Example Ofa Project Business Case

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                          SUPPORTING DOCUMENTS

                                    BUSINESS CASE

1. INTRODUCTION & OVERVIEW                                    2    APPENDIX 1 – QUANTIFYING RISK               33

                                                                   A1.1 PHASES FOR GATHERING AND REFINING
2. OVERVIEW OF THE BUSINESS CASE                              3    INFORMATION                                 34
                                                                   OF RESULTS                                  38
CASE (STAGE 3)                                                4    APPENDIX 2 – PPP MODELS                     41

3.1 PRELIMINARY ASSESSMENT                                    4
                                                                   APPENDIX 3 – EXAMPLE OUTPUT
3.1.1 Technical Solutions and Project Delivery Options        4
                                                                   SPECIFICATIONS                              42
3.1.2 Assessment of likely value for money                    4
3.1.3 Business Profile                                         5
3.2 PROCESS                                                    7
3.2.1 Formalisation of the Steering Committee and the
Government Project Team                                        7
3.2.2 Development of a Project Plan                            7
3.2.3 Development of an Output Specification                  8
3.2.4 Development of the Reference Project                    10
3.2.5 Development of the PPP Project                          12
3.2.6 Completion of Risk Analysis and Development of a
Risk Allocation Matrix                                        13
3.2.7 Market Sounding                                         14
3.2.8 Completion of the Public Interest Assessment            15
3.2.9 Completion of Environmental, Cultural Heritage,
Native Title and other specialist studies                     17
3.2.10 Completion of Employee, Employment and Skills
Development Assessment                                        17
3.2.11 Development of the Public Sector Comparator (PSC)      17
Frequently Asked Questions                                    21
Common Problems in Constructing and using the Public Sector
Comparator                                                    22
3.2.12 Development of the Partnership Model                   23
3.2.13 Value for money assessment of Project Delivery
Options                                                       25
3.2.14 Compilation of the PPP Business Case                   31
3.2.15 Consideration by Cabinet                               31

                                                                                                      AUGUST 2002
    Queensland’s Public Private Partnership Policy –
    Achieving Value for Money in Public Infrastructure and
    Service Delivery – was launched in September 2001. This
    Policy is a key strategic initiative that supports the
    Queensland Government’s central economic objective of
    achieving high and sustainable levels of economic growth
    and employment by providing efficient and effective
    services and infrastructure. The objectives of
    Queensland’s Public Private Partnership (PPP) Policy are

    •   deliver improved services and better value for money
        through appropriate risk sharing between Public and
        Private Sector parties;

    •   encourage Private Sector innovation;

    •   optimise asset utilisation; and

    •   integrate whole of life management of public

    This document forms part of a suite of Guidance Material
    developed and issued by the Infrastructure Partnerships
    Taskforce (IPT) within the Department of State
    Development, in collaboration with Treasury. The
    Guidance Material will assist in providing practical
    guidance on key technical issues that arise from the
    development and implementation of PPP Policy in

    The Guidance Material comprises the Overview, the Value
    for Money Framework and a range of other Supporting
    Documents that provide further detail on specific aspects.
    These include:

    •   Risk Management;

    •   Project Resourcing;

    •   Probity and Process Governance;

    •   Contract Development and Management; and

    •   Business Case Development.

    This document should be read in conjunction with the
    other Guidance Material, as relevant information in the
    other documents is not duplicated here. This Guidance
    Material may be supplemented over time by the release of
    further Supporting Documents.

    This document provides additional detail to the Business
    Case Stage as initially set out in the Value for Money
    Framework. For ease of cross-reference, the numbering of
    specific elements of the Business Case has been
    maintained between documents.

    AUGUST 2002
                                                                 •   development and refinement of a Reference Project,
                                                                     PPP Project, PSC and Partnership Model to gain a
CASE                                                                 detailed and rigorous understanding of the Project
                                                                     Delivery Options likely to deliver value for money. This
Business Case Development (Stage 3) builds on the work               development will be informed by the development
undertaken as part of the Preliminary Assessment (Stage              and refinement of:
2). Stage 3 develops a comprehensive Business Case that
                                                                     –   the Risk Allocation Matrix;
analyses each of the Shortlisted Project Delivery Options
in further detail.                                                   –   Market Sounding;

The level of detail required for this Stage is much greater          –   Public Interest Assessment;
than that for Preliminary Assessment. The extent to which
                                                                     –   environmental planning, Cultural Heritage, Native
each of the elements in this process need to be
                                                                         Title and other specialist studies; and
undertaken will depend on the specific Technical
Solutions and Project Delivery Options being considered.             –   Employee, employment and skills development
It should be recognised that where the Project Delivery                  assessments.
Options involve private financing, the analysis will be
                                                                 •   determination and development of a procurement
inherently more complex. However, where non-private
                                                                     method that can be utilised to maximise the potential
finance Project Delivery Options are under consideration,
                                                                     for a value for money outcome. The procurement
a rigorous analysis is still required. This includes a similar
                                                                     method will ensure that the process is competitive
level of financial and technical analysis of the Reference
                                                                     and consistent with probity requirements.
Project, PPP Projects, PSC model and Partnership Model
as outlined in this document.


The purpose of the PPP Business Case Development Stage
(Stage 3) is to:

•   identify the Project Delivery Option most likely to
    provide the best value for money outcome;

•   provide information regarding the Project Delivery
    Options, sufficient to enable the CBRC and Cabinet to:

    –   determine the preferred Project Delivery Option;

    –   make commitments regarding funding of the
        potential project.

These goals are achieved through:

•   more detailed examination of potential Technical
    Solutions and Project Delivery Options, including
    those identified and carried forward from Preliminary

•   ongoing and iterative qualitative and quantitative
    assessment to ensure the selected Project Delivery
    Option meets the service requirement and delivers
    best value for money;

•   development and refinement of an Output
    Specification that details the service requirement and
    delivers opportunity for a value for money outcome;

                                                                                                             AUGUST 2002
                                                                     Partnership Models for each option. By qualitatively
                                                                     assessing the value drivers, it should be possible to focus
    BUSINESS CASE (STAGE 3)                                          in on a single Project Delivery Option as the most likely to
                                                                     deliver value for money on a quantitative basis.

                                                                     3.1.2 ASSESSMENT OF LIKELY VALUE FOR MONEY
    3.1 PRELIMINARY ASSESSMENT                              VALUE DRIVERS

    During the development of the Preliminary Assessment,            If a project is to be taken forward as a PPP then it must be
    the foundation of the Business Case Development Stage            demonstrated that the recommended Project Delivery
    will have been laid out and normally includes:                   Option is likely to deliver better value for money than the
                                                                     alternative, traditional means of delivery. This means that
    •   determination of the priority and initial affordability of
                                                                     the PPP must be capable of generating potential efficiency
        the project;
                                                                     savings when compared to traditional delivery options.
    •   determination and preliminary assessment of the
                                                                     Efficiency savings can be realised by accessing value in
        range of Technical Solutions and Project Delivery
                                                                     the following key drivers:
        Options; and
                                                                     •   Risk Allocation – There is scope to achieve savings
    •   qualitative assessment of likely value for money.
                                                                         through optimal risk allocation between Government
    3.1.1 TECHNICAL SOLUTIONS AND PROJECT DELIVERY                       and the Private Sector. The PPP Project Delivery
    OPTIONS                                                              Option, through the allocation of risks to those parties
                                                                         best able to manage them may enhance the likelihood
    When undertaking the development of the Business Case,               of a better value for money outcome.
    agencies should be mindful that the level of information
    and analysis required must be sufficient to enable the           •   Whole of life Costing – Integration and synergy
    CBRC and Cabinet to:                                                 between the design, build and service operation can
                                                                         promote whole of life cost savings. These savings are
    •   determine the preferred Project Delivery Option; and             likely to be greater where the project is characterised
    •   make commitments regarding funding of the potential              by a higher operational content, providing incentive
        project.                                                         for the Private Sector to achieve whole of life cost
    This does not mean that every identified Technical
    Solution and Project Delivery Option needs to be analysed        •   Innovation – The robust competitive tender process
    to the same degree. The level of analysis required to                and output-oriented service specifications of a PPP
    establish which Project Delivery Option is likely to deliver         creates an environment conducive to innovation.
    best value for money is extensive. It should be possible to          Innovation may be as simple as designing 45 degree-
    discount options early on in the process without fully               angled window sills to discourage people from putting
    developing PSCs and Partnership Models to prove the                  objects on the sill, in order to reduce cleaning costs.
    case.                                                                Innovation may also be as complex as the
                                                                         introduction of innovative proprietary water treatment
    It is therefore suggested that as part of the Preliminary            technologies previously considered too risky to
    Assessment (Stage 2), the number of Shortlisted Technical            operate by a water authority.
    Solutions are kept to a minimum. The number of Technical
    Solutions taken forward into the Business Case (Stage 3)         •   Improved Asset Utilisation – The PPP Delivery Option
    will of course be determined on a project-by-project basis,          may promote more intensive use of assets. Additional
    but it is recommended that a maximum of two or three                 revenues may be accessed from shared use of
    should be considered further, except in very large and/or            facilities and sale of spare capacity.
    complex projects. In most cases it should be possible to         •   Economies of Scale – The PPP Delivery Option can
    review the Preliminary Assessment (Stage 2) and simply               result in economies of scale, where a service provider
    focus on the single most desirable or practical Technical            is able to increase the volume of services provided
    Solution.                                                            from an existing resource base. For example, a service
    Similarly, the number of Project Delivery Options will be            provider may increase the output from an existing
    determined on a project-by-project basis but it is                   commercial cook/chill facility to service a PPP
    recommended that, except in very large and/or complex                developed hospital or school.
    projects, a maximum of two or three Partnership Models           •   Competitive process – While the individual value
    should be sufficient. It should be possible to develop the           drivers are able to generate potential value for money,
    PPP Project by discounting those ProjectDelivery Options             the ability to undertake a competitive process is a key
    that are unlikely to meet with Government’s objectives or            requirement in delivering a value for money outcome.
    fail the public interest test. This will reduce the                  As such, it is important to understand the viability of
    unnecessary time and expense spent in developing a                   the project from a market perspective. Sufficient

    AUGUST 2002
    numbers of market players and an overall degree of         outcome. The analysis undertaken during this stage will
    project interest are required to maximise the              also set the benchmark and parameters for the ability to
    deliverability of value drivers listed above.              deliver the project through a competitive process in
                                                               subsequent stages, should a partnership approach be
Empirical evidence from similar projects may assist in
                                                               most likely represent best value for money.
estimating the impact of these value drivers.
                                                               Further information regarding qualitative and quantitative VALUE ANALYSIS
                                                               assessment is covered in Section 3.2.13 of this document.
The value for money analysis is focused on these value
drivers as the sources of efficiency savings. These savings    3.1.3 BUSINESS PROFILE
counter balance the additional procurement costs and
                                                               The Business Profile is a useful tool to assist through the
financial premiums associated with the PPP Delivery
                                                               remainder of the project. It is a brief, plain English project
                                                               summary that encapsulates all of the key elements of the
Broadly, the initial analysis that must be carried out on      project. The Business Profile will be prepared at the
these value drivers as part of the Preliminary Assessment      commencement of the Business Case Development stage.
and Business Case Development is:
                                                               The Business Profile should include an outline of:
•   Qualitative assessment of the objectives, service
                                                               •   the service requirements;
    requirement and proposed structure of the project to
    establish whether there is likely to be sufficient scope   •   stakeholder requirements;
    for the Private Sector to access and exploit the value
                                                               •   viable Technical Solutions and Projects Delivery
    drivers; and
•   Quantitative assessment, based on sensitivity and
                                                               •   qualitative analysis of the Project Delivery Options,
    scenario modelling on the Partnership Model, to
                                                                   indicating a likelihood of achieving a value for money
    establish the likely cost (in NPV terms).
                                                                   outcome; QUALITATIVE ASSESSMENT
                                                               •   expected requirements for environmental, planning,
During the Preliminary Assessment Stage qualitative                Cultural Heritage, Native Title and specialist technical
analysis will be undertaken of the various Technical               studies that may be required to inform the project;
Solutions and Project Delivery Options. The purpose of the         and
qualitative assessment is to subjectively test whether the
objectives, service requirement and proposed structure of      •   Preliminary Risk Allocation.
the project are likely to provide the Private Sector with      The Business Profile is a useful synopsis of the key
sufficient scope to access and exploit the value drivers.      elements of the project, and should be kept up to date as
Throughout Business Case Development it is important           further analysis is undertaken during the Business Case
that those Project Delivery Options being considered           Development Stage, to ensure that it remains a relevant
undergo repeated qualitative assessment to ensure they         synopsis of the Project. It is then used as a Project
remain consistent with the service requirement and             Management tool, for the reminder of the project, and a
remain likely to represent a value for money outcome.          key informer for those coming to the project fresh. It will
                                                               also form one of the elements from which the Market QUANTITATIVE ASSESSMENT                                Sounding and Project Brief will be developed.
Quantitative assessment of the identified Project Delivery
Options is undertaken to identify the Project Delivery
Option most likely to deliver a better value for money

