medium levels of integration:

Traditional Advantages Disadvantages Contract Forms Best Used VfM DriversConstruct Only: Design consultancies and construction contracts are procured separately. Construction is generally procured when Final Sketch plans are available.

High confidence around construction costs for budgeting

Flexibility

Minimal Innovation Delivery costs do not

reflect a competed design

Cost overruns through variations

A.S. 2124 GC 21

The scope is defined and there is little likelihood of scope creep or wholesale changes to requirements

Little incentive or need for innovation from the contractor

It is desirable and there is sufficient time to complete design documentation before tendering

Limited opportunity for bundling services/maintenance and creating whole-of-life efficiencies

Larger pool of potential tenderers which leads to increased competition

Greater scope for competitive prices because of design certainty

Contract value is set before construction starts

Design & Construct (D&C): An integrated design and construction outcome is simultaneously procured. Generally at Preliminary Sketch Plan.

Delivery cost reflects a competed design

Innovation Improved VfM Contractor motivated

for earliest completion

Competition may drive reduced quality of finish and durability

More emphasis on upfront specifications required to ensure the asset is fit for purpose

A.S. 4300 GC 21

The Government’s requirements are tightly specified before tender or do not change

Government is seeking cost effective designs.

Limited opportunity for bundling services/maintenance and creating whole-

Single point of accountability for design and construction

Fixed price contract Potentially, reduced

overall project cost because the Contractor has the opportunity to contribute construction


Traditional Advantages Disadvantages Contract Forms Best Used VfM Driversof-life efficiencies experience into the

design, resulting in innovation and efficiencies.

Design Construct Maintain:A Design & Construct with an integrated maintenance contract.Maintenance contracts are typically 5 to 15 years.

Certainty of maintenance outcomes

Maintenance contract can prevent poor finish and fittings

More emphasis on upfront specifications

Higher procurement and bid costs

GC 21 Scope for bundling maintenance with the design and construction contract and creating whole-of-life efficiencies

As with D&C with the additional benefits of greater durability and better whole of life cost outcomes

Integrated: these are delivery models that are suitable from complex projects and involve a bundling of services:

Integrated Advantages Disadvantages Contract Forms Best Used VfM DriversDesign Construct Maintain Operate (DCMO): Involves a D&C with a bundling of maintenance and operations usually for a period of between 10 to 30 years.

Design outcome reflect commercial risk of operations and maintenance

Drives innovation Drives quality

outcomes

Substantially higher bid and procurement costs

Public sector comparator

Longer procurement

Bespoke Scope for bundling operations and maintenance with the design and construction contract and creating whole-of-life efficiencies

As with D&C and DCM, with the additional benefits of greater durability and better whole of life cost outcomes

PPP (Availability) Involves a D&C with a bundling of maintenance and operations usually for a period of between 25 to 40 years. Fully financed.

Financed outcome with no upfront cash outlay

High innovation Financial certainty Drives quality

outcomes

Very high procurement and bid costs.

High expertise required.

Low flexibility post financial close.

Extremely complex contract management.

Bespoke Complex and long-term infrastructure projects.

Outputs can be clearly defined and measured

Scope for innovation Whole-of-life asset

management is achievable and cost-effective

Sufficient scale and long-term nature

Complex risk profile and opportunity for risk transfer

Whole-of-life approach from integration of design, construction, operation and


Integrated Advantages Disadvantages Contract Forms Best Used VfM Drivers Long term payment

stream. Strong market interest Opportunities for

appropriate risk transfer

Opportunity for bundling contracts

Significant service component

Complementary commercial development

maintenance over the life of an asset, in a single project package

Innovation Appropriate third-

party use of facilities, reducing net cost to government

Efficiency of contract management

PPP (Build Own Operate Transfer): Involves a D&C with a bundling of maintenance and operations usually for a period of between 25 to 40 years. Fully financed. Revenue risk transfer.

Financed outcome with no upfront cash outlay

Extremely high innovation

Financial certainty Drives quality

outcomes No payment streams

Extreme procurement and bid costs

High expertise required

Low flexibility post financial close

Highly complex contract management

Bespoke

Flexible: these are delivery models that are suitable for projects where price risk cannot or only be partially transferred. Relevant where scope is unknown or variable:

Flexible Advantages Disadvantages Contract Forms Best Used VfM DriversProject Management Agreement (PMA): Appointment of a project manager with trades contacting with PM or Territory.

Highly flexible Rapid procurement

and deployment Tolerant of

developing scope and multiple variations

Extensive risk retention, especially where trades contract with Territory

Lack price certainty Low discipline

ACT Project Management Agreement

Low value projects with significant uncertainty and minimal risk transfer

Suitable for projects where Government needs to retain high levels of control

Managing Contractor (MC):Appointment of lead contractor to potentially establish a management framework. MC can provide a central contact point and procure and manage sub-contractors directly. Typically established with incentives

MC can procure sub-packages of work.

Scope doesn’t need to be fully defined.

Can use varying pricing model for each sub-package i.e. fixed, target, open

Enables early

Often an expensive delivery model

Generally requires incentive payments

Reduced Government control.

Modified GC 21 Bespoke Defence Managing

contract Form

Complex or high-risk projects with uncertain scope, risks or technology

Entire project does not need to be open book priced

Relatively fast procurement

Flexibility in delivery to manage uncertain risks

Maximising government input to manage risks where appropriate

Managing contractor is incentivised to


Flexible Advantages Disadvantages Contract Forms Best Used VfM Driversand management fees. contractor

involvementachieve cost and schedule targets

Alliance: Government contracts on an open book process. Sharing of both upsides and benefits. Pricing established through a Target Outturn Cost (“TOC”). Can also be run on a competitive basis.

Sharing of upside. Can deliver projects

with substantial uncertainty such as developing scope and latent conditions

Limited sharing of downside

High procurement costs

High contract management costs

Complex contract management

Significant time to establish

Bespoke Complex and high-risk infrastructure projects

The solution is unclear or there is a significant likelihood of scope changes

A high level of innovation is required

Risks are unpredictable and best managed collectively, with costs of transferring risk prohibitive

The owner can be closely involved and add value

There is mutual strategic benefit in long-term relationship building between the parties

Cost of adversarial conduct, claims and disputes is eliminated (e.g. the “no blame” culture)

Culture promotes innovation Integrated planning, design and construction process with early contractor and consultant involvement


6.2 Outline of Key Risks

• Outline process undertaken for risk management. • Has a RiskOrganizer (or equivalent) workshop been undertaken? If not, was any Risk

Workshop undertaken? • Please attach a copy of your Risk Register in an Appendix to the Business Case.• Please attach a Risk Management Plan which highlights the process to identify, assess,

allocate and monitor current, anticipated and emerging risks? Please note if utilising the RiskOrganizer tool, outline how often risk workshops will be held and who will be managing the process. Please see Appendix B: Risk of the Guidelines for further information on how to develop a Risk Management Plan.

6.3 Commercial Principles

Commercial principles provide a link between the project risk and the delivery model. These reflect how project risk will be dealt with.

Commercial principles need to be developed before the delivery model can be assessed The five default commercial principles are discussed in the following sections. Additional

commercial principles may arise following the undertaking of risk workshops. If additional commercial principles are incorporated into the analysis then these should be covered in the business case.

Time to Market: is the delivery model suitable for rapid procurement? Flexibility: is the delivery model flexible and can it easily accommodate uncertainty

and variation? Level of Integration: to what extent does the delivery model incorporate integrated

outcomes beyond construction? Level of Risk Transfer: to what extent is the delivery model suitable to the transfer of

risk to the contractual counter-party? Innovation and Incentive: to what extent does the delivery model drive innovation

and incentivise the counter-party.

1. Time to Market Certain delivery models lend themselves to rapid procurement and delivery

whereas others require many months of preparatory work to bring to market. In broad terms higher value, more complex projects suit delivery models with long lead times.

The following diagram is a generalisation but provides an indicative guide to where various models sit on the time to market continuum:


2. Flexibility Certain delivery models are more tolerant to changes in scope and

uncertainties than others. Financed models however require a transaction in their own right for any significant scope changes.

The following diagram is a generalisation but provides an indicative guide to where various models sit on the flexibility continuum:

HighLowFlexibility

Managing Contractor

Project Management AgreementAlliance


Construct OnlyDesign & Construct

PPP (BOOT)

Design Construct Maintain OperatePPP (Availability)

3. Price Certainty Certain delivery models are more tolerant to changes in scope and

uncertainties than others. Financed models however require a transaction. It is a general principle that price certainty should be sought where possible,

and it is equally valid that that where price certainty is not achievable a fixed price contract form is not appropriate. The flexible delivery models are structured in a way that facilitates delivery where uncertainty prevails; this could be for any of the following reasons:

Innovation is needed in design and the outcome is uncertain Geotechnical instability Scope is still being developed Time pressures and interdependencies Latent conditions i.e. aging pipes, etc Contamination


HighLowTime to Market

Managing ContractorProject Management Agreement

Alliance Design Construct Maintain

Construct OnlyDesign & Construct

PPP (BOOT)


PPP (Availability)

Complex and unresolved stakeholder issues

The following diagram is a generalisation but provides an indicative guide to where various models sit on the price certainty continuum:

4. Innovation and Incentive A number of delivery models drive innovation through incentive structures.

This can arise for a number of reasons such as the transfer of certain risks i.e. revenue or through performance based payment mechanisms embedded in the delivery model.

The following diagram is a generalisation but provides an indicative guide to where various models sit on the innovation and incentive continuum:


HighLowPrice Certainty

Managing Contractor

Project Management AgreementAllian

ce


Construct Only

Design & Construct

PPP (BOOT)

Design Construct Maintain OperatePPP

(Availability)

HighLowInnovation and Incentive

Managing Contractor

Project Management Agreement

Alliance


Construct Only

Design & Construct

PPP (BOOT)


PPP (Availability)

5. Risk Transfer The following diagram is a generalisation but provides an indicative guide to

where various models sit on the risk transfer continuum:

6.4 Delivery Model Assessment

The FrameworkThe process in the following figure can be used to assist in selecting an appropriate delivery model:

Data gatheringShortlist delivery models

ValidationDelivery

model options analysis

Preferred delivery model

Step 1 Step 2 Step 3 Step 4 Step 5

Objectives

Risks

Unique features

Market and council capability

Consider delivery model suitability

What project precedents exist

What does the market think

Which model best achieves project objectives

Which model best achieves project risk

Structure preferred model

Consider risk

Approvals

1. Data gatheringThe procurement strategy should draw on all relevant data for the purpose of informing the delivery model decision, much of which will be available from the business case.

Key considerations include:

Project objectives: What are the objectives of the project?


HighLowRisk Transfer

Managing Contractor

Project Management AgreementAllian

ce


Construct Only

Design & Construct

PPP (BOOT)

Design Construct Maintain OperatePPP

(Availability)

The requirement: What are the core services or requirements to be delivered? Are there any associated post-construction services that could be delivered

by the private sector? How are post-construction services currently provided?

Project risks: Consider the risks and strategies outlined in the risk management plan. This

information can be used to highlight specific risks that might be better managed by the public or private sector through a particular delivery model.

Project characteristics: What is the likely cost? What is unique about the project? What features of the project make it different from other ACT Government

projects?

3. Shortlist delivery modelsThis step involves short listing delivery models based on a consideration of the scale, scope, risk and whole of life service opportunities. Key Issues for consideration are set out in the following Table.

Table: Key considerations in short-listing delivery modelsIssue Description

To what extent can services be bundled as part of the project (such as operational and maintenance services)

What services are core and non-core? Are there any potential constraints on packaging of services? What are the expected efficiencies from packaging construction,

operational and maintenance components, compared with other service delivery options?

Can the service need be contracted over the longer term?What is the scale of the project, including lifecycle costs?

What is the size of the estimated capital investment? What is the estimated operational life of the asset? How attractive will the project be to different tiers of the

construction and facilities management market?What is the project scope? Can the scope and outputs of the project be defined?

Is the construction straightforward and established, or complex with challenges?

Is the required technology proven and understood? Are there potential issues that may impact the scope during the

project?What are the key risks facing the project?

What is the ACT Government’s capability to manage these risks versus a private party?

Is the cost of transferring responsibility for this risk prohibitive?

3. Validation It is important to validate the chosen delivery model by reference to benchmark projects, both domestically and internationally, and by conducting market sounding


exercises. This process can help determine the market’s interest and ability in managing risks associated with the project, and may inform how the project can be structured to ensure the best possible outcome. It is important to consider lessons learned from similar relevant projects.

4. Delivery model option analysis Having identified and validated a number of potentially suitable delivery models, the preferred model needs to be identified. The preferred model is chosen by evaluating each model against project objectives, criteria and any rankings associated with the criteria.

It is important to remember that in evaluating different procurement options, the main purpose is to identify which procurement method will achieve the project's objectives whilst maximising value for money outcomes for the project.

Frameworks designed to assess different procurement models against agreed criteria should be based on qualitative and quantitative factors. It may be appropriate to base the majority of the analysis on qualitative analysis, which is supported by quantitative analysis. Each criterion chosen should be related to how the option will achieve the project's key objectives.

Key considerations include: All relevant data gathered The capacity of the market and the ACT Government to successfully deliver the

project under each model The degree to which each model will achieve strategic outcomes and project

objectives Implications of each model for the ACT Government or market To what extent the chosen delivery model would still be relevant if

circumstances change Unique or unusual project characteristics and risks associated with the models Significant risks associated with a delivery model that could not be effectively

managed by the Directorate

There is no prescribed approach or methodology for delivery model selection. However, a number of tools are available for comparing models and identifying the most suitable for a particular project. A semi-quantitative assessment may assist in selecting the preferred delivery model. The essence of quantitative analysis is to quantify the rationale behind delivery model selection decisions.2 The following guidelines should be considered when using a decision support tool:

Avoid methodologies that conceal their logic or fail to demonstrate the reasoning involved;

Ensure sufficient intellectual expertise is available to analyse options from first principles;

Ensure the tool is appropriate – there is no decision support tool that fits all projects;

2 Above n17, 25.


Do not rely on the assessment of a single tool; and Compare the result arrived at by applying the tool with an analysis from first

principles – does the result withstand scrutiny from a first-principles analysis and a check against another analytical method? 3

6.5 Recommended Delivery Model

1. Selecting a delivery model

The delivery model decision requires:

A comprehensive understanding of project strategic outcomes and their relationships to the various aspects of different delivery models;

A comprehensive understanding of project risk; Detailed analysis to identify which option best optimises the project's strategic

objectives; Detailed analysis to identify which option is likely to maximise value for money;

and A project specific risk assessment in respect to each of the delivery models.

Factors which may be relevant in considering different procurement models are set out in the table below.

Table: Procurement Model FactorsFactor Consideration

Design complexity of the design solution level of control sought by the ACT Government over design

development need and ability to achieve complete design prior to tendering or

construction commencing desire for design flexibility during construction obsolescence of the design and the ability to upgrade scope for innovations and benefits of having completing design

solutionsCapacity and Capability availability of suitable contractors

internal resources and skills of the DirectorateWhole of life merits of bundling capital and ongoing maintenance

responsibilities how whole-of-life costs will be assessed under each model maintenance and disposal responsibilities

Political ACT Government policy and other political considerationsScale likely cost of the projectCost certainty the need for strict cost control and/or certainty

degree of certainty regarding design and achievement of KPIs need for cost certainty

Project characteristics risk factors particular to a project unique or unusual circumstances or factors

3 Ibid.


Table: Procurement Model FactorsTiming constraints What model is likely to best accommodate time constraints?

are there critical deadlines

Once a preferred delivery model has been identified, it can be structured in detail and tailored to the project. It’s also advisable that the project’s risk assessment is reviewed once the preferred delivery model has been structured.4

Prior to going to market, the final procurement strategy which incorporates the preferred delivery model should be approved by Directorate, Commerce and Works and Treasury. It is important to engage with the market in respect of the preferred delivery model prior to the receipt of tenders.5

The table below provides a summary of how these five key procurement drivers relate to each of the delivery models.