                 •   Private finance premium
                 •   Bid costs

                                                                               •   Innovation
                                                                               •   Whole life costing
                                                                               •   Risk transfer
                                                                               •   Asset Exploitation
                                                                               •   Economies of Scale

                                                                                                             AUGUST 2002
                                                               FORMALISATION OF THE
                                                                STEERING COMMITTEE
                                                               AND THE GOVERNMENT
                                                                   PROJECT TEAM

                                                                 DEVELOPMENT OF A
                                                                   PROJECT PLAN

                                         DEVELOPMENT OF THE PPP BUSINESS CASE, INCLUDING;
                                         • Development of an Output Specification
                                         • Development of the Reference Project
                                         • Development of the PPP Project
                                         • Completion of risk analysis and development of Risk Allocation Matrix
                                         • Market Sounding
                                         • Completion of the Public Interest Assessment
                                         • Completion of the environmental, Cultural Heritage, Native Title and
                                           other specialist studies
                                         • Completion of the employee, employment and skills development
                                         • Development of the Public Sector Comparator (PSC)
                                         • Development of the Partnership Model
                                         • Value for Mmoney assessment of Project Delivery Options

                                                                COMPILATION OF THE
                                                                PPP BUSINESS CASE

             CAN THE PROJECT
                                                                                                                   project does
                                                                     CONSIDERATION                not
                          no                                                                                       not proceed
                                                                        BY CBRC                                    at this time

                  project does not                                       priority
                proceed at this time
                                                 PPP likely to deliver                  PPP not
                                                   value for money                  value for money

                                                     STAGE 4

    Figure 1 – Key elements of Business Case Development (Stage 3)

    AUGUST 2002
3.2 PROCESS                                                              Planning and Management is a key mitigation strategy
                                                                         against process risk. The development of the PPP
The development of the Business Case is a detailed                       Business Case is a highly interrelated activity and, as
extension of the work undertaken in the Preliminary                      such, an effective Project Plan that is well understood by
Assessment Stage. While the following steps are                          the Government Project Team is essential.
presented in a linear manner, the reality of their
achievement is much less sequential and more iterative.                  A well-developed Project Plan ensures that realistic
The elements of the Business Case are developed                          timetables, resources and budgets are allocated to the
iteratively to allow for ongoing review and assessment.                  project. The plan is best developed in broad terms at the
Step-wise assessment ensures that the project retains its                Preliminary Assessment (Stage 2) and refined in more
focus on the service requirements and that the chosen                    detail at the commencement of Business Case
Project Delivery Options are those most likely to deliver                Development (Stage 3). This should be done concurrently
value for money. As a result of the iterative development                with Project Resourcing to ensure the two activities are
of the Business Case many elements will be developed                     consistent.
contemporaneously, with the information generated in                     The key elements of Business Case Development (Stage 3)
one place required to inform and refine a number of other                are illustrated in Figure 1. The illustration headings are for
elements.                                                                reference purposes only. In practice, the activities
3.2.1 FORMALISATION OF THE STEERING COMMITTEE                            described will need to be developed iteratively.
AND THE GOVERNMENT PROJECT TEAM                                          Integration of technical and financial analyses is vital to
                                                                         ensure the preferred Project Delivery Option is both
The Project Resourcing Supporting Document provides                      technically sound and deliverable.
detailed guidance on Project Management Structure and
                                                                         The Business Case is developed around the PSC and
Procurement of Specialist Advisers.
                                                                         Partnership Model. These models require development of
3.2.2 DEVELOPMENT OF A PROJECT PLAN                                      the Output Specification, the Risk Allocation Matrix and a
                                                                         detailed understanding of economic and financial issues,
The risk of process difficulties or failures that result in              public interest issues, policy implications, employee,
time delay, additional expense or suboptimal outcomes                    employment and skills development assessment, Native
(Process Risk) is often an underestimated and                            Title, Cultural Heritage, environmental and other relevant
undervalued element of delivery. Effective Project                       project impacts.


                                  Business case development timeline

                Development of an
                Output specification

            Development of the Reference

                                         Risk analysis & Risk
                                          Allocation Matrix


                                 Special Studies – Public Interest, Environmental,
                                 Cultural Heritage, Native Title, Employment, Other

                                         Development of the
                                       PSC & Partnership Model

                                                                         Value for Money

                                                                                                            Stage 4

Figure 2 – Indicative Timeline for Business Case Development (Stage 3)

                                                                                                                      AUGUST 2002
    Figure 2 sets out an indicative timeline that illustrates       c) Communications Protocol
    how the different elements of the Business Case overlap
                                                                        Given the sensitivity of many issues encountered in
    throughout the duration of the work.
                                                                        project development, it is important for all parties to
    As an indication only, the Business Case Development                maintain confidentiality. Key confidentiality issues are
    Stage, to the point of submission to Cabinet/CBRC, may              as follows:
    take approximately 3 to 6 months. This will depend on a
                                                                        •   Public statements should only be made via the
    number of factors, including the size and complexity of
                                                                            Steering Committee and/or Project Director.
    the project and the planning and preparedness of the
    Government Project Team to undertake the work.                      •   Government Project Teams should explore efficient
                                                                            and secure media through which to communicate
    Elements of the Business Case are depicted in Figure 2.
                                                                            non-sensitive Project information to stakeholders
    The solid lines illustrate how the majority of the work for
                                                                            and the wider community (e.g., website, press
    each element is interrelated on a time basis. Again, the
                                                                            releases, etc.) All relevant Departmental staff and
    elements of the Business Case are not undertaken
                                                                            Advisers should be made aware of the
    sequentially, but in many cases will inter-relate or overlap.
                                                                            Communications Protocol and its requirements.
    It is highly likely that a number of the elements developed
    during the Business Case will be further refined and            d) Timetable
    polished following submission to CBRC/Cabinet. This
                                                                        A crucial element of Project Planning is the project
    process of refinement can continue as appropriate until
                                                                        timetable. Any project timetable should include the
    the commencement of the Binding Bid Stage. It is
                                                                        specific tasks, anticipated time requirements to
    important that the project does not change following the
                                                                        achieve the tasks, highlighted key milestones,
    formal engagement of the Private Sector in the
                                                                        resource allocation and progress to date.
    development of Binding Bids. Should variation be
    required at this stage it should be undertaken with a full          The timetable should be realistic and, where possible,
    understanding of the Probity, competition, market impacts           flexible enough to incorporate unforeseen
    and process risk to which Government may be exposed.                circumstances. It may be necessary to modify or
                                                                        update the timetable over the course of the project in
    The plan will be required to take account of all steps in
                                                                        order to achieve the key milestones.
    the PPP process (Stages 3-6) including consultation,
    market sounding and the Government approval process.                As with other planning elements, key stakeholders
                                                                        should provide direct input into the timetabling
    The Project Plan should include the following key
                                                                        A Gantt chart, conscientiously monitored by the
    a) Roles and Responsibilities
                                                                        Project Director (or a nominee thereof) will be an
        Clear definition of the roles and responsibilities of the       extremely useful tool in keeping the project on track.
        all parties including:
                                                                    3.2.3 DEVELOPMENT OF AN OUTPUT SPECIFICATION
        •   CBRC and Cabinet;
                                                                    The Output Specification underpins the entire
        •   IPT and Queensland Treasury;                            procurement process. The purpose of an Output
        •   Line Agency;                                            Specification is to comprehensively and accurately state
                                                                    the outputs required from the process, i.e., the identified
        •   Steering Committee;                                     service requirements.
        •   Evaluation Committee;                                   The focus of an Output Specification is on services
        •   Government Project Team;                                required rather than assets wanted, and the service
                                                                    standards expected by Government, regardless of who will
        •   Advisers – financial, legal and technical, engaged      deliver the services. Output Specifications should be
            to assist the Project Team; and                         clear, unambiguous statements of what is needed, not
        •   Key Stakeholders.                                       how it is to be provided. It is generally acknowledged that
                                                                    the development of Output Specifications will require
        Where appropriate, these resources should provide           significant expertise.
        direct input into the planning process in order to gain
        a greater understanding of timetables, key milestones,      It is important that the Output Specification is clearly
        roles, responsibilities and deliverables.                   defined and quantifiable, as it will become the foundation
                                                                    for indicators against which performance will be measured
    b) Project Probity Plan                                         and payment made. This is necessary in order to achieve a
        The Project Probity Plan should be developed in line        clear and unambiguous contract structure for the payment
        with the Probity and Process Governance Supporting          of services and satisfaction of service requirements.

    AUGUST 2002
The Agency should be indifferent as to how a particular               limit the provision of a service to a timeframe too short to
service requirement is met, provided that the required                enable the Private Sector to generate sufficient income to
service standard is achieved in a timely and cost effective           present a value for money delivery option to Government.
manner. It may be prudent however, depending on the
                                                                      For sample Output Specifications refer to Appendix 3.
nature of the project, to ensure that certain minimum
design and construction criteria are complied with, rather            Determining the level of detail required in the Output
than rely on payment or penalty mechanisms alone for a                specification requires striking a balance between allowing
guarantee of performance.                                             the Private Sector scope to generate a value for money
                                                                      delivery option through innovation and Risk Allocation,
The team developing the Reference Project should also be
                                                                      and the complexity of the assessment required to
involved in the drafting of the Output Specification to
                                                                      determine the best value for money bid. In general, as
ensure that the Reference Project reflects the Output
                                                                      more detail is added to the Output Specification, the
                                                                      assessment becomes easier and the scope for innovation
The Output Specification should be drafted in such a                  decreases. In addition, the opportunity for optimal Risk
manner to ensure that it captures relevant ‘value for                 Allocation is best achieved at a point part way along this
money’ drivers initially identified in the Preliminary                continuum (Figure 3).
Assessment. It would, for example, be inappropriate to

                         Output                 Innovation            Complexity of       Opportunity for Optimal
                       Specification                                   Assessment            Risk Allocation

                      Minimal detail             Maximum                  Difficult


                        Completely                 None                    Easy                       Government

   Figure 3 – Competing requirements for detail in Output Specification

   Take for example an educational facility. At Option A, the specification may contain no more detail than, “a college
   for Queensland”. This level of specification provides the Private Sector with significant scope for innovation in
   service delivery. However, given the widely variant nature of the bids that are likely to be developed, assessment of
   each bid against another and against the actual requirements for the project will be almost impossible at this
   stage. This level of detail would also see the Government maintaining significant risk as to the functionality and
   consistency with Government’s requirements for core service support.

   Conversely, Option C represents an overly detailed Output Specification, including everything down to the specific
   screws to be used in the cupboard door. While this level of detail is likely to promise easy comparison between
   delivery options, it also will severely limit the opportunity for the Private Sector to achieve an innovative value for
   money delivery option. At this level of specification, Government will retain the bulk of the risk associated with the
   suitability and functionality of the facility.