Delivery ModelTime to Market Flexibility Price Certainty

Innovation & Incentive

Risk Transfer

Package drivers H/M/L H/M/L H/M/L H/M/L H/M/L

Construct Only Suitable Suitable Indifferent Highly unsuitable Indifferent

Design & Construct Suitable Indifferent Indifferent Indifferent Indifferent

Design Construct Maintain Indifferent Unsuitable Suitable Suitable Suitable

Design Construct Maintain Operate Indifferent Unsuitable Suitable Highly suitable Highly suitable

PPP (Availability) Highly unsuitable Highly unsuitable Highly suitable Highly suitable Highly suitable

PPP (BOOT) Highly unsuitable Highly unsuitable Highly suitable Highly suitable Highly suitable

Project Management Agreement Highly suitable Highly suitable Highly unsuitable Highly unsuitable Highly unsuitable

Managing Contractor Highly suitable Suitable Unsuitable Suitable Unsuitable

Alliance Unsuitable Highly suitable Highly unsuitable Suitable Highly unsuitable

2. Matching models to project values There is no definitive guide that prescribes what delivery models can be used

against specific value projects The various models do have varying levels of complexity and as a general rule

more sophisticated models are generally better matched to higher value and more complex projects

The following diagram provides an indicative guideline on the relationship between the delivery model and the project value:

4 Above n17, 26.5 Ibid.


Construct Only

Design & Construct



PPP (Availability)

PPP (BOOT)

Project Management Agreement

Managing Contractor

Alliance

0m 50m 100m 150m Note that BOOT car park projects are delivered in a lower value range than indicated on the diagram.

3. Implications for Procurement A summary of the procurement implications should be included and these may

include, but are not limited to: Timeframes; Resources and skill sets required; Advisors needed; and Procurement costs.

The business case needs to recommend a delivery model however it may outline alternative options

A summary of the rationale for the recommended delivery model should be included here

6.6 Review 3 (PCW): Delivery Model Selection

This is the second review point for PCW and is an assessment of the delivery model analysis.

Sign off should only occur if the PCW office is confident that the delivery model selected is the most suitable to the project requirements and level of risk.

PCW will review the delivery model selected to ensure that it is the most suitable to the project requirements and level of risk.



Tier 1Applicable 1 2 3

7. Financial Analysis (PPP & DCMO only)

A delivery model available to the Territory is to deliver the project under a Public Private Partnership arrangement (“PPP”).

A typical PPP project involves a long term contract (concession agreement) between the Territory and a private sector entity (commonly a special purpose vehicle referred to as the project company) to deliver infrastructure and services. The concession agreement may be for a period of 10 - 50 years (concession period). The project company provides the upfront capital required to construct or develop an asset and agrees to construct, maintain and/or operate that asset in accordance with a performance based or 'output' specification. Under this option the delivery model and the funding option are inextricably linked.6

The project company owns or controls the project assets until the end of the concession period when the assets are transferred back to the Territory (except where a 'build own operate' procurement model is used, in which case the project company retains the asset at the end of the concession period).

The drivers for the Territory and the private sector must be well understood for this form of partnership to succeed. For the Territory, the viability of the project depends on its efficiency and value for money compared with the economics of funding the project with public funds. However, this is not only an assessment of the comparative cost of finance. Although the Territory may be able to borrow money more cheaply than the private sector, other factors could offset this advantage, such as private sector efficiencies and innovation and the transfer of risk. For the private sector, the viability of the project depends on revenue from the project covering the operating and maintenance costs and debt service, as well as providing sufficient return on investment. 7 The Territory needs to consider this proposition in structuring a PPP if the project is to be attractive to the market and ultimately successful.

There are two main types of PPP projects – economic infrastructure projects and social infrastructure projects (some projects may be a combination). These are outlined below.

Economic InfrastructureEconomic infrastructure refers to projects where a revenue generating asset is developed, for example toll roads, commercial car parks or sporting stadiums. The project company derives revenue from the operation of the asset and this revenue is used to service the financing debt and provide a return on investment to the sponsors who provided equity for the project.A true economic infrastructure PPP requires no contribution of capital to the project by the Territory for the construction of the asset or during the operations phase. However, in

6 This approach would typically involve project delivery models such as design, build, finance, maintain/operate (DBFM/DBFO), build, operate and transfer (BOT), build, own, operate, transfer (BOOT) or build, own, operate (BOO) for economic infrastructure and design, build, finance and operate (DBFO) for social infrastructure. See Part B2, Procurement options.

7 Build Own Operate Transfer (BOOT) Projects, <http://www.mcmullan.net/eclj/BOT.html>


recent years the private sector has resisted taking on certain risks in economic PPP projects, in particular demand risk. This means that where certain patronage levels are not met during the operation phase, the Territory would be required to make a capital contribution. This has been the case in some State Government PPP toll road projects.

Suitable projectsPPP arrangements for economic infrastructure are suited to projects where:

o The project value is in excess of $100 million – the National PPP Guidelines suggest this threshold given the high transaction costs and upfront investment required for a PPP procurement, although it also notes value for money may still be achieved on projects with a capital value of $50 - $100 million8

o The project involves capital investment in a revenue generating asset capable of servicing debt and providing a return on equity contributions

o The project is large scale, complex or high risko There are significant post construction operation and service componentso There is strong private sector capability and capacity to undertake the projecto Private sector efficiencies or expertise are an advantageo The project provides opportunities for innovationo The risk-adjusted whole-of-life cost delivered by the private sector provides value

for money compared with the cost to the Territory of public deliveryo Significant project risks can be allocated to the private sectoro The scope of the service output is relatively certain and can be measured and priced.

Benefits and disadvantagesThe key benefits and disadvantages of a PPP arrangement for Territory economic infrastructure projects are outlined the Table below.

Table: PPPs for economic infrastructure projects - benefits and disadvantagesBenefits DisadvantagesRisk allocation: The Territory may be able to transfer significant project risks to the private sector and away from the taxpayer, including finance, design, construction and revenue risks.Accelerated development: This approach may enable the Territory to bring forward projects (and the associated services) which would otherwise not be possible using general operating revenue.Innovation and efficiency: There is an opportunity to take advantage of private sector innovation and efficiencies.Territory resources: During the concession period, there is little pressure on Territory resources in relation to the project.Minimal public debt: PPP projects provide an alternative to Territory borrowing funds or

Reduced flexibility and control: The output specification is established at the outset of the project and can only be changed through processes set out in the contract.Financing costs: The cost of borrowing is higher for the private sector than it is for the Territory and financing costs (such as interest costs, facility and establishment fees, lenders legal costs etc) will be a project cost factored into the bid by the project company for the project.Transaction costs: This method of financing generally involves high transaction costs (although this needs to be evaluated in the context of the overall value for money of the project).Complexity: PPP projects are inherently complicated. The project development, tendering and negotiation stages are lengthy and

8 Infrastructure Australia, Commonwealth of Australia, National PPP Guidelines, Overview (December 2008).


Table: PPPs for economic infrastructure projects - benefits and disadvantagesBenefits Disadvantagesraising rates, both of which are politically unpopular. In a PPP project, the Territory is generally not required to make a capital contribution to the development, operation or maintenance of an asset and the provision of associated services.Whole of life risk: The risk is largely shifted to the private sector during the concession period, and this incentivizes the project company to consider the whole-life costs of the asset. This also provides an incentive to keep the asset properly maintained and to design the asset in a manner which is likely to reduce maintenance costs.Refinancing risk: Depending on the length of the concession period, the refinancing risk is largely born by the project company.

costly, and the financing and accounting issues are usually complex.Lead time: Given the complexity and long term nature of the arrangement, there is generally a fairly substantial lead time.Resource intensive: During the project development and tendering stages, the project is resource intensive for the Territory, requiring large teams, the involvement of high level staff and the appointment of external advisors and consultants.Flexibility and control: The Territory may wish to retain control of its core services or otherwise maintain flexibility for future shifts in policy – this model does not provide much scope for this.Residual project risks: If the project company becomes insolvent or defaults, the asset and associated operation and maintenance obligations may be transferred to the Territory, increasing pressure on public funds and resources.

Social infrastructureSocial infrastructure refers to projects which require capital investment in an asset which does not generate revenue, or generates an unpredictable or minimal revenue stream. Examples include the development and operation of a waste facility, long term road maintenance and capital works programs, expansion or upgrade of regional airports, new bridges etc.

Like an economic PPP, the Territory typically does not provide any up front capital for the project. The project company derives income from periodic service payments or availability charges paid by the Territory during the concession period once the asset has been constructed. These payments may be monthly, annually etc. Payments are subject to the project company meeting specified performance criteria and will be reduced or 'abated' for failure to reach the required standard.

In social infrastructure PPP projects, the Territory has the option of engaging the private sector to design and build an asset and provide the post construction community services and maintenance services, or the Territory may provide the 'core' community services while the project company provides the maintenance services. This allows the Territory to maintain control over the community service component of the project.

Suitable projectsPPP arrangements for social infrastructure are suited to projects where: The project value is in excess of $100 million – the National PPP Guidelines suggest this

threshold given the high transaction cost and upfront investment required for a PPP


procurement, although it also notes value for money may still be achieved on projects with a capital value of $50 - $100 million9

The project involves capital investment in an asset which does not generate revenue, but the project involves significant post construction operations or maintenance activities

The project is large scale, complex or high risk There is strong private sector capability and capacity to undertake the project Private sector efficiencies or expertise are an advantage The project provides opportunities for innovation The risk-adjusted whole-of-life cost delivered by the private sector provides value for

money compared with the cost to the Territory of public delivery Significant project risks can be allocated to the private sector The scope of the service output is relatively certain and can be measured and priced.

Benefits and disadvantagesThe key benefits and disadvantages of a PPP arrangement for Territory social infrastructure projects are outlined in the Table below.

Table: PPPs for social infrastructure projects - benefits and disadvantagesBenefits DisadvantagesFlexibility and control: The Territory may wish to retain control of its core services – this model provides scope for this.Risk allocation: Territory may be able to transfer significant project risks to the private sector and away from the taxpayer including finance, design, and construction and operation/maintenance risks.Accelerated development: This approach may enable the Territory to bring forward projects (and the associated community services) which would otherwise not be possible using general operating revenue.Innovation and efficiency: There is an opportunity to take advantage of private sector innovation and efficiencies.Territory resources: During the concession period, there is little pressure on Territory resources in relation to the project.Minimal public debt: PPP projects provide an alternative to Territory borrowings or raising rates, both of which are politically unpopular. In a PPP project, the Territory is not required to commence payments until the asset is commissioned and operational.Budget certainty: Where the availability/service charge is a smooth charge over the concession period, or is reasonably

Reduced flexibility and control: Social infrastructure PPP projects require a long-term commitment of Territory funds which reduces the flexibility of future Territory policy and budgets. The output specification is established at the outset of the project and can only be changed through processes set out in the contract.Financing costs: The cost of borrowing is higher for the private sector than it is for the Territory, and financing costs (such as interest costs, facility and establishment fees, lenders legal costs etc) will be a project cost factored into the bid by the project company for the project.Transaction costs: This method of financing generally involves high transaction costs (although this needs to be evaluated in the context of the overall value for money of the project).Complexity: PPP projects are inherently complicated. The project development, tendering and negotiation stages are lengthy and costly, and the financing and accounting issues are usually complex.Lead time: Given the complexity and long term nature of the arrangement, there is generally a fairly substantial lead time.Resource intensive: During the project development and tendering stages, the project is

9 Infrastructure Australia, Commonwealth of Australia, National PPP Guidelines, Overview (December 2008).


Table: PPPs for social infrastructure projects - benefits and disadvantagesBenefits Disadvantageslikely to be able to be calculated over that period, the Territory enjoys a level of long term budget certainty regarding the services to be provided.Whole of life risk: The risk is shifted to the private sector during the concession period which incentivizes the project company to consider the whole-life costs of the asset. This also provides an incentive to keep the asset properly maintained and to design the asset in a manner which is likely to reduce maintenance costs.Refinancing risk: Depending on the length of the concession period, the refinancing risk is born by the project company.

resource intensive for the Territory requiring large teams, the involvement of high level staff and the appointment of external advisors and consultants.

7.1 Financing Assumptions

The Territory requires the calculation of a proxy model to quantify the estimated payments under a PPP or DCMO partnership arrangement. Calculation of the estimated payments requires the advice of specialist advisers and liaison with Treasury.

The proxy model will also, potentially, include VfM efficiencies presented as discreet sensitivities or, alternatively, as a range of outcomes for direct comparison to the PSC using point estimates or Monte Carlo simulator. The PPP proxy model will require a number of key assumptions including:

o The use of a debt based or capital markets (bond financing) structure for the project; o The gearing assumptions to be utilised (balance between debt and equity finance); o The cost of debt and equity; o The coverage ratios to be applied (these can have a material influence on model

outcomes); and o Taxation structure.

Some of these assumptions, especially those related to the financing structure and associated cost of funds, will be heavily influenced by the risk analysis. These assumptions should be developed in liaison with Treasury.

7.2 PPP/DCMO Payment Stream

For PPP delivery models, the outcome from this proxy model will be an estimate of the annual availability fee that a typical private sector bidder may seek in order to generate its required return on equity, taking account of the factors outlined immediately above. This will be expressed in Net Present Cost (NPC) terms for comparison with the risk adjusted Public Sector Comparator (PSC).


The proxy model is required to inform pricing impacts, affordability and risk considerations and represents the costs of delivering the project under the PPP or DCMO delivery option. This model is fully integrated with the PSC and uses the same set of core cost data. This ensures the proxy model is developed efficiently and also that a clear audit trail exists linking key assumptions back to the original reference project.

The key difference between the PSC and proxy model is that the proxy model includes a project financing structure and overlays this onto the original PSC cash flows. In addition, the proxy model requires taxation assumptions to be applied to the model.

The availability charge also acts as a basis for affordability analysis.

7.3 Incremental Procurement/Transaction Costs

In the event of a PPP or DCMO, there will be incremental procurement and transaction costs in particular in relation to legal, commercial and technical advice. The level of these costs will need to be estimated and included in this section to be additional to the project cost estimate. Section 10.0 of these Guidelines provides additional guidance on the nature and role of the required advisors.

7.4 Public Sector Comparator (“PSC”)The Public Sector Comparator is an estimate of the net present cost to government if it was to deliver the project under a traditional procurement method, for example design and construct. The PSC contains forecast whole of life cash flows for a government delivered reference project based on the infrastructure and service specifications provided to bidders, i.e. on a like-for-like basis to the PPP. The PSC incorporates allowances for project risks, for example construction price cost increases.

Key attributes of a PSC include: o It is forecast based on the reference project – reflecting the cost to government of

delivering the infrastructure and services to the same standards as being procured from the private sector under the most likely traditional procurement model if not a PPP;

o It is expressed in net present cost (NPC) terms; o It is based on life-cycle costing – i.e. the whole of life cost of providing the services and

maintaining the infrastructure to standard prescribed for the PPP; and o It is risk-adjusted.

All future project cash flows are converted to a net present cost by applying a discount rate.

National PPP Policy and Guidelines have been prepared and endorsed by the Territory, Commonwealth Government, Infrastructure Australia and the other State and Territory Governments as an agreed framework for the delivery of PPP projects.

The guidelines set a framework for the procurement of PPPs on a national basis, and apply to ACT arrangements.


Volume 4 of the Guidelines provides specific and detailed guidance in relation to the PSC. It provides guidance to on the process for, and issues associated with, the development of the PSC including the selection of the discount rate.

Primary responsibility for the construction and use of the PSC rests with the Directorate. However the construction of a PSC requires a high level of specialist skills that will require the engagement of external expert advisers.

Treasury may be involved in assisting with the development of preliminary costing of the main PSC components, including assisting Directorates throughout the project development process and providing advice on technical issues, such as the discount rate to be used in constructing PSCs. Treasury will review the first preliminary PSC as part of the business case and will review the PSC when government approval is sought prior to the release of the Request for Proposal to bidders.

The PSC is developed to a preliminary stage in the business case phase. It is developed in detail in the project development phase, and should be finalised prior to release of the Request for Proposal.

The PSC is to be approved by Treasury and the Budget Committee of Cabinet at project approval or, at the latest, prior to the release of the Request for Proposal document. Any subsequent material changes must also be approved.

Disclosure of the PSC during the bidding process is not dealt with in these business case guidelines and will be dealt with on a project by project basis and under the Territory’s Partnerships Framework.

Procuring agencies are to consult Treasury on the appropriate discount rate for use in the PSC. Discounted cash flow analysis is required to compare differing PSC and bid cash flows on a consistent basis. The national PPP guidance material provides a methodology for determining the discount rates to be used in making this comparison and determining whether PPP delivery offers value for money (refer Volume Five: Discount Rate Methodology). The national guidance material focuses upon the development of the discount rate for social infrastructure projects, i.e. projects with net cash outflows for Government. Different considerations may apply to economic infrastructure projects.