   Option B, however, represents an Output Specification that presents a balance between these extremes. It
   provides specification on what is required in terms of, for example, teaching space and support facilities, but not
   information on how such facilities are to be provided. This allows the Private Sector opportunity to deliver an
   innovative approach to the ‘how’ of service provision, and give them scope to carry the associated service
   provision risks. This level of detail in the Output Specification will allow for a like-with-like assessment of
   measurables that Government has established as specific requirements of the project. It also provides significant
   scope for effective risk allocation

                                                                                                                    AUGUST 2002
     The Value for Money Framework outlines a number of
     items that should be included in an Output Specification.
     Additional items also worthy of consideration for inclusion
     in a specification are as follows:

      Structure                                                      Content

     Project description                                             Policy outline and contracting requirements statement.

     Organisation outline                                            Structure of organisation and project interfaces.

     Stakeholder requirements                                        Schedule of stakeholder requirements, for example,
                                                                     expectations of core service providers.

     Scheme Objectives                                               Strategy outlined in preliminary report/Profile Business
                                                                     Case and purpose of project – What it is to achieve?

     Performance standards and monitoring                            Required operating performance in output terms, with
                                                                     details of monitoring requirements.

     Quality standards                                               Minimum asset quality criteria, codes and standards.

     Constraints                                                     Constraints essential to an acceptable solution, including
                                                                     environmental, stakeholder or other minimum

     Payment criteria                                                Basis on which payments may be made (availability, use,
                                                                     flexibility, and performance).

     Change mechanisms                                               Provision for change in load conditions, etc.

     3.2.4 DEVELOPMENT OF THE REFERENCE PROJECT                      When developing the Reference Project and PSC, the
                                                                     Project Team should limit the scope of what is included in
     The Reference Project is the most likely and efficient form     those activities that form traditional delivery. Other
     of Public Sector delivery that the Government would             commercial developments should only be included in the
     traditionally have used to satisfy all elements of the          Reference Project if the Agency has a mandate from
     Output Specification.                                           Government to undertake such business activities
     The process of formally defining the Reference Project          Note that the compilation of a Reference Project for a
     should commence after the Output Specification has been         social infrastructure project (e.g., prison, hospital) may
     developed to an advanced stage. This ensures that the           differ in focus when compared with an economic
     Reference Project meets the service requirements of the         infrastructure project (e.g., water treatment plant, road).
     project, and helps to assess the validity of the Output         Therefore, the Terms of Reference outlined below may not
     Specification. It is sometimes easier to define the Output      be applicable to all projects, although the level of detail
     Specification after the identification of the required inputs   should be taken as a guide irrespective of sector.
     for the requisite project services. This does not, however,
     imply that the project should be procured on the basis of       The type of project may also indicate the most appropriate
     those inputs.                                                   group of advisors to develop the Reference Project. For
                                                                     instance, architects may be the most appropriate advisors
     The Reference Project then forms the basis for the PSC. As      to develop the Reference Project for a serviced
     such, it should be updated and refined as issues that           accommodation type project, but for an economic
     impact on the Output Specification or the expectations of       infrastructure project, engineers may be better placed to
     the Project are identified.                                     develop the Reference Project.

     AUGUST 2002 TERMS OF REFERENCE FOR A REFERENCE PROJECT               ground conditions. The survey also highlights whether the
The team developing the Reference Project should also be         site has appropriate access to services (i.e., electricity,
involved in developing the Output Specification, to ensure       gas, water, etc.) that may impact on costs.
that the former meets the latter, and that the PSC is            While the terms of reference for a Reference Project will
correctly costed.                                                change on a project-by-project basis, a typical Terms of
Where possible and applicable, a geotechnical survey of          Reference is shown below.
the preferred site is recommended for all projects. This
assists in accurately estimating the costs involved in
building on a particular site, taking into account specific


   •   Compilation of the Reference Project concept drawings, based on the draft project Output Specifications. The
       concept drawing should encompass:

       –   details of the site and positioning of buildings, plant and machinery

       –   details of services access e.g., electricity, water, gas, travel plan arrangements, parking, and demonstration
           of how the flow around the site will be maintained throughout development

       –   functional relationships between building areas/process diagrams/road alignments, etc. as required

       –   scale 1:500 (key areas shown to 1:200)

       –   drawings to show year by year development including enablers, demolitions, etc., and with complex
           interfaces, further detail may be necessary

   •   Schematic drawings of the key relationships with a macro of key areas at a scale of 1:100.

   •   Diagram of the functional relationships for the whole project.

   •   Ground and site conditions based on the site geotechnical survey.

   •   Estimation of costs involved in providing utility and other necessary services to the site (if applicable)

   •   Room data sheets are to be prepared for all key service areas (if applicable).

   •   Process, mechanical, electrical and control diagrams and specifications (if applicable)

   •   A costs estimate of the net area is to be calculated based on the room data sheets, (if applicable) with an
       appropriate industry standard grossing factor applied. Note that the net area usually includes mechanical and
       electrical services, specialist equipment and IT costs.

   •   Prepare a list of the required FF&E (furniture, fixtures and equipment) for the project and an estimation of the
       costs of procurement and installation in accordance with the Output Specification.

   •   Details on the method of construction with a construction programme, development control plan, summary of
       construction assumptions and areas requiring special attention, e.g., dewatering.

                                                                                                              AUGUST 2002
     Given that the raw PSC and the risk valuation process are                                                                            IDENTIFICATION OF THE SERVICES
     developed on the basis of the assumptions underlying the                                                                                      The infrastructure service under consideration comprises a
     Reference Project It is recommended that a ‘value’                                                                                            number of components each of which may be identified in
     management exercise be undertaken to check the                                                                                                terms of the function performed. The number of
     reasonableness of underlying assumptions/technical                                                                                            components and complexity of the interrelationship
     aspects. Any changes to the Reference Project is to be                                                                                        between the components vary according to the specific
     fully reflected in the raw PSC cost estimates and the risk                                                                                    infrastructure services. For example, a new road project
     estimates.                                                                                                                                    comprises relatively few functional components, (such as
     3.2.5 DEVELOPMENT OF THE PPP PROJECT                                                                                                          provision of vehicular access and emergency services)
                                                                                                                                                   when compared with a new hospital project that requires
     The PPP Project is the Agency’s estimate of the most                                                                                          a large number of complex functional components and
     efficient Private Sector solution to satisfy the Output                                                                                       services.
     Specification. The PPP Project will be similar in form to the
                                                                                                                                                   In identifying components of infrastructure assets and the
     Reference Project and will form the basis upon which the
                                                                                                                                                   relationship between them, the following steps should be
     Partnership Model will be constructed.
     The spectrum of possible Project Delivery Options
                                                                                                                                                   •           identify each component by its function;
     encompasses combinations of Public and Private Sector
     service delivery, ranging from wholly public to wholly                                                                                        •           identify sub-components (services) within each
     private. The spectrum also includes Project Delivery                                                                                                      component;
     Options financed by the Public and Private Sectors.
                                                                                                                                                   •           identify the nature and extent of the integration
     The framework for ascertaining the scope of Private Sector                                                                                                between each of the components; and
     participation in service delivery and comparative analysis
                                                                                                                                                   •           identify the integration of all the services with other
     of Project Delivery Options comprises the assessment of:
                                                                                                                                                               parts of the system (e.g., integration of a hospital with
     (i) The Services comprising the infrastructure asset;                                                                                                     the health system in Queensland) and other relevant
                                                                                                                                                               Agencies and organisations.
     (ii) Related Non-Core Services;
                                                                                                                                                   As an example, Figure 4 below illustrates the required
     (iii) Application of PPP Models which have been
                                                                                                                                                   services for sentenced and remand prisoners from the
           implemented elsewhere for Private Sector
                                                                                                                                                   point at which they are received into a prison through to
           participation in the delivery of similar services;
                                                                                                                                                   their release.
     (iv) Risks allocation and commercial structure associated
          with the delivery of the services; and

     (v) Specific constraints that impede service delivery by
         the Private Sector.

                                                                Service Requirements Identified
                                                                                                                                                       Education & Training
                                                                          Estate Management

                                                                                                                                                                                                 Custodial Services
                                                                                              Medical & Health
                                                       Security Systems

                                                                                                                                                                              Program Delivery
                                                                                                                                   Work Programs

                                                                                                                 Soft Facilities


     Figure 4: Prison Project Service Requirements Identified

     AUGUST 2002
Within each of the service categories summarised above,  LEGISLATIVE/REGULATORY CONSIDERATIONS
there are a number of service requirements (where core            The legislative/regulatory framework requires analysis to
services are denoted by the pale boxes). For example,             ensure that it permits delivery of the project. One question
accommodation services includes the provision of the              of importance that may be asked is, “Does the Agency
infrastructure required to house prisoners, and the               have the necessary powers in law to enter into the Project
infrastructure to support the rehabilitation and re-              Agreements with the Private Sector?”
socialisation activities for prisoners, an integral part of the
overall case management function. Medical and health              In the event that the Agency does not possess sufficient
services comprise the provision of on-site primary and            powers to contract with the Private Sector, extension of
secondary medical and health services (e.g., staffing of an       such powers or the enactment of enabling legislation
on-site infirmary and the provision of primary mental             should be investigated. The Project Plan would need to
health services and drug rehabilitation programmes).              incorporate the necessary process and timetable, should
                                                                  this be required. RELATED NON-CORE SERVICES
                                                                  Careful consideration of the implications of legislation
Having identified the functional components of the
                                                                  amendments or regulation required to facilitate or enable
infrastructure assets, issues relevant to any distinction
                                                                  project delivery is necessary, particularly in terms of the
between Core Services and related Non-Core Services
                                                                  implications for Government in the delivery of future
need to be considered. PPP projects are likely to include a
                                                                  projects. This issue needs to be addressed as early as
requirement for a range of services, such as
                                                                  possible to ensure sufficient time is available for the
accommodation availability, Information Technology
                                                                  necessary legislation amendment or regulation.
outputs and many other Non-Core Services.
                                                                  3.2.6 COMPLETION OF RISK ANALYSIS AND
The scope for Private Sector service delivery does not
                                                                  DEVELOPMENT OF A RISK ALLOCATION MATRIX
include the delivery of core services. APPLICATION OF PPP MODELS                                 Risk is defined as, “the chance of an event occurring that
                                                                  would cause actual project circumstances to differ from
To analyse and apply each model to the project under
                                                                  those assumed when forecasting project benefit and costs
consideration, the following steps should be followed:
                                                                  of that project.” The effective management of risk is
•   identify service categories included in the PPP model;        critical to the success of a project, and particularly to long-
                                                                  term projects such as PPPs.
•   compare the option of procuring the services from the
    Private Sector as part of a PPP, against the option of        There exists a need to identify, evaluate and allocate
    service provision by the Public Sector; and                   project risks effectively, regardless of the project
                                                                  procurement process. A risk allocation and qualitative
•   provide the rationale for the grouping of service
                                                                  comparative analysis is required in respect of each of the
    categories (for example, existing interrelationships
                                                                  Project Delivery Options. Preliminary Risk Analysis and
    between services).
                                                                  allocation is likely to have been undertaken during the
To reach an overall conclusion on the merits and                  Preliminary Assessment. These should be revisited to
suitability of the Project Delivery Option being considered,      ensure appropriate and rigorous analyses have been
the following ‘tests’ may be applied:                             undertaken.

•   is the Option considered feasible? For example, if            A thorough analysis of all project risks will be required
    there are major issues associated with the particular         during Business Case Development. As outlined in the
    option, can these be mitigated (e.g., through                 Risk Management Supporting Document, this analysis
    contractual measures such as the performance or               should commence with Risk Identification. The analysis
    payment regime, through the bid evaluation process            will, in the first instance, provide information regarding
    or through practical measures)                                the preferred risk allocation for each Project Delivery
•   does the Option meet the project objectives identified
    by the stakeholders?                                          Further detail on how to undertake Risk identification,
                                                                  allocation and quantification is contained in Appendix 1 of
•   overall Value for Money Assessment (refer to Section
                                                                  this document. A detailed discussion of project risk and
    3.2.13 for further detail)
                                                                  Government’s likely preferred position regarding each set
The Project Delivery Options determined at this stage will        of risks relating to privately financed PPPs is provided in
be refined by the Risk Allocation.                                the Risk Management Supporting Document. An example
                                                                  of a Risk Allocation Matrix is provided in Appendix A of the
Appendix B provides a summary and examples of PPP
                                                                  Risk Management Supporting Document.
models that have set precedent in Australia and overseas.

                                                                                                                AUGUST 2002
     The next step in Risk Allocation is to compare the                  •   market Sounding should canvass a broad cross
     allocation between the different Project Delivery Options.              section of the market. Industry representative bodies
     During this comparison, any specific issues pertaining to               may be a useful vehicle through which market
     each Project Delivery Option and the manner by which                    sounding may be undertaken;
     these may be managed or mitigated should be identified.
                                                                         •   think broadly about the project and about potentially
     This analysis may include:
                                                                             interested parties, but also ‘target’ companies that
     •   analysis of major risks such as scope and design risk,              may be interested;
         some of which are not able to be quantitatively
                                                                         •   before engaging in discussions with companies,
         evaluated, (for example, public interest risks, policy
                                                                             ensure the aims of the project and of the Market
                                                                             Sounding are clearly established. It is important to
     •   consideration of the integration of services, where                 provide sufficient information about the project to
         different services are procured from different service              enable respondents to provide meaningful feedback.
         providers (as is the case in a mixed service model);                As those parties consulted may indeed be potential
         and                                                                 Bidders, it is important that information disclosed is
                                                                             sufficiently broad to enable respondents to gain an
     •   consideration of pertinent macro issues such as
                                                                             appreciation of the project. Information should not be
         funding allocation.
                                                                             so specific as to raise concerns regarding Probity. It is
     3.2.7 MARKET SOUNDING                                                   essential that those consulted are not “spoon fed”
                                                                             information, but that they “do most of the talking” on
     Market Sounding is an important part of Business Case                   the issues raised through the Market Sounding
     Development. The aim of Market Sounding is to:                          process;
     •   obtain an understanding of the marketability of the             •   consider holding a market forum to brief interested
         project;                                                            parties on the project, its objectives, the service
     •   highlight potential commercial constraints;                         requirement, PPP models under consideration and
                                                                             identified opportunities for added value (such as third
     •   begin to prepare the market for the project; and
                                                                             party revenue);
     •   estimate or confirm the assumptions used to develop
                                                                         •   face-to-face meetings should be arranged with each of
         the Partnership Model.
                                                                             the companies on the contact list. Companies should
     The following points should be considered when                          be informed that the discussions will be informal and
     undertaking a market sounding:                                          are not to be regarded as a part of the formal
                                                                             procurement process that may occur subsequent to
     •   the exercise must be explicitly carried out on a
                                                                             the discussion;
         without-prejudice basis, and participants must be
         made aware that, at this stage, Government has not              •   if the project involves unusual or groundbreaking
         yet approved the project. It is prudent to involve                  provisions/aspects, be prepared to openly discuss
         advisers with prior project experience in Market                    these if you wish to get meaningful feedback on the
         Sounding;                                                           market’s likely response;

     •   clear objectives must be set on what the exercise               •   keep an open mind and be prepared to listen;
         seeks to achieve and the type of information that is to
                                                                         •   respect confidentiality and Intellectual Property; and
         be sought (refer to example below for general
         objectives);                                                    •   use this as an opportunity to ‘market’ the project as


         •   Provide an outline of the project to those likely to bid;

         •   Gain feedback from interested parties on the project, the process and the commercial structure;

         •   Gather a wide range of views from those likely to bid;

         •   Identify issues of concern for the Private Sector, so as to ensure these are addressed in a way that adds value;

         •   Update the Private Sector on the indicative timetable.

     AUGUST 2002
The results of Market Sounding should be evaluated and EFFECTIVENESS IN MEETING THE SERVICE
the Project Delivery Options reappraised at the end of the     REQUIREMENT
exercise, as there may be potential implications for the       Where there are a number of solutions to service
scope of the project that may need to be revisited.            requirements, the delivery of each may impact differently
3.2.8 COMPLETION OF THE PUBLIC INTEREST                        on public interest. These differences will need to be
ASSESSMENT                                                     reflected and evaluated in the ongoing assessments of
                                                               the Project Delivery Options throughout the development
Policy and public interest considerations may impact the       of the Business Case.
viability of the Project Delivery Options being considered.
                                                               The project service requirements defined within the
A preliminary Public Interest Assessment will have been        Output Specification should be described in terms of
undertaken for each of the Project Delivery Options during     demand, target population/clients, boundaries,
Preliminary Assessment (Stage 2).                              constraints, etc. Measurement of the effectiveness of a
                                                               solution in meeting the service requirement will be
During Business Case Development it is necessary to
                                                               achieved by the development of measurement tools such
complete Public Interest Assessment for the Project
                                                               as Key Performance Indicators (KPIs), balanced scorecards
Delivery Options, to assess consistency with the public
                                                               and performance measures.
interest. This assessment may identify public interest
issues that may impact on the development and delivery IMPACT ON STAKEHOLDERS
of the Project. These impacts may be either qualitative or     In order to develop a more detailed picture of stakeholder
quantitative in nature, and will require estimation. Issues    needs and their views on the relative merits of the
identified may affect project costs or benefits and            proposal, development of the Business Case will require
therefore could have a material affect on the PSC or           assessment of the results of stakeholder consultation.
Partnership Model.                                             Generic information that will assist in this process
It is recommended that the Government Project Team             includes:
engage with particular interest groups or relevant statutory   •   the nature of stakeholders;
authorities at an early stage of the project in order to
mitigate the risks relating to these issues.                   •   the direction and magnitude of the impact the project
                                                                   will have on the stakeholder;
For each Project Delivery Option, the matters given
consideration during the Public Interest Assessment            •   the type of impact (i.e. income gains, efficiency gains,
should include such issues as:                                     transfers) including details of the distribution of the
•   the effectiveness in meeting the service requirement;
                                                               •   the timing of the impact; and
•   the impact on stakeholders;
                                                               •   differences between the impacts of individual Delivery
•   accountability and transparency;                               Options.
•   public access and equity;                                  It may be useful to summarise this information in the form
•   consumer rights;                                           of an “Impact Matrix”.

•   security; and                                              An Impact Matrix is a mechanism for summarising the
                                                               impact of a project on various stakeholders. While
•   privacy.                                                   preparing an Impact Matrix will assist in identifying types
When assessing public interest considerations, due regard      of impacts, additional work is likely to be required to
should also be given to any matters impacting on the           adequately define the magnitude of costs and benefits
achievement of Government’s priorities.                        accruing to community stakeholders and potential
                                                               measures to mitigate these impacts. Further guidance on
Unlike the financial and economic assessments that focus
                                                               preparing Impact Matrices can be found in Queensland
principally on the final overall net impact, a key theme of
                                                               Treasury’s Public Benefit Test Guidelines.
the public interest assessment is to consider the
“distributional’ consequences of moving from the current
state to alternative states.

Agencies should also make reference to the Social
Analysis sections of the Queensland Treasury Project
Evaluation Guidelines (March 1997) and the draft
Queensland Treasury Business Case Guidelines, which
provides additional guidance on social outcomes.

                                                                                                           AUGUST 2002

      Stakeholder      Type of Impact         Timing             Traditional Delivery    PPP Delivery

     Community        Improved facility for   Following          Perceived safety of     Contractual safety of
                      delivery of service.    completion of      delivery.               delivery.
                                                                                         Increased likelihood of
                                                                                         construction and
                                                                                         commissioning on time.

                                                                                         Improved expectation
                                                                                         of maintenance and
                                                                                         service delivery
                                                                                         standards will be met.

     Line Agency      Budget Impact due       Dependent on       Ability to apply        Ability to link ongoing
                      to construction and     delivery method.   capital surplus to      service delivery
                      maintenance of                             initial construction    including maintenance,
                      facility.                                  cost. May have          upgrades etc to
                                                                 difficulty in funding   specified recurrent
                                                                 maintenance, refit      funding.
                                                                 and upgrade during
                                                                 life cycle.

     Core Service     Improved ability to     Upon               Service standards       Ability to ensure service
     Provider         deliver core service    commissioning of   may deteriorate         delivery standards are
                      through improved        facility.          through inability to    maintained at specified
                      facility.                                  fund required           levels during whole of
                                                                 ongoing                 life.
                                                                 maintenance, refit
                                                                                         Designated process to
                                                                 and upgrades
                                                                                         add additional service
                                                                 through life cycle.
                                                                                         requirements over time
                                                                                         through process agreed
                                                                                         in initial contract.

     Private Sector   Ability to undertake    Dependent on       Potential for           Ability to form long term
     Partners         work on behalf of       Project Delivery   involvement in          partnership.
                      Government.             Option.            design and

     AUGUST 2002
3.2.9 COMPLETION OF ENVIRONMENTAL, CULTURAL                     Employment security and preservation of employment
HERITAGE, NATIVE TITLE AND OTHER SPECIALIST                     conditions and entitlements are of paramount importance
STUDIES                                                         to workers. Accordingly, when developing specific Project
                                                                Delivery Options, employee concerns need to be
Environmental, planning, Cultural Heritage, Native Title        considered and appropriately addressed.
and other specialist issues require consideration and
analysis during the development of Project Delivery             The focus of the employee, employment and skills
Options. Where unresolved or not addressed, these issues        development assessment is as follows:
may impact the viability of those Project Delivery Options      •   Employee stakeholder consultation: It is
being considered. A number of specialist studies will be            recommended that the Government Project Team open
used to inform the Reference Project, PPP Project, PSC and          lines of communication with employees, employee
Partnership Model.                                                  groups and unions early in the project timetable in
Undertaking these studies (or elements thereof) may also            order to promote an understanding of the project and
be a viable risk management strategy. Understanding risk            to avoid negative sentiment due to lack of information
better through the study may provide a better                       and potential mis-truths. Dialogue in these contexts
understanding of the risk and the management options                should be open and consultative, with the aim of
available.                                                          ensuring effective change management mechanisms
                                                                    can be developed and implemented during project
These studies could be made available to Bidders during             development;
the Binding Bid Stage (Stage 5). However, a careful
analysis of the risks and benefits of making these studies      •   Employment and Training Impact Statement: The
available to bidders needs to be undertaken prior to a              Government Project Team is required to instigate an
decision being made. If a decision is made to release the           Employment and Training Impact Statement. Agencies
studies, care must be taken to ensure that warranties               should make reference to the Department of
appropriate to the studies are provided with them.                  Employment and Training’s Employment and Skills
However, if Government provides warranty as to the                  Development Impact Statement, which provides
reliability of material, it may increase its own exposure to        guidelines and a template for the preparation of such
risk.                                                               an impact statement.