7.5 Review 4 (Treasury): Financial

This is the second review point for Treasury and is an assessment of the financial estimate calculations for PPP and DCMO models.


Treasury will review the budget impact calculations for PPP and DCMO models.

Traditional delivery models (and integrated models such as a DCMO) typically involve payments through the construction period aligned with construction activity progress or


milestones, followed maintenance and operations payments. An indicative payment profile is set out below.

Figure: Payment profile – traditional procurement

0

50,000

100,000

150,000

200,000

250,000

300,000

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046

Tota

l cap

ital a

nd re

curre

nt co

sts

($'00

0)

Capital costs including risks Recurrent costs

A PPP model on the other hand may have a long term (e.g. 30 year) availability/service payment stream which commences from the point of commercial acceptance of the asset. An indicative payment profile is set out below.

Figure: Payment profile – PPP procurement

0

50,000

100,000

150,000

200,000

250,000

300,000

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046

Tota

l cap

ital a

nd re

curre

nt co

sts

($'00

0)

Recurrent costs - retained Quarterly service payments

Accounting treatment and taxation matters Accounting and taxation matters are a complex part of PPP transactions and require the advice of specialist advisers and liaison with Treasury. The National PPP Guidelines (refer Volume Two: Practitioner’s Guide) contains advice on accounting and taxation matters that are also relevant in the ACT (refer Chapter Nine, page 40 and Appendices F and G).

Treasury must be consulted on accounting issues and kept informed as to the likely balance sheet status of PPP projects and the budget implications of the accounting treatment. Early consultation with the Auditor-General’s Office on PPP accounting is also desirable to ensure the correct accounting framework and any relevant accounting standards are appropriately considered and applied.



8. Project Governance

Business cases for Tier 1 and Tier 2 projects are to include a section on the proposed project governance arrangements.

This section sets out:

What are the Government Directorates involved and what are their roles? Who would assume responsibility to chair governing committees?

Successful project delivery requires the establishment of a dedicated project team. The team members will need to have an appropriate mix of skills and experience across key technical, commercial and financial disciplines relevant to the project.

The project team would need to be supported as necessary by specialist external advisers from legal, financial, technical, planning, industrial relations and communications fields.

PCW and Treasury representatives on the steering committee will report through their respective Director Generals to the relevant Ministers.

8.1 Governance and Stakeholder Management

It is important to note the distinction between project governance and stakeholder management. Stakeholders are integral to the successful outcomes of a project through relevant consultation and communication. It is not however the role of stakeholders to be involved in the project decision making process either in planning, procurement or delivery.

Both Project Control Groups and Steering Committees should be kept to a manageable size for effective decision making and a recommended size of 6 to 10 persons should be taken as an indicative guide.

8.2 Key Roles & Responsibilities

A Tier 1 project may include the following governance groups:

Steering CommitteeThe Steering Committee’s role is to oversee the development of the project and deal with key commercial and policy issues.

In particular, the steering committee should: determine the strategic direction of the project oversee the operations of the government project team consider and determine preferred positions on key commercial and policy issues,

including the content of key documentation oversee the competitive bid process and the evaluation of competitive bids and


consider recommendations on short-listed and preferred proponents make recommendations to Cabinet through the responsible Minister, CWD and

Treasury on key policy and commercial matters and on short-listed and preferred proponents

Role Description ResponsibilityProject Sponsor Typically the senior

responsible person in the Requesting Directorate (ideally at Director General level for Tier 1)

Undertakes the role of Chair of the Steering Committee

Responsible for briefing the Minister on the progress of the project

Treasury representative Provide input to the Steering Committee where required

Relevant advisors Provide specialised/technical input to the Steering Committee where required

Other committee members Project Director Members from the

project team

Provide input to the Steering Committee where required

Project Control Group (PCG)The PCG’s role is to oversee the delivery of the project.

Role Description ResponsibilityProject Director (PD) Typically from the Requesting

Directorate. The PD will be required to have highly developed project management and commercial skills and knowledge of government processes. Depending on the size and nature of the project, it may also be desirable for the project manager to have the appropriate technical skills relevant to the project. The PD should have adequate delegated responsibility to enable them to successfully lead and manage the process.

Day to day management of the project;

Management of the project team & advisors;

Provide periodical progress updates to the Steering Committee/ Project Sponsor;

Ensure project objectives are being met;

Overall responsibility for financial management & reporting;

Overall responsibility for contracts management;

Overall responsibility for time/schedule management


Project team Made up of officers from both the Requesting Directorate and PCW. Team members will ideally have subject matter, project management and contracts management experience.

Develop positions on a range of policy, commercial and administrative matters to be considered by the steering committee;

Manage the advisors to ensure satisfactory performance, deliverables are achieved;

Manage the competitive bid process;

Manage stakeholder relations and community consultation;

Provide advice and assistance to the evaluation committee on its assessment of expressions of interest and binding bids.

Manage contract administration

Monitor project programme Progress invoices & maintain

budgets

Relevant Advisors Provide specialised/technical input to the PCG where required.

Probity Advisor Should be engaged where required.

Observe and review the competitive bid process and establish whether the procedures have been administered fairly and impartially to all parties.


8.3 Typical Governance Structure for Tier 1 Projects

A typical governance structure is set out below:

Figure 8a: Typical Governance Structure for Tier 1 Projects


8.4 Typical Governance Structure for Tier 2 Projects

For most Tier 2 projects a formal Steering Committee arrangement would not be required. Nevertheless, a Project Control Group with cross representation of stakeholders should report through the Project Sponsor. This arrangement is set out in the Figure below:

Figure 8b: Typical Governance Structure for Tier 2 Projects


Tier 1ApplicableTier 1 Applicable

11

22

33

9. Stakeholder Engagement Plan

The business case guidelines assume that Directorates have established processes and tools for engaging with the community.

It is important for the project team to obtain preliminary support from the key stakeholders, particularly for major projects that will impact diverse sections of the community or which involve the delivery of bundled services through regional collaboration. Preliminary support should be sought from key stakeholders early to avoid projects being derailed or abandoned due to the revelation of stakeholder objections or issues after substantial resources have already been spent on developing the project.

For large complex projects, or projects likely to involve significant stakeholder issues, the project team may wish to outline a stakeholder communication plan.

9.1 Stakeholder Identification

Stakeholders are individuals or groups who have an active interest or investment in the project. Stakeholders may include:

Businesses, employees and industry stakeholders; Local residents (in one or a number of municipalities); Federal Government departments or agencies; Local Government; Special interest groups; Indigenous communities; and Staff.

The project team should identify the stakeholder groups for the project and undertake preliminary consultations with representatives from each of the key groups.

9.2 Stakeholder Involvement and Interest

Identifying stakeholder issuesDuring the stakeholder engagement process, the Directorate should seek to identify: The potential impacts of the project (both negative and positive) on the different

stakeholders; The level of support or influence which stakeholders have on the project; How the input from stakeholders may be captured throughout the development of the

project.

The design of the stakeholder engagement strategy is discussed further below.


9.3 Stakeholder Engagement Plan

Stakeholder analysisStakeholder analysis is an ongoing process supporting the development of a major project. At the business case stage, the stakeholder analysis is focused on describing:o The nature and extent of potential impacts of the project on different stakeholders;o The stakeholder benefits; ando Potential synergies between the project and stakeholder requirements.The stakeholder engagement process during the business case stage should aim to review and clarify stakeholder concerns and the strength of stakeholder support for the project.

It is essential to allow enough time and resources to consult effectively with stakeholders during the business case stage.

Communication strategyThe project team may wish to develop a communication strategy outlining the critical path for engaging with project stakeholders and the resources available for stakeholder consultation.

One of the key benefits of having a communication strategy is the formation of agreed messages to underpin stakeholder consultations relating to the project. This ensures clarity and consistency in project communications.

Building upon the preliminary stakeholder consultations undertaken to support the preparation of the outline business case, the communication strategy may include the following elements:

o Objectives of the communication strategy – these may differ between stakeholder groups;o Identification of stakeholders;o Method of consultation and the priority order of consultations;o Need for a formal stakeholder management structure to provide guidance to the project

team (for example a Stakeholder Reference Group);o Key messages to stakeholders as part of consultation – may be different for different

groups; ando Reporting requirements and planning framework for resolution of identified issues.

In certain cases, it may be appropriate to engage the advice of public relations organisations, independent facilitators or community relations officers to facilitate the development and implementation of the stakeholder engagement strategy.

Method of consultationThere are a range of methods for engaging stakeholders, including those represented in the Figure below.


Figure 9a: Stakeholder engagement

Selection of the most appropriate approach of stakeholder engagement depends on a number of considerations. The project team may wish to consult the same stakeholder using more than one method.

Documenting stakeholder analysis The business case should present the following information arising from the stakeholder analysis:

o The process already undertaken (including at the strategic assessment stage) to identify and engage with stakeholders to clarify their needs and responses to the project;

o A stakeholder mapping and/or segmentation to outline: The specific groups of stakeholders – including those directly impacted by the

project, those internal or external to the Territory, and those with project influence or who may experience wider project implications ;

The nature of issues, impacts or interests for different stakeholders, including the critical success factors for the project from the perspective of each of the key stakeholders;

The specific consultation actions relating to each stakeholder; and The level of support or concerns which require management for each stakeholder.

o Consideration of how certain stakeholder issues or views have contributed to the shaping of the project, including how the project should be/has been reconfigured, in appropriate circumstances, to address stakeholder concerns; and

o The communication strategy for the business case stage, and potentially the communication strategy to be established and implemented going forward during the project development stage, to deliver a responsive approach to engaging with stakeholders and resolution of their issues.

Attach a copy of the Stakeholder Engagement Plan as an appendix to the Business Case.


Stakeholder Engagement

Community Forums

Information Sessions

Surveys

Media Campaigns

Requests for Submissions

Websites

One-on-one Consultations

Focus Groups/Work

shops

Tier 1Applicable 1 2 3

10. Advisor Engagement Plan

10.1 Proposed Advisors Roles

External advisers can typically offer a wider commercial perspective and greater experience than that available within government. It is important, however, to consider the expertise available within government before considering mandates for external advisers. Specialist advisers should be engaged where their skills and experience are likely to add value to the project.

The types of specialist advisers and the circumstances in which their appointment might be considered for a public private partnership project are discussed below.

10.1.1. Legal

Will an external Legal Advisor be required?

Certain delivery models such as PPP, DCMO etc. often involve complex contractual arrangements between government and contracting counterparties. For this reason, it is important that the government project team includes legal expertise. In the first instance this is always obtained for from the Territory Solicitor (“ACTGS”). For large complex projects under sophisticated delivery models, bespoke contracts may be required and this could involve the use of external lawyers.

Legal advisers play a key role in developing the risk allocation matrix, the contract management structure and in the preparation of project agreements. Particular areas where external legal advice may be appropriate (without duplicating financial advice) include:

The structure of the transaction and advice on the procurement approach to be taken;

Advice on contractual issues in relation to the request for expression of interest and request for binding bid documents;

The market sounding process; Drafting of the output specification; Drafting and finalisation of project agreements; Advice on how project agreements will achieve the allocation of risk and the

commercial terms which have been agreed with the preferred proponent; and Advice as required on more general issues such as taxation, property, planning

and environmental law, competition law and intellectual property.

10.1.2. Commercial Procurement


Will a Commercial Procurement Advisor be required?

For DCMO and PPP this is mandatory; and Assessment of in house resources and expertise is advisable.

The role of the commercial procurement advisor may include:

Facilitate risk workshops; Assess commercial principles; Delivery model assessment; Develop EOI and RFP documentation; Run EOI and RFP evaluation processes; Assist in drafting commercial terms and parameters for contracts; and Provide ongoing commercial advice for contract management.

10.1.3. Financial Advisor

Will a Financial Advisor be required? This role only applies to the following delivery models

PPP (mandatory) DCMO (recommended)

Financial Advisors will be the same entity as Commercial Procurement advisors for these delivery models

For DCMO this role is largely limited to development of the PSC

The Government project team is likely to require the support of a suitably qualified and experienced external financial or commercial adviser.

A PPP financial adviser should have direct experience with project financing and be able to explain the different risk and return expectations of different financial markets and instruments. A financial adviser would typically provide the following services, although not all of the following would necessarily be required on any given project:

Assistance with the preparation of the PPP business case, including; Advice on the development of the output specification, the PSC and PPP Service

Payment; Advice on carrying out risk analysis (including facilitation of risk workshops) and

the identification, quantification and allocation of risk; Market sounding; Structuring and drafting the bid documentation to ensure good quality

responses from the private sector; Ensuring the payment structures offer the optimum balance of risk and reward Providing advice on the financial evaluation of bids, including the deliverability

of funding structures; Reviewing and checking the accuracy of the proponents’ financial models; Testing the robustness of the proponents’ assumptions; and Providing financial advice and support during the period leading up to financial

close.


10.1.4. Technical Design & Engineering

Will Technical Design and/or Engineering advice be required?

The Government project team is likely to require technical design & engineering specialists. The skills required depend upon the nature of the project. Likely skills include design, construction, quantity surveying and engineering skills. Where projects involve technology, technical consultants are required to assist with drafting appropriate performance specifications, evaluating the technical components of bids, and auditing or inspecting systems during the testing and implementation phase.

Specific technical advice may be of particular use—for example, in the following areas:

Assistance with defining an output specification for the physical asset and services to be provided under the proposed arrangement;

Technical assumptions to be used in the public private partnership business case, including the public sector comparator;

Assistance with drafting the request for expression of interest and request for binding bid documents;

Assistance with technical evaluation of bids, including capability of contractors Assistance with technical aspects of risk assessment; Valuing assets that may be sold or transferred as part of a public private

partnership proposal; Technical aspects of facilities management, including the development of

appropriate payment mechanisms and the monitoring and measuring of service delivery performance; and

Undertaking peer reviews of design during the design process to ensure in-discrepancies and oversights are picked up and addressed early.

10.1.5. Other Specialists

Will any other specialist advice be required?

The Government project team is likely to require other specialist advice. Specialist advice may be of particular use – for example, in the following areas:

Assistance with projects associated with heritage sites; Assistance with projects with high environmental impacts; Assistance with projects where social procurement is appropriate; and Alliance auditors for those delivery models.

10.1.6. Stakeholder Management & Communication

Will Stakeholder Management/Communications be required?

The Government project team may require the assistance of a Stakeholder Management advisor for projects that have significant impacts on the public including development in urban or residential areas.


Stakeholder liaison can take the form of:

Community Forums Information Sessions Surveys Media Campaigns Requests for Submissions Websites One-on-one Consultations Focus Groups/Workshops

10.1.7. Project Management

Will an external Project Manager be required?

For large complex projects such as PPP/DCMO/Alliance an external Project Manager may be engaged to act as the single point of contact for the project and report directly to the Project Director.



11. Timelines

11.1 Project Timetable

11.1.1. Outline Outline the proposed timetable based on the identified project milestones. Please attach a Project Programme at Appendix E (Tier 1 template). This should

be presented as a Gantt chart that details the project milestones, task dependencies, task duration and the critical path of the project tasks.

The timetable should also demonstrate the planned expenditure against each of the project milestones.

11.1.2. Proposed float What flexibility does the timetable allow? The project timetable should have float to deal with unforseen issues which can

arise for a broad range of reasons.

11.1.3. Project constraints and/or deadlines Are there specific constraints to the timetable? Are there mandated or imposed deadlines? E.g. Election commitment. What community and internal engagement will be required?

11.1.4. Project decision points What are the project review points? What approvals are required? Who are the decision makers at these points? They are:

Cabinet/Minister Steering Committee

Project Sponsor Committee Members

Project Control Group Project Director Project Team

Client Team PCW Team


Appendix A: Economic Analysis Guidelines

This Appendix provides guidance material to support Directorates in undertaking a Cost Benefit Analysis (CBA).

The purpose of a CBA, like any policy analysis, is to provide information that will materially assist decision-making. The assessment involves identifying, quantifying and, where possible, valuing in money terms the costs, benefits and uncertainties of each option. It also involves quantifying costs and benefits that occur at different points in time on a comparable basis.The key steps in the CBA process are set out below.

Determine scope and objectives Identify the constraints Consider the alternatives Specify and quantify costs and benefits Calculate the NPV and BCR Sensitivity analysis.