Some specialist studies may be lengthy in nature, and as            In accordance with the guidelines, an Employment
such, may not be completed prior to finalisation of                 and Training Impact Statement is intended to assess
Business Case Development. Provided the issues which                the likely impact of the project on employment and
will impact upon the viability and timing of a project can          skills development, (be it positive or negative) and to
be appropriately included in the business case, these               identify where employment and skills development
studies need not necessarily be completed until the                 opportunities are being generated.
beginning of the Binding Bid Stage. The studies should be       3.2.11 DEVELOPMENT OF THE PUBLIC SECTOR
completed in sufficient time to allow the Bidders (if           COMPARATOR (PSC)
appropriate) to access the information and include
appropriate responses in their Binding Bid.                     The development of the PSC is a specialist skill and is
                                                                therefore likely to be undertaken by the Financial Adviser.
Given that these issues may have a significant impact on
                                                                The PSC is a hypothetical model that estimates the risk-
the viability and timing of a project, careful and particular
                                                                adjusted, whole of life cost to Government of delivering
consideration of each is important. While most issues
                                                                the Reference Project via a traditional delivery method.
were likely highlighted in the Preliminary Assessment, all
will need further consideration and, potentially, a greater     The PSC represents the true financial cost (net of any
level of analysis during Business Case Development.             revenues) to Government of meeting the Output
                                                                Specifications under a public procurement delivery
                                                                method. As such, the PSC:
                                                                •   includes a full, whole of life, risk adjusted estimate of
Employees, whether existing or future, are key                      project cost;
stakeholders in most projects, and their issues and
concerns are very important in project development. In          •   is a key management tool during the procurement
many cases, existing employees will have direct input into          process, as it focuses attention on the Output
the project, through the development of the Output                  Specification, risk allocation and development of a
Specification.                                                      comprehensive estimate for the Project;

                                                                •   provides a means of demonstrating likely value for

                                                                                                             AUGUST 2002
     •    provides a consistent benchmark and bid evaluation                      •     assumptions used in the derivation of the discount
          tool; and                                                                     rate;

     •    encourages the Private Sector to put forward its most                   •     details of foreign exchange assumptions;
          efficient bids.
                                                                                  •     insurance assumptions;
     The key attributes of the PSC are:
                                                                                  •     estimation of the replacement cost capital items and
     •    the model is developed in Net Present Value (NPV)                             when they occur over the project term;
          terms. The NPV is based on the ‘time value of money’
                                                                                  •     to detail and separate out the costs relating to
          concept and takes into account the effects of the
                                                                                        revenues to Government; and
          timing of different cash flows over the project life by
          calculating the total, net amount of all cash flows in                  •     to ensure that the costs provided correlate with the
          equivalent values;                                                            scope of the Reference Project, and that any changes
                                                                                        to the Reference Project are reflected in amended cost
     •    the NPV analysis is conducted using nominal cash
          flows discounted at a nominal discount rate. The
          discount rates used must be developed in                                GST
          consultation with Queensland Treasury and the IPT;                      GST is paid on most services at a rate of 10%. Agencies
     •    it is costed over the life of the Project; and                          are entitled to a GST refund from the Australian Tax Office
                                                                                  (“ATO”) for any GST paid. The ATO advise that they aim to
     •    it takes account of the risks identified in the                         refund GST within 14 days of the lodgement of the
          forecasted cash flows.                                                  Business Activity Statement. As such, the cost of the
     The PSC is comprised of two elements:                                        timing lag between the remittance of GST and the ATO
                                                                                  refund of GST is not considered material, and therefore,
     (i) Raw PSC (base costing); and                                              the PSC is usually calculated net of GST.
     (ii) Risk adjustments (Transferable and Retained risks).                     However, the GST has a minor working capital cost RAW PSC                                                             resulting from the timing lag between the payment and
                                                                                  collection of GST. For budgeting purposes, the GST
     The raw cost estimates for the PSC are based on the
                                                                                  position of the Agency should be checked, as it may be
     Reference Project and are generally derived by the
                                                                                  different to that described above.
     technical advisors in consultation with the Agency. To
     build up the raw costs for the PSC, the Terms of Reference                   The treatment of GST for the PSC and the Partnership
     for this work by the technical advisors include, inter alia:                 Model should be the same for consistency and
                                                                                  comparability purposes.
     •    to estimate each cost in accordance with the scope of
          the Project, detailing assumptions used for each cost          RISK ADJUSTMENTS
          category and the breakdown of the costs in each cost                    Risk and uncertainty are inherent in all projects, no matter
          category;                                                               the size.
     •    to provide the cost estimates as at an agreed date;                     For Project Management, the most serious consequences
     •    to provide details on inflation/indexation of costs for                 of risk can be broadly characterised as:
          each cost category over the project term. For example,                  •     failure to keep within the cost estimate;
          labour rates/wages usually rise faster than CPI, and
          construction materials may also inflate at different                    •     failure to meet the completion date; and
          rates. Guidance should also be sought directly from                     •     failure to achieve the required quality and operational
          Queensland Treasury and IPT for inflation assumptions                         requirements.
          relating to long-term projects;
                                                                                  Risk is all too often ignored or dealt with in an arbitrary
     •    to reflect the true financial cost of the project to                    way, by, for example, simply adding 10% “contingency”
          Government rather than the cost to the Agency (this                     onto the estimated cost of a project. This contingency is
          may be different, for instance, when a GOC is the                       almost certain to be inadequate and will result in cost
          traditional delivery mechanism)1                                        overruns and delay. It is therefore essential that risk is
     •    estimation of the timing of construction costs over the                 identified and valued, where possible, in order to gain a
          construction period;                                                    full appreciation of the likely cost to Government of
                                                                                  pursuing the project.
     •    to detail the assumptions regarding the payment
          terms of the contractor, i.e., are there any holding                    The identification and costing of risks is particularly
          costs included in the raw estimates;                                    important, as risk allocation and its financial
                                                                                  consequences will play a key role in assessing value for
     1 It is important to note that Binding Bids must include all revenues to     money and contract negotiation.
     Government that may be imparted by the project including payroll tax,
     stamp duty, land tax, etc. These will be adjusted as part of the value for
     money assessment.

      AUGUST 2002
In practice, it is likely that some combination of the           The PPP delivery mechanism may be preferred over the
individual risks identified (whether quantified or not) will     alternative PSC delivery, as it offers Government a
be encountered. It is therefore important to make some           reduction in its overall exposure to risk volatility.
assessment of the implications of the combined impact of
                                                                 It is important to recognise that probabilities and
the identified risks. It must also be recognised that not all
                                                                 uncertainties in cost prediction vary from stage to stage
identified risks will be quantifiable. It is therefore
                                                                 and therefore so do the measures of likely cost outcome
important that these risks are also captured in the
                                                                 and volatility. The quantifications of risk at the
analysis (not only for Business Case Development, but
                                                                 identification and appraisal stages of a project should be
also during Bid Evaluation).
                                                                 detailed enough to give a reasonable upper limit for the
The analysis of the combined range of identified and             project. Then, as risks and uncertainties are removed or
quantified risks provides a greater understanding of the         reduced, the risks should reduce.
risk spectrum or “volatility” that is inherent in the project.
                                                                 Figure 6 illustrates the effect of risks on cost predications
Volatility can be considered in terms of a probability (or
                                                                 at different stages during the project. This so-called
confidence) limit that is usually expressed as the “P90” –
                                                                 ‘torpedo’ diagram illustrates how the development of the
the range of outcomes bounded by the fifth and ninety-
                                                                 Reference Project generally results in a better
fifth percentile probability outcomes (refer to Appendix C
                                                                 understanding of the risks associated with the project and
for further details).
                                                                 a corresponding reduction in the spread of potential
Figure 5 illustrates the inherent volatility of the costs of a   outcomes. The step down between the PSC and the PPP
traditional approach, compared with that of a PPP option.        Contract represents the expected value for money
In this case, where Government retains more risk under           outcome, albeit with some uncertainty associated with the
traditional procurement than under PPP, the potential            retained risks. Final out turn cost will not be known until
range of cost outcomes for the PSC is wider than that for        the end of the contract, but should lie within the range
the PPP.                                                         estimated at contract award.

The analysis of risk both in terms of expected cost (single
figure estimation) and volatility is very powerful, as it
provides a full understanding of the inherent uncertainty
in the project.

            Likelihood of                        PPP


Figure 5 – Risk Volatility Comparison

                                                                                                             AUGUST 2002
                                    Torpedo Diagram of Risk Analysis and Management

                                        Feasibility study            PSC               Bid       Project cost

                                                                       B               B             ABC


                                    A                       C    A          C    A           C


                       Most                                                                                Project
                       Likely                                                                               Cost

                     Minimum                                               Tendering
                                C                  Development

                                          Preliminary                PSC                  PPP     Contract
                                          Assessment                                    Contract Management


     Figure 6 – Total Diagram of Risk Analysis and Management REALITY CHECK OF THE RISK ADJUSTED PSC
     The type of reality check or review conducted depends
     largely on the complexity of the project. The extent of the
     review process can range from a comprehensive audit of
     the calculations in the model to independent advice on
     the Raw Cost Estimates. As it is usual for the scope of the
     project to change during the development of the PSC, the
     reality check is important in ensuring that the estimated
     costs are consistent with the scope. As stated earlier,
     continual checking of the Reference Project and
     communication between the Government Project Team,
     technical advisors and financial advisors regarding
     changes to the scope of project services will help to
     ensure that the assumptions underlying the PSC are

     A review of risk adjustments could be performed by
     comparing the percentage likelihood of the risk occurring,
     and the associated cost impact to empirical evidence from
     previous projects.

     AUGUST 2002

A. The PSC promotes full cost pricing at an early stage in the project cycle. The PSC is commenced during the
development of the Business Case and therefore sets the budget funding limit for funding approval that may be
sought from CBRC/Cabinet.

A. Yes. Not only is the PSC an integral component of Queensland’s PPP Policy, it also represents best practice
benchmarking for all Government capital investment projects irrespective of the ultimate means of procurement.
The PSC is a key management tool during the procurement process and focuses attention on outputs, risk and
costing at a very early stage in the project. The PSC is also a reliable means of demonstrating value for money and
provides a consistent benchmarking and bid evaluation tool.

The PSC is developed and refined during Business Case Development (Stage 3). It needs to be developed to an extent
that it can be presented to Cabinet/CBRC at the end of the Business Case Development Stage in order to assist
Cabinet/CBRC to make a decision as to whether the project should proceed to Expressions of Interest (Stage 4).

A. Yes. The PSC can be changed during the procurement, subject to certain constraints. The PSC should be
regularly discussed throughout the feasibility process and, where necessary, amended as a result of changes in
scope, or if it becomes apparent that a significant component has been mis-priced or omitted. However, where
there is an impact on the potential funding requirement, it will be necessary to consult with IPT and Queensland
Treasury in order to determine whether it may be necessary to resubmit the Business Case to CBRC and Cabinet

A. The sole convincing argument for a PPP delivery is that it offers the potential for Government to secure better
value for money and greater innovation in the delivery of services. To determine whether the PPP Project Delivery
Option is likely to deliver a value for money outcome, the PSC must be a robust and defensible estimate of the
cost to Government of providing the services through a traditional means of procurement. Having said this, it
should be kept in mind that risk quantification is a subjective element of the PSC.

A. Guidance should be sought directly from Queensland Treasury and IPT for inflation assumptions relating to
long-term projects.

A. If a Government Agency believes that things can be done better under conventional Public Sector procurement
than in the past, and there is significant credible and verifiable evidence to support this belief, then the PSC
should reflect these efficiencies. Evidence of potential for future cost savings might be provided by a declining
trend over a significant period. Equally, if costs have been increasing, this trend should be projected into the
future. If cost savings are possible, but there is no supporting evidence for their realisation, then they should not
be incorporated into the PSC. However, sensitivity analysis should be undertaken to understand the effects of
such possible cost improvements on the PSC.

A. The value of all pre-existing assets should be included in the PSC. Virtually all pre-existing assets will have an
alternative use to Government and/or a market value that is the basis for estimating the opportunity cost. Very
occasionally, there is no alternative use for a pre-existing asset so that the opportunity cost is zero and the asset
represent sunk costs.

                                                                                                          AUGUST 2002
      A. Yes, the values of revenues flowing to the State under PPP procurement are to be accounted for in both the
      Partnership Model and PSC model. Examples of the types of costs that may have an effect on revenues to
      Government include land tax, stamp duty and payroll tax.