These steps are discussed in turn in this Appendix.

Determine scope and objectivesThe first step for a CBA is to outline the nature of the problem to be addressed: its background, context and rationale. The information presented should also provide an initial indication of how appropriate the objectives of the initiative are in relation to current Government priorities. Following this, the outcomes expected from undertaking the proposal should be identified. They should be clearly distinguished from the means of meeting them.

Identify the constraintsThe next step is to identify the constraints in meeting the objectives to ensure all alternatives examined in the analysis are feasible. Constraints may be financial, distributional, institutional, managerial, environmental and political in nature.

Consider the alternativesA CBA involves the identification and specification of a set of alternatives. In most cases, a ‘do nothing’ or ‘status quo’ option should be included as a base case. This option is generally required because costs and benefits are nearly always measured as incremental to what would have happened had the project not gone ahead.

The process of developing and analysing a range of options can be expensive and time consuming. It may be appropriate to outline various potential options and have decision-makers select, after a preliminary screening, a smaller number for detailed appraisal.

Specify and quantify costs and benefitsA critical step in the CBA process involves identifying and quantifying the costs and benefits of each alternative. The types of benefits and costs will depend on the project. Typical costs of a proposal would include:

• initial capital costs;• capital costs of any buildings, equipment, or facilities that need to be replaced during the life

of the project;• operating and maintenance costs over the period of a programme or project; and• Costs which cannot be valued in money terms (often described as 'intangibles').


Typical benefits of a proposal would include:• benefits which can be valued in money terms, in the form of revenues, cost savings or non-

market outputs; and• Benefits which cannot be valued in money terms (also described as ‘intangibles’).

Estimating the magnitude of costs and benefits can be difficult and will normally involve input from economists and other technical specialists.

Intangible costs and benefits are those that cannot be assessed realistically in monetary terms, for example, some health and education benefits. Such costs and benefits should be identified and quantified to the extent possible.

Costs and benefits occurring at different time periods need to be set on a comparable basis. Normally they should be expressed in ‘real terms’ (this is, in constant prices) at the price levels prevailing in the year the analysis is carried out because inflation simply raises the values of all costs and benefits of future years by a given percentage. However, where the price of a particular good or service is expected to increase or decrease significantly more or less than the general rate of inflation (for example, oil prices may be expected to move faster or slower than general inflation), these changes in relative prices also need to be accounted for in the analysis.

Undertaking a CBA generally involves a degree of judgement. Individuals involved in an evaluation can often hold overly optimistic views in setting the costs, benefits and time profile of a project or activity. This behaviour is known as ‘optimism bias’. To counter this bias, appropriate adjustments can be made to the costs, benefits and time profile of the project or activity. Calculating adjustments for optimism bias is beyond the scope of these guidelines. [The UK Treasury’s Green Book - Appraisal and Evaluation in Central Government (pp.85-87) and Supplementary Green Book Guidance – Optimism Bias provides useful guidance on optimism bias.]

Valuation of Costs and BenefitsThere is an important distinction between the costs and benefits involved in a financial analysis and those included in an economic analysis.

Financial analysis implies the notion of the Directorate maximising its net financial surplus over time.This will generally differ from the maximisation of the economic "surplus" generated for the community as a whole whenever prices do not fully reflect the benefits or costs associated with an activity (in some cases there may not even be any prices because benefits and costs are not traded).In estimating the economic costs and benefits of a project, values will often have to be estimated where no direct price is charged and will generally have to consider a wider range of costs and benefits than occurs in a financial appraisal.

When considering how impacts should be valued in practice, it may be convenient to classify impacts into three categories.

• Costs and benefits which can be readily identified and valued in money terms (e.g. value of additional electricity supplies to users, travel time savings).

• Effects which can be identified and measured in physical terms but which cannot be easily valued in money terms because of the absence of market signals and consequential disagreement as to the rate of valuation (e.g. museums, reduction in pollution).

• Impacts which are known to exist but cannot be precisely identified and accurately quantified, let alone valued (e.g. crime prevention effects of police programs, comfort improvements in new trains, aesthetic effects of beautification programs).

•


Costs and benefits which can be expressed in monetary terms will normally include estimated initial outlays and running expenses on the cost side and, estimated receipts and cost savings on the benefit side. In practice, the items to be included on the cost and benefit sides of the monetary calculations will include:

Costs• capital costs (estimates of the cost of land, buildings and equipment)• Operating costs (running costs for the whole life of the option).

Benefits• revenue from traded output generated by the asset• revenue from non-traded outputs• Benefits to users of the service not reflected in the price paid but which can be valued.• cost savings• residual value of asset (if any)• Benefits to the broader community which can be valued.

Care must be taken to ensure that all investment-related costs and benefits are included, even those which do not actually involve spending or receiving cash.

Benefits and Costs Which Can Be Quantified But Not Readily ValuedThere are many areas where some quantification can be achieved, but it is very difficult to place monetary values on them. For example, the number of children passing through a school or the number of people entering a national park can be measured, but valuation is far more difficult.In some cases these benefits or costs may be regarded as relatively minor in terms of the project. In these cases they can simply be described and taken into account in a subjective manner. Further consideration needs to be given to these benefits and costs when they represent the main or a major impact of a project.

Benefits and Costs Which Cannot Be QuantifiedIn the public sector there are many areas where it is impossible even to measure the benefits and costs. Examples are the effect on law and order of the courts or the aesthetic impact of sewage works in an area of natural beauty. Again these items can simply be described if they are relatively minor.

Costs to be excluded from analysisCBAs are conducted on a cash accounting basis. A number of items which are included as costs in accounting reports or financial appraisals should not be included in an economic evaluation of an investment proposal.

Sunk Costs: In an evaluation, all costs must relate to future expenditures only. The price paid 10 years ago for a piece of land or a plant item is of no relevance; it is the opportunity cost in terms of today's value (or price) which must be included. All past or sunk costs are irrelevant and should be excluded.Depreciation: Depreciation is an accounting means of allocating the cost of a capital asset over the years of its estimated useful life. It does not directly reflect any opportunity cost of capital. The economic capital cost of a project is incurred at the time that labour, machinery and other inputs are used for construction, or in the case of an existing asset, when it is diverted from its current use to use in the project being evaluated. These project inputs are valued at their opportunity cost. This is why depreciation should not be included in the economic evaluation.Interest: As future cash flows are discounted to present value terms in economic evaluations, the choice of the discount rate is based on various factors which include the rate of interest and associated finance charges. The discounting process removes the need to include finance charges in the cash flows.


Project life and terminal/residual valueA project or program should generally be appraised over its projected life. This often accords with estimated physical lifetime of the assets.

When conducting a CBA, all of the benefits and costs should generally be discounted over the life of the project. However, when assessing projects with long lives, it may be appropriate for the CBA to be conducted on the basis of a shorter timeframe (the useful life). Adopting a shorter time frame may be a valid approach as uncertainty with forward estimates increases with extended time. Where a shorter timeframe is adopted, a terminal/residual value is to be included in the CBA, to reflect all subsequent benefits and costs.

The preferred approach for the BCR calculation is develop the residual value by applying a straight-line depreciation method. The alternative method is to calculate the residual value using an approach which estimates the future benefit stream provided by the asset (to the end of the asset life). This may be may be presented as additional information.

Calculate the NPV and BCR

NPVIn CBA, the excess of total benefit over total cost is represented by the net present value (NPV) of the proposal.

Before determining the value (or NPV) of a proposal, the costs and benefits need to be quantified for the expected duration of the project.

Valuing each alternative by calculating NPVs facilitates comparison between proposals that exhibit different timing of their benefits and costs. Programmes with positive NPVs generally indicate an efficient use of the community’s resources.

The NPV of a proposal is determined by applying a ‘discount rate’ (discussed below) to the identified costs and benefits. It is necessary to ‘discount’ costs and benefits occurring later relative to those occurring sooner. This is because money received now can be invested and converted into a larger future amount and because people generally prefer to receive income now rather than in the future.The NPV is calculated as follows:

tNPV = ∑ (Bt- Ct)/(1+r)t

0Where:

Bt is the benefit at time t;Ct is the cost at time t; andr is the discount rate.

Where all projected costs and benefits are valued in real terms, they should be discounted by a real discount rate. If nominal (current price) values are used for projected costs and benefits, they should be discounted by a nominal discount rate.