      A. No, unless the tax receipts associated with the project are directly channeled back to the State. The
      Commonwealth tax issues associated with a PPP project should be explored and documented as part of the
      development of a robust Business Case.

      A. Yes, if there are insurable risks involved in a project procured under conventional means. Even if insurance is
      not taken out, the commercial premium is a good proxy for the value of that risk. Be careful to avoid double
      counting (i.e., by including the cost of the risk and the insurance premium).


       Some problems commonly experienced in the construction and use of PSCs are as follows:

       •   introducing inappropriate and spurious detail in risk analysis. It is important to focus on the important risks –
           follow the Pareto Principle of placing emphasis on, and allocate resources to, the significant few, rather than
           the insignificant many. For value for money comparison, it is the risk that is transferred that is the significant
           factor to be quantified;

       •   failure to properly and systematically record the construction of the PSC, including failure to record
           assumptions, including reality checks and validations, and failure to record sources of information. (This
           should not be an expensive process, and should not require additional resources – it simply requires
           discipline in recording material as one goes. There are clear and important benefits from a methodical and
           rational PSC construction process);

       •   errors and confusion from poor financial models. It is worth investing in spreadsheet and financial modelling
           skills, specifying good style so that coherent and clear spreadsheets are routinely developed, and by
           documenting the spreadsheet properly;

       •   changes of personnel in the Government Project Team constructing the PSC can make for difficulties, but are
           sometimes unavoidable. Such problems can be minimised by being meticulous in maintaining appropriate

       •   invalid bases for estimating economic costs of occupying property, e.g., utility costs, etc;

       •   ignoring real price movements. No one can accurately forecast real price changes for the long time periods
           involved in a PPP procurement project. However, some facts, information and advice may be readily available
           for real price movements of component costs of the PSC, e.g., for building material over the immediate
           construction period;

       •   underestimation of the impact of foreign exchange movements, where a project requires the importation of
           capital equipment;

       •   underestimation of costs, especially third party fees and performance monitoring costs to Government;

       •   underestimation of maintenance costs due to the omission of lifecycle costs required to maintain the asset in
           the required condition to supply the specified service;

       •   inclusion of contingency items in the Raw PSC. Contingency items should be excluded from the raw PSC costs
           and included as part of the project risks;

     AUGUST 2002
    •    inconsistent output specifications between the Reference Project / PSC and the Private Sector bids. Make sure
        that the Private Sector bids are not requested in terms of a different quality of service than what is in the
        Reference Project and PSC;

    •   failure to guide the Private Sector bidders in terms of format and content of bids. This can make risk allocation
        unnecessarily difficult, if not impossible in practice. Broad guidance on style and content should be provided
        in the Project Brief; and

    •   making unverifiable assumptions about the timing of availability of public funds e.g. phasing capital
        investment over 15 years on the basis that public capital would be available in that timescale. The PSC
        assumes availability of upfront funding.

3.2.12 DEVELOPMENT OF THE PARTNERSHIP MODEL                           ‘riskiness’ of the loan. Debt ratios need to be
                                                                      considered during the development of the Partnership
The Partnership Model is a hypothetical model that                    Model to assist in understanding the acceptability of
estimates the true financial cost to Government to procure            the project to financiers. Further advice on the use of
the required service under the PPP Project Delivery                   these ratios should be sought from the Financial
Option. The development of the Partnership Model                      Adviser.
requires specialist skill and is therefore likely to be
undertaken by the Financial Adviser to Government. Items          •   Tax. Any structure devised for the delivery of a project
to be considered in the development of the Partnership                must consider the taxation issues. As with all tax
Model include:                                                        matters, the taxation consequences will depend on
                                                                      the precise and full facts of the structure proposed.
•   Service Payments. The Partnership Model represents                Expert tax advice should be sought for the tax
    an estimate of the Project Delivery Option that the               treatment of specific projects and the optimal way of
    Private Sector would likely adopt to structure the                structuring a project.
    project. The aim of this exercise is to estimate the
    Service Payments that the Government would pay over           •   Third Party Revenue. Third party revenue usually
    the Operating Period of the Project. Ultimately, the              arises from commercial development that occurs
    Partnership Model allows Government to determine                  outside of the normal course of business for the
    the likelihood of gaining value for money under a PPP             Agency, but is allowed under a PPP arrangement.
    Delivery Option. Additional discussion of Service                 Assumptions regarding future demand and revenue
    Payments is in Section below.                            should be carefully estimated and external advisers
                                                                      may be required in order to help estimate the revenue
•   Financing. Where private financing is a feature of the            streams and the risks associated with them.
    PPP Project Delivery Option, the Partnership Model must
    incorporate the likely financial structure that the Private       The attraction for Government of third party revenue in
    Sector would use to finance the project. In general, the          the project is the potential decrease of the project cost
    loan facility amounts are based on the construction cost          to Government. There are various ways in which
    for the project with a working capital allowance.                 Government can structure the project that will impact
                                                                      on how the Service Payment is calculated. If all the
•   Debt. Consideration should be given to the drawdown               commercial revenue is to go to the Private Sector, then
    and repayment profile of debt. Usually the drawdown               the Service Payment could be calculated net of the
    of funds will be matched to the construction period               commercial revenue. If, for example, Government
    funding requirement and debt will terminate a few                 wishes to profit share in the commercial development,
    years prior to the end of the Operating Period. The               then the Service Payments could be calculated before
    timing of interest/principal repayment profile can be             any commercial revenue, and the profit share element
    annual, semi annual, or quarterly. Upfront,                       separated out and paid to Government in a separate
    commitment, Agency and underwriting fees, as well as              payment. The calculation of the Service Payment with
    interest rates need to be considered.                             regard to commercial revenue will differ from project
•   Equity. Equity can be paid into the project in any                to project depending on how the project is to be
    number and combination of ways. The specific                      structured. Once again, Market Sounding may aid in
    structure will depend on many factors, including the              assessing the commercial potential of the project with
    sources of equity providers and their appetite for risk.          and without specific commercial development.

•   Debt Ratios. These ratios are a measure of the extent to      •   Revenues to Government. Most privately funded
    which available cash flow from the project covers loan            projects will involve the Private Sector making
    repayments, and are used by financiers to assess the              payments to Government in the form of land tax,

                                                                                                              AUGUST 2002
           stamp duty, payroll tax or other charges. These should      •   Performance relates to the operation of the facility to
           be included in the Partnership Model.                           agreed operational standards. These standards are
                                                                           expressed in terms of measurable Key Performance
     •     Cost of Retained Risks. Retained risks that were
                                                                           Indicators. In the event of poor performance that does
           identified and quantified in the PSC are to be added
                                                                           not meet the performance standards, deductions may
           back to the Partnership Model such that a like-with-
                                                                           be made;
           like comparison can be made.
                                                                       •   Volume/Usage is typically incorporated in the
     •     Residual Value of the Asset. If the project is structured
                                                                           Payment Mechanism where demand risk is shared
           so that Government pays a residual value to the
                                                                           between the Government and the Private Sector party.
           Private Sector at the end of the Operating Period, then
                                                                           This is often the case where the payment structure is
           this cash flow should be included in the Partnership
                                                                           wholly or partly demand or market driven. For
           Model. Expert advice should be sought in order to
                                                                           example, toll road revenues are a function of usage
           obtain an estimate of the value of the asset. Note that
                                                                           and user charges; payments for water treatment
           there will be tax and accounting implications resulting
                                                                           plants are determined by the plant throughput; and
           from the way this is structured, which may affect both
           the Government and Private Sector approaches to the         •   Indexation linking the service payment to inflation.
                                                                       Each aspect of the payment mechanism is linked to Risk
     •     Discount Rate. The discount rate used to determine          Allocation. The payment mechanism should include
           the NPV of the Project must be developed in                 performance-based incentives as well as payment
           consultation with Queensland Treasury and IPT.              abatements (penalties), liquidated damages and
                                                                       termination provisions. PAYMENT MECHANISMS
     The payment mechanism may encompass payments from                 The payments are linked to the services provided by the
     third parties and/or Service Payments from Government.            Private Sector and the risks borne by both the Private
     The key aspects of the payment mechanism are:                     Sector and Government.

     •     Availability of the service for which an availability fee VALUE FOR MONEY ASSUMPTIONS
           is paid regardless of usage (e.g., heat provided, light,    The Partnership Model is set up to test value for money by
           equipment standards);                                       running a series of sensitivity and scenario analyses on
                                                                       key assumptions. The Partnership Model must therefore
                                                                       be capable of running sensitivities and scenarios around
                                                                       the following value drivers:

         Value Driver                                                  Suggested Partnership Model Variable

     Risk allocation                                                   •   All cost assumptions
                                                                       •   Return on equity (if applicable)
                                                                       •   Margins
                                                                       •   Discount rates

     Whole of life costing                                             •   Capital cost
                                                                       •   Operating and Maintenance costs
                                                                       •   Major refurbishment costs
                                                                       •   Inflation

     Innovation                                                        •   Capital cost
                                                                       •   Operating and Maintenance costs
                                                                       •   Major refurbishment costs

     Asset exploitation                                                •   All costs to reflect additional services required to
                                                                           generate third party income
                                                                       •   Third party income

     Economies of scale                                                •   Capital cost
                                                                       •   Operating and Maintenance costs

     AUGUST 2002
3.2.13 VALUE FOR MONEY ASSESSMENT OF PROJECT                    As a guide, qualitative assessment should address the
DELIVERY OPTIONS                                                following issues:

One of the key objectives of the PPP Policy is to ensure        •   Risk Allocation:
that the Government obtains a value for money outcome.              –   Have risks been allocated to the party best able to
The assessment of value for money may be considered to                  manage the risks?
be three-dimensional:                                               –   Is there a genuine transfer of risk to the Private
•   The economic assessment is concerned with the worth                 Sector?
    of the project to the Government, the community and             –   Does the market have sufficient management
    the user of the services. This assessment is based on               quality to control the transferred risks?
    cost benefit analysis techniques that focus on the
    broader economic, social and environmental impacts              –   Does the market have the appetite to take the
    of the project (triple bottom line). An economic                    risks being transferred?
    assessment should include the cost and benefit                  –   Is there sufficient credit quality in the market?
    differentials arising from different Project Delivery
                                                                    –   Can the contract be developed to enforce the risk
    Options yielding different timing outcomes;
•   The financial assessment is primarily concerned with
                                                                    –   Can the risk allocation be relied upon even under
    the likely cost of the project to the Government (or end
                                                                        extreme circumstances, such as Private Sector
    user). The assessment is based on a discounted cash
    flow analysis that incorporates risk valuation. The
    basis of the financial assessment is a whole of life            –   Have design, planning, completion and
    comparison of the various Project Delivery Options for              operational risks been allocated to the Private
    the project. Using discounted cash flow techniques,                 Sector?
    the various Project Delivery Options can be compared
                                                                    –   To what extent is residual value risk transferred to
    by measuring the Net Present Value (NPV) of each
                                                                        the Private Sector?
    option. Typically, the NPV will be expressed as a range
    of likely costs as a reflection of the inherent                 –   Is payment at risk to service performance?
    uncertainty of risk;
                                                                •   Whole of life Costing:
•   The quality assessment is based on defining the
                                                                    –   Is the Private Sector free to determine the
    service requirements in terms of the outputs sought
                                                                        operating and maintenance requirements to meet
    by Government. As part of Business Case
                                                                        the Output Specification?
    Development (Stage 3), the Output Specification must
    be developed to sufficient detail for incorporation into        –   Is the Private Sector responsible for all
    the documentation for the Binding Bid Stage (Stage                  refurbishment requirements?
    5). The Reference Project and associated PSC also
                                                                    –   Is the Private Sector responsible for performance
    developed for the Business Case must be based on
                                                                        of the asset throughout the contract period?
    the Output Specification, and therefore must be
    capable of delivering the services at the requisite level   •   Innovation:
    of quality. Ultimately, the final quality assessment is
                                                                    –   Is the Private Sector free to determine how to
    undertaken as part of the evaluation process during
                                                                        deliver the services?
    the Binding Bid Stage, when the bids received are
    assessed for quality against each other and the PSC.            –   Is the manner of the design and construction of
                                                                        the asset a decision under the control of the
The economic assessment forms part of the Preliminary
                                                                        Private Sector?
Assessment. The financial assessment forms the core part
of the analysis undertaken for Business Case                        –   Is there scope for innovation either in asset design
Development. The quality assessment is an ongoing                       or service delivery?
requirement of all viable Project Delivery Options.                 –   Is the scope of service delivery sufficient to VALUE FOR MONEY – QUALITATIVE ASSESSMENT                       provide incentive for innovative design solutions?
The purpose of the qualitative assessment is to                     –   Is the Private Sector responsible for all or only part
subjectively test whether the objectives, service                       of the services required to be delivered from the
requirement and proposed structure of the project are                   asset?
likely to provide the Private Sector with sufficient scope to
                                                                    –   To what extent is the Public Sector responsible for
access the value drivers.
                                                                        service delivery utilising the asset?

                                                                                                             AUGUST 2002
     •   Improved Asset Utilisation:

         –   Is the Private Sector service provider able to
             generate additional third party income from the

         –   Can the Private Sector provide additional services
             to third parties?

         –   Is third party revenue generation likely to reduce
             the overall cost of the service to Government?

     •   Economies of Scale:

         –   Is the market for the service large enough to
             access significant economies of scale, either in
             construction or operations?

     The Business Case (Stage 3) should incorporate a broad
     discussion of the qualitative assessment of the project’s
     value for money, with reference to each of the value
     drivers. As a minimum, all of the issues identified above
     should be addressed as part of this assessment.

     A useful tool for summarising the qualitative assessment
     is to adopt a scoring mechanism against each of the value
     drivers. For example:

         •    x         represents no scope for value

         •              represents some scope for value

         •              represents reasonable scope for
                        value generation

         •              represents excellent scope for value

     To illustrate how this scoring mechanism, or one similar,
     can assist with the qualitative assessment of value for
     money, consider the following hypothetical examples.
     Note that, in practice, there would of course be much
     more information available for analysis during the
     qualitative assessment of such projects.

     AUGUST 2002

To support the communication and signalling requirements of a rail corridor, Government is seeking Private Sector
participation in the provision of fibre optic cable infrastructure. The infrastructure is to be installed via a ‘design,
construct, own and maintain’ Project Delivery Option, with the following key features:

Objective                                     •   To provide rail signalling services on a defined rail corridor

Service Requirement                           •   To provide current and future rail communication needs along a
                                                  defined rail corridor

Scope for Private Sector involvement          •   Provision, operation and maintenance of the fibre optic cable, i.e.,
                                                  dark fibre

Public Sector involvement                     •   Transmission, i.e., lit fibre

Transferred Risk                              •   Design, Installation, Operation and Maintenance Costs, Third Party

Retained Risk                                 •   Transmission of signalling service

The following table summarises the qualitative assessment of value for money for this project:

 Value Driver                       Value Score                  Rational

Risk allocation                           X                      The proposed risk allocation is very similar to that
                                                                 under the traditional Project Delivery Option

Whole of life costing                     X                      Operation and maintenance costs of dark fibre optic
                                                                 cable is relatively small in comparison to installation

Innovation                                X                      Little scope to innovate in what is essentially the
                                                                 design and roll out of fibre optic cable

Asset Utilisation                                                Scope to exploit additional fibre optic capacity for
                                                                 third party revenue generation

                                                                 However, given the current market saturation in fibre
                                                                 optic capacity, the scope for generating additional
                                                                 revenue to deliver value back to the Government
                                                                 seems limited

Economies of Scale                                               Some scope to incorporate the rail corridor into a
                                                                 much bigger fibre optic network

This qualitative assessment indicates that there is little value for money opportunity in the PPP Project Delivery
Option for provision of the dark fibre services to Government (i.e., within risk allocation, whole of life costing and
innovation). In this example it may be possible to improve on this value by widening the service provision to include
transmission services. The only realistic source of value in the current project structure lies in the generation of third
party revenue from spare communications capacity, and in the potential to incorporate the rail corridor into a bigger
fibre optic network. However, given the current oversupply in the telecommunications market and the significant
markdown of the industry worldwide, it is unlikely that these value drivers alone will provide sufficient scope to
generate value for money for Government. Overall, the qualitative assessment indicates that there is little to no
scope for generating value for money from the project, (as currently structured) and as such, a quantitative
assessment would not be required.

                                                                                                            AUGUST 2002

      To support its health and fitness policy Government is seeking Private Sector participation in the provision of a
      leisure centre facility. The facility will incorporate international playing services for a number of defined sports. The
      project will possess the following key features:

      Objective                                        •    To increase the community participation in health and fitness
                                                            and to encourage involvement in certain international sports

      Service Requirement                              •    To provide leisure facilities to a defined standard

      Scope for Private Sector involvement             •    Design, construction, maintain, operate and finance the leisure
                                                            facility that is to be funded by a combination of user charges
                                                            and Government subsidy

      Public Sector involvement                        •    Definition of output requirements, monitoring of service delivery
                                                            and payment of fixed subsidy (tendered)

      Transferred Risk                                 •    Design, planning, construction, operation and maintenance
                                                            costs, residual value, volume of usage

      Retained Risk                                    •    None, other than meeting the subsidy payments as bid and

      The following table summarises the qualitative assessment of value for money for this project:

       Value Driver                        Value Score                 Rational

      Risk allocation                                                  The proposed risk allocation appears optimal and
                                                                       transfers significant volume/ usage risk to the Private

      Whole of life costing                                            Operation and maintenance costs of the leisure centre
                                                                       are significant when compared to the design and
                                                                       construction costs

      Innovation                                                       There is reasonable scope to be innovative in service
                                                                       delivery, for example incorporating flexible playing
                                                                       services capable of supporting different sports

      Asset Utilisation                                                Significant scope to exploit the leisure and sports
                                                                       market and even to expand into related services such
                                                                       as catering and sports injuries

      Economies of Scale                                               Some scope to incorporate the development into an
                                                                       existing network of sports services

      This qualitative assessment indicates that there seems to be significant scope for the Private Sector to access and
      exploit the value drivers. Whilst Government has recognised that a subsidy may be required to maintain the sports
      facilities to international standards, there is significant transfer of volume or usage risk to the Private Sector.

      There also appears to be significant scope for innovation in service delivery and increased asset utilisation by
      incorporating complementary services. Overall, the qualitative assessment indicates that there is significant scope
      for generating a value for money outcome from the project as structured. Therefore, a quantitative assessment of
      the project would be required.

     AUGUST 2002
Though these examples are necessarily simplistic, they do        The quantitative assessment is based on discounted cash
illustrate the type of analysis required for the qualitative     flow analysis carried out on the Partnership Model and in
assessment. The fibre optic example also demonstrates            comparison with the PSC. The quantitative assessment
how the qualitative assessment can be sufficient to              should be built up using the following techniques:
demonstrate that the project is unlikely to represent a
                                                                 •   Sensitivity analysis; and
value for money option for Government. In this example,
the next step would be to explore the options for                •   Scenario analysis.
restructuring the project and/or expanding the services
                                                                 SENSITIVITY ANALYSIS
provided by the Private Sector to see if such actions
improve the qualitative assessment. If, after carrying out       Sensitivity analysis is a technique used to consider the
this exercise, the qualitative assessment demonstrates           effect on the whole project of changes in the value of each
that there is still little scope for generating value for        of the value for money drivers. The analyses involve
money via a PPP Project Delivery Option, then the                repetitive calculation of the effects on the project outcome
Business Case (Stage 3) recommendation would be to               of a range of values of the variables that generate value
pursue the traditional delivery option. This example             for money. Project outcome is usually considered in terms
further illustrates that by carrying out a robust and            of overall value for money, expressed as the difference in
defensible qualitative assessment, the additional costs          NPV between the PSC and the Partnership Model.
and time required to develop a quantitative assessment           The results of sensitivity analyses can most usefully be
can be avoided.                                                  shown graphically on a spider diagram. Figure 7 shows VALUE FOR MONEY – QUANTITATIVE ASSESSMENT
                                                                 how changes in the above-mentioned key variables for the
                                                                 model impact on the total NPV. Steeper gradients indicate
The purpose of the quantitative assessment is to
                                                                 that the NPV is more sensitive to changes in this variable
objectively test whether the objectives, service
                                                                 relative to the other variables tested.
requirement and proposed structure of the project are
likely to provide the Private Sector with sufficient scope to
access and exploit the value drivers. Quantitative
assessment will determine which Project Delivery Option
is most likely to deliver optimal value for money. It will
also provide the benchmark against which Bids will be
evaluated in the Binding Bid Stage (Stage 5).

                                               Sensitivity Analysis – VFM







                                      -15%   -10%     -5%       0%         5%         10%        15%

                                                       % change in Base Case

                                                         Asset Utilisation ($m)
                                                         Innovation ($m)
                                                         Risk Allocation ($m)
                                                         Economies of scale ($m)
                                                         Whole of life costing ($m)

Figure 7 – Sensitivity Analysis

                                                                                                             AUGUST 2002
     This example is based on an analysis of the possible                Delivery Option to represent a value for money outcome. It
     overall value for money, which itself is based on the most          also provides a focus on the areas that critically impact on
     likely cost outcome for the leisure centre example. The             value for money, as shown in the example above, where
     spider diagram represents the sensitivity of the overall            sensitivity analysis highlighted the importance of asset
     outcome, and changes in the variables identified in the             utilisation for the project in question.
     Partnership Model. For instance, it indicates that, for this
                                                                         A limitation of sensitivity analysis is that each variable is
     project, the overall value for money is particularly
                                                                         considered independently, with no attempt made to
     sensitive to asset utilisation (as indicated by the
                                                                         quantify their combined impact or the extent to which
     steepness of the gradient of the asset utilisation graph
                                                                         ranges are achievable.
     compared to the other drivers). In comparison this project
     is relatively insensitive to whole of life costing.                 SCENARIO ANALYSIS

     The technique is very useful as the effect of a small               Scenario analysis is a technique used to consider the
     change in one variable (in this case, asset utilisation)            effect on the whole project of changes in a combination of
     often produces a marked difference in the value for money           value for money drivers. Scenario analysis overcomes
     outcome. Sensitivity analysis can also be extended to               some of the limitations of sensitivity analysis by
     look at the individual variables that comprise the project,         specifying ranges of outcomes for each variable and
     for example:                                                        looking at likely combinations. The result of scenario
                                                                         analysis is a range of values in which the final outcome
     •   capital costs;                                                  may lie. The results of scenario analysis can be usefully
     •   operating and maintenance costs;                                represented in the form of a bar chart comparison. Figure
                                                                         8 demonstrates how a PPP Project Delivery Option is likely
     •   refurbishment costs;                                            to deliver value for money when compared with the range
     •   discount rate;                                                  of possible outcomes from the traditional option (i.e., the
     •   inflation rate; and

     •   equity rate of return.