The discount rate can also be varied to test the sensitivity of the proposal to changes in this variable and, implicitly, to the phasing of costs and benefits. Sensitivity analysis is discussed further below.


Setting the discount rateIt is necessary to discount costs and benefits occurring later relative to those occurring sooner since money has an opportunity cost – money received now can be invested and converted into a larger future amount. While discounting costs and benefits is integral to conducting a CBA, a critical consideration is the discount rate used.

While there may be no universally accepted "correct" discount rate, interpretation of appraisal results will be impossible if different Directorates use different discount rates. The solution is the application of a standard set of real discount rates.

For the purposes of the CBA the discount rates should be: A real discount rate of 7% Sensitivity tests on the use of 4% and 10% to see if the outcome is sensitive to such

variations.

These rates are consistent with those required by Infrastructure Australia and the guidelines in New South Wales.

BCRFollowing the calculation of the NPV, the BCR for the project options is to be derived. It is recognised that there are two ways to estimate the BCR: 1) calculate the present value of benefits to the present value of costs or 2) calculate the ratio of the present value of net recurrent benefits to the present value of capital costs.

Given the former is used more and established in the Infrastructure Australia guidance material, Directorates should use this approach, whereby the BCR is calculated as:BCR = Benefits / (Construction Costs + Operating Costs)

The benefit and cost measures are incremental to the Base Case and discounted over the evaluation period.

A ratio of greater than 1 (one) shows there is net benefit to a particular project having considered the present values of the costs and benefits. The BCR should always be greater than 1 in order for the benefits of a proposal to exceed the associated costs.

Sensitivity analysis The values of future costs and benefits on which the NPV is based are forecasts that cannot be known with certainty. While they should be forecast expected values, it is important to test the NPV for ‘optimistic’ and ‘pessimistic’ scenarios. This is achieved by changing the values of key variables in the analysis, such as the discount rate, costs and benefits, and measuring the impact of the changes on the NPV. This is known as sensitivity analysis and is a critical component of any CBA. Where the NPV is shown to be very sensitive to changes in a variable, the analyst should check on the appropriateness and impact of this variable, and whether any changes to the design of the programme or underlying assumptions are warranted.

Typically there are four sources of uncertainty surrounding a proposal: • Capital costs; • Construction duration and therefore opening date• Operating (including maintenance) costs• Under and over estimation of the benefits (typically demand for the service).


A risk assessment should be undertaken to estimate the variations around these inputs with the sensitivity testing undertaken based on the variations.

Appendix B: Risk & Contingency Management

Managing risk is critical for major infrastructure projects. Risk management identifies potential risks, analyses their likelihood & consequences, and devises and implements responses to ensure that procurement and service delivery goals are achieved.10 Effective application of a risk management process will improve project outcomes. The amount of resources allocated to risk management should be commensurate with the:

Nature of the project Cost of the project Complexity of the project Significance of the project to the Territory’s business activities

Risk is the uncertainty of the occurrence of future events. Project risks have the potential to increase costs, create delays, and generate other challenges for the successful delivery of the project. Risk analysis is a method – qualitative and / or quantitative – for assessing the impacts of risks on projects.

It is best practice to adopt a risk management process throughout all stages of a project’s procurement, as it will assist in:

Understanding the possible events which could occur on a project Developing a risk adjusted estimate of project cost and contingency Developing strategies to minimise the impact associated with the occurrence of possible risks Developing a benchmark cost estimate for the purpose of analysing whether bids received

through the tender process represent value for money

i) Risk Management Process

The ACT has available a risk management tool, named RiskOrganizer. All Tier 1 and 2 projects should undertake a risk workshops facilitated by a PCW officer and a facilitator where required.

At the business case stage, the risk analysis should reflect an initial attempt to:

Identify all risks associated with the project Assign “likelihood” and “impact” Quantify risks for the purpose of identifying a risk adjusted cost estimate Develop a risk management plan which sets out treatment strategies and an action plan to

counter the impacts of risk occurrence

The project’s risk database should be updated throughout the project’s development to reflect the latest information available.

ii) Risk Workshops

10 NSW Government Procurement Guidelines, Risk Management (Dec 2006).


For a Tier 1 and 2 projects, the typical process for risk management is outlined below:

Workshop 1: Risk Identification

Purpose Identify the risks Assign risk “likelihood” Assign risk “impact” Decide if the risk has a “direct cost”

DurationDepending on the complexity of the project the workshop will typically run for a full day.

AttendeesTo ensure a successful outcome a wide range of people should attend the initial risk workshop; these include but are not limited to:

Project Sponsor Project Director Client team including:

o ICT Personnel PCW Team Treasury Design Team/Technical Consultants Key Stakeholders Key end user groups Commercial Advisors (where engaged)

To optimise results, the workshop participants should have a multi-disciplinary background and be familiar with delivering projects of a similar nature.

HowAs risks are identified in the workshop, all information is input into a single screen (as shown in the Figure below). Once the team has assigned the risk “likelihood” and “impact”, the risk is committed and the Initial Analysis is registered for future comparison.


Figure B1: RiskOrganizer input screen

Output Risk Register

Workshop 2: Risk Treatments

Purpose Assign treatments to individual persons for all risks identified in Workshop 1 Assign “due dates” for treatments to ensure continual monitoring

DurationDepending on the complexity of the project, the workshop will typically run for half-day.

AttendeesTo ensure a successful outcome, the team involved in the day-to-day management of the project should attend this workshop. These include but are not limited to:

Project Director Project Manager (external), if applicable Senior client team Senior PCW team


HowAs treatments are assigned to individual persons, all information is input into the same single screen as shown in the Figure B1 above. Due dates are assigned to each treatment to ensure continual monitoring.

Output Risk Register with treatments assigned to individual persons

Workshop 3: Risk Quantification

Purpose Assign costs to risks that have a “direct cost”

DurationDepending on the complexity of the project the workshop will typically run for half-day.

AttendeesTo ensure a successful outcome, the team involved in the day-to-day management of the project. These include but are not limited to:

Project Director Project Manager (external), if applicable Senior client team Senior PCW team Quantity Surveyor (where engaged)

HowFor each “costed risk”, the team assigns a “best case”, “worst case” and “most likely” case cost if the risk materialised.

Once all costs have been input, RiskOrganizer uses an inbuilt Monte-Carlo simulation to quantify the expected value of these risks based on the “likelihood” and “impact” assigned in Workshop 1. This calculates a P90 value for “risk”.

Output P90 value to support the basis for contingency estimate


iii) Risk Management

Risk MonitoringTypically the senior PCW team member will be responsible for monitoring and updating the Risk Register, this will include:

Contacting the individual persons with assigned risk treatments and ensuring the treatments are being carried out

Updating treatment “due dates” “Recognise“ new risks that may have arisen

Closing a treatmentOnce a treatment has been carried out, it can be “closed”. This will enable you to update the “likelihood” and “impact” which may have changed as a result of that treatment.

Closing a riskOnce a risk has been “realised” or “retired”, the risk can be “closed”. This risk will no longer appear on the “open” Risk Register.

ReportsSeveral reports can be derived from Risk Organizer including:

Management Related Reports Risk Rating Analysis Summary Risk Rating Analysis Detailed Commitments by Due Date Higher Management Visibility Required Process Monitoring Risk Treatment Priority Summary by Responsible Person Commitment by Responsible Person All Risks Summary

Project Related Reports All Risks Summary Risk Status Review Summary by Areas & Categories Individual Risk Full List by Responsible Person

iv) Contingency Management

There are three levels of contingency which are treated and managed differently. These are described below.

Line item contingencyLine item contingency is originally included in the preliminary cost estimate however once the contract is awarded, this contingency makes part of the contract price and is managed by the Contractor.


Project contingencyProject contingency is based on the Risk Organizer P90 figure. Although appropriated to the requesting Directorate, this contingency would be jointly managed (“realised” and “retired”) by PCW and the Directorate.

Delivery model contingencyDelivery model contingency is based on the delivery model selected and is managed by Treasury. Access to this contingency would need to be applied for through Treasury under the existing process for additional budget appropriations.

Please refer to the Risk and Contingency Management Protocol document for further information.


Documents

SAF Business Case Guide 2016 v2.1 - apps.treasury.act.gov.au€¦ · Web viewThe project company derives revenue from the operation of the asset and this revenue is used to service