     Sensitivity analysis is particularly useful in determining
     the variables that have a significant impact on the value
     for money outcome. Sensitivity analysis can therefore
     provide support for the qualitative assessment and
     indicate whether there is potential for a PPP Project

                                                       Scenario Analysis – VFM

                            PPP Option
                                                      378         401           438

                                                      381          406                449

                                          350         375      400            425        450         475


                                                  Best case/Expected Case/Worst Case

     Figure 8 – Scenario Analysis: VFM

     AUGUST 2002
3.2.14 COMPILATION OF THE PPP BUSINESS CASE                 13. Project Delivery

This section provides the Government Project Team and           •   Project Management requirements
sponsoring Agency with guidance on the deliverables to          •   Resources and organisation for the Binding Bid
be included as part of the submission to CBRC and                   process
Cabinet. It should be noted that the guidance provided in
this section is indicative only and the final format for        •   Timetable
submission should be considered on a project-by-project         •   Post-Contract award management
                                                            14. Conclusion & Recommendation
A suggested contents for a PPP Business Case is as
                                                            Detailed Output Specifications
1. Executive Summary
                                                            Detailed Risk Matrix
2. Business Profile                                         PSC Model & Assumptions
3. Output Specifications                                    Partnership Model & Assumptions
                                                            Supporting Documents
     •   Outcomes
                                                            3.2.15 CONSIDERATION BY CABINET
     •   Services
                                                            At the end of the PPP Business Case Development Stage,
     •   Outputs
                                                            a submission will be presented to CBRC and Cabinet
4. Reference Project Development                            seeking:

5. PPP Options Development                                  •   confirmation of project priority and affordability;

     •   Services                                           •   approval to proceed with the recommended Project
                                                                Delivery Option;
     •   Infrastructure Assets
                                                            •   in the context of Government’s normal budget process
     •   Related Non-Core Services
                                                                –   funding approval for the recommended Project
     •   PPP Models
                                                                    Delivery Option; and
     •   Risk Allocation
                                                            •   where a PPP Project Delivery Option is approved,
     •   Qualitative Comparative Analysis                       approval to proceed to Expression of Interest (Stage 4)

     •   Commercial Structure                               The key deliverables to CBRC and Cabinet are as follows:

           Payment mechanism                                (i) CBRC and Cabinet Submission

           Revenue composition                                  This should be a document prepared by the
                                                                Government Project Team that acts effectively as an
     •   Legislative / regulatory considerations
                                                                executive summary of the Business Case (Stage 3). It
           For project delivery                                 should provide an overview of the Business Case, and
                                                                should summarise and highlight the specific issues
           Overall Government context
                                                                for consideration at the CBRC and Cabinet levels.
6. Market Sounding
                                                                Specific guidance should be sought from IPT,
7.   Public Interest Assessment                                 Queensland Treasury and the Queensland Government
8. Environmental, Cultural Heritage, Native Title and           Cabinet Handbook as to the specific requirements of
   other specialist studies                                     the final Cabinet Submission.

9. Employee, Employment and Skills Development              (ii) PPP Business Case report
   Assessment                                                   In preparing the Business Case, the Government
10. The Public Sector Comparator                                Project Team should refer to the suggested Table of
                                                                Contents outlined in Section 3.2.14. This report will be
     •   Raw PSC                                                based on provision of the following outputs to CBRC
     •   Risk Analysis                                          and Cabinet:

11. The Partnership Model                                       •   Project Plan;

12. Value for Money Assessment                                  •   Output Specification;

     •   Qualitative Assessment                                 •   Documented Reference Project;

     •   Quantitative Assessment                                •   Documented Project Delivery Options;

                                                                                                         AUGUST 2002
        •   Summary Risk Assessment and Risk Allocation

        •   the PSC;

        •   the Partnership Model;

        •   Value for Money Assessment for Project Delivery
            Options; and

        •   Specialist studies/assessments.

     (iii) Other supporting documentation

        As part of any submission, the Government Project
        Team should consider including additional
        documentation that could assist CBRC and Cabinet in
        reaching an informed decision.

        Documentation should include (where applicable) the
        following assessments/studies.

        •   Public Interest Assessment;

        •   Environmental Impact Assessment;

        •   Planning Assessment;

        •   Cultural Heritage;

        •   Native Title;

        •   Employment and Training Impact Statement; and

        •   Other Specialist Studies.

     AUGUST 2002
                                                                   Risk assessment incorporates:
                                                                   •   estimation of the likelihood of the occurrence of each
The Risk Management Supporting Document sets out the                   risk;
Risk Management cycle. This cycle is:
                                                                   •   estimation of the financial impact of the occurrence of
i.    Risk identification;                                             each risk

ii. Risk assessment;                                               The gathering and refinement of this information will
                                                                   inform the finalisation of the Risk Allocation process as
iii. Risk allocation;
                                                                   well as provide information for the PSC and Partnership
iv. Risk mitigation; and                                           Model.

v. Monitoring and review.


     There are many methods available for quantifying risk, however, for the purposes of developing the PSC, only two
     are recommended. The most ‘simple’ method is the subjective assessment of the probability for each risk. Although
     a user-friendly method, a limitation of the simple probability technique is that it provides a single estimate for risk
     that is based on analysing risks independently of each other. The weighted effects of each risk are accumulated to
     provide the most likely outcome risk adjusted PSC.

     The second method is based on multivariable analysis, and typically involves the use of computer-based simulation
     packages. Though more complex and still subjective, greater realism and confidence in risk quantification can be
     achieved by applying probabilities to the risks and considering the interdependencies between the risks. Probability
     analysis overcomes the limitations of the simple approach by specifying a probability distribution for each risk, and
     then considering the effects of the risks in combination. The result of the analysis is a range of values in which the
     final outcome may lie.

     The expression of risk as a range of final outcomes is far more useful in terms of understanding Government’s
     exposure to risk volatility, and in demonstrating the robustness of options with regard to risk transfer and
     management. This information forms the foundations upon which appropriate risk management strategies can be
     developed to mitigate and reduce Government’s risk exposure. Adopting this technique for the Project may also
     assist in the process of bid evaluation, where bids are close to the PSC.

     The risk quantification technique adopted for a particular project or risk depends on the significance of the project
     and the complexity of the risks within it. When selecting a risk quantification technique, factors that need to be
     considered include:

     •   relative impact of the risk on the project;

     •   size of the project; and

     •   complexity of the project.

     For example, a relatively simple project such as a car park is unlikely to warrant sophisticated probability valuation
     techniques, while a more complex project, such as a hospital, may warrant such analysis. However, this example
     may be overly simplistic, as a car park project may be structured to transfer significant usage risk to the Private
     Sector, in which case it may be advisable to carry out an advanced analysis on the volume projections.

     No matter the risk quantification technique used, particular care must -be taken to ensure that the quantification of
     risk is robust and defensible. Outputs from the risk quantification are only as good as the assumptions on which it
     is based, and it is therefore vital that a robust methodology is carried out.

                                                                                                               AUGUST 2002
     A1.1 PHASES FOR GATHERING AND REFINING                         forethought, and too early in the process. The
     RISK INFORMATION                                               identification of risks is less prone to these problems, and
                                                                    the creative benefits of group work early in the
     The majority of the risk information is gathered and           development of the PSC outweigh the dangers.
     refined in five phases:
                                                                    Those who might be involved in the identification and
     Phase One – Structured risk identification workshop –          quantification of risks include:
     Identifying Risk;
                                                                    (a) “core” service Operational Managers and
     Phase Two – Structured risk quantification workshop –              stakeholders;
     Quantifying Risk;
                                                                    (b) Departmental stakeholders;
     Phase Three – Further refinement of the risk quantification
     by Risk Experts;                                               (c) IPT and Queensland Treasury representatives;

     Phase Four – Risk Review Workshop; and                         (d) Project Managers;

     Phase Five – Risk Modelling.                                   (e) Technical Consultants, such as architects and design
     The data gathered out of this process is documented in a
     Risk Register. This may be a stand-alone document or           (f) Financial and Legal advisers; and
     contained within the PSC financial model. The Risk             (g) the Risk Analyst.
     Register is likely to be built up from the Risk Allocation
                                                                    A list of risks to which the project may be exposed is a
     Matrix. The Risk Register differs from the Risk Allocation
                                                                    useful tool to help structure the brainstorming session.
     Matrix in that the Risk Register contains the data upon
                                                                    The Risk Management Supporting Document provides a
     which the risk quantification is based.
                                                                    useful starting point for developing this list.
                                                                    The concepts of ‘risk’ and ‘outcome’ are often
                                                                    misunderstood. The key differences between these terms
     Irrespective of the risk quantification technique used on a    are as follows:
     project, the sources of risk must first be identified.
                                                                    •   an outcome is a consequence of a risk such as
     The risk identification process is potentially the most            “delay”, “cost overrun”, “under-performance”; and
     important and useful part of the risk valuation analysis. It
                                                                    •   a risk is an event that causes the consequence, such
     brings considerable benefits in terms of understanding
                                                                        as “failure to grant a right of way”, “poor ground
     the project and its problems, as well as provoking thought
                                                                        conditions”, “material defect”.
     about the appropriate management response to risks,
     including optimal risk allocation between parties.             Accordingly, “construction cost overrun” is not a risk, and
                                                                    therefore should not appear on the Risk Register. Instead,
     The identification of risks is best done using a
                                                                    a construction cost overrun should be identified as a
     brainstorming session. Good practice in brainstorming
                                                                    consequence of certain risk events.
     sessions is not described here and it is recommended
     that Agencies seek expert facilitation of the risk             The output from this stage should be incorporated into a
     identification and quantification (often forming part of the   Risk Register that must include, as a minimum:
     terms of reference for the Financial Adviser).                 •   risks identified and categorised for ease of reference
     The purpose of the brainstorming should initially be solely        (individual risk identification tags can also prove
     the identification of risks, with no risk quantification at        useful for future reference);
     this point. Quantification of risks is a complicated process   •   a preliminary Risk Allocation; and
     and care must be taken to ensure that experts form their
     own views after some consideration of the identified risks     •   identification of a “Risk Expert” for each risk whose
     in the context of the Reference Project and the Raw PSC.           role is to further refine the preliminary risk analysis in
                                                                        terms of description, consequence, and numerical risk
     The aim of the brainstorming session is to identify the            estimates in the following stages of the risk
     ‘material risks’ (those risks that could have a significant        quantification process.
     cost impact (when considering the probability of the risk
     occurring in combination with the likely cost of the           During risk allocation, regard should be given to the Risk
     occurrence). There is a danger that the group dynamics at      Allocation principles contained in the Risk Management
     the risk identification workshop may give rise to a            Supporting Document. Queensland Government’s PPP
     conformism of point of view, resulting in a simplification     Policy is committed to optimal, rather than maximum, risk
     of treatment and underestimation/overestimation of the         transfer. Consequently, the identifiable risks of the project
     level of risk. This is particularly the case if risk           should be quantified and allocated to the party best able
     quantification is done without sufficient preparation and      to manage them. If a risk is to be retained by Government,

     AUGUST 2002
it is classified as a ‘retained’ risk. If the Private Sector    Depending on the stage of development of the project and
would be better placed to manage the risk, the risk is          time constraints, it may be possible to complete both the
classified as ‘transferable’. Note that retained risk will be   risk identification and risk quantification workshops in the
added back to the Partnership Model to ensure                   same day.
comparability with the PSC.
                                                                To accelerate the workshop process it may be useful to set
Specialist commercial expertise will be required to             some parameters for subjective descriptions of probability
support collation of the risk estimates, facilitation of the    and impact. For example:
risk workshops and the risk modelling process.

A1.1.2 PHASE TWO – STRUCTURED RISK                               Boundary        High            Medium          Low
                                                                Probability of   greater         From 30%        Less than
The quantification of risk should only be attempted after       occurrence       than 60%        to 60%          30%
the Reference Project and Raw PSC costing exercise have
been completed. In the first instance, risks can be usefully    Impact on        $0.5m to        $0.25m to       $50K to
quantified using workshop techniques. This should occur         Capital Cost     $1.0m           $0.5m           $0.24m
after the Risk Experts have been given sufficient time to
individually consider the likely probabilities and impacts      Impact on        $50K to         $25K to         $10K to
of the risks.                                                   Recurrent cost   $100K           $49K            $24K

Considerable analysis has been undertaken on the
psychological factors that give rise to error in the            Note that the ranges above should not be used without
quantification of uncertainty, both in and out of workshop      consideration of their applicability to the proposed project.
situations. When quantifying risks in a workshop                They are examples only and would, for example, be
situation, some of the dynamics to be considered include:       inappropriate for a $1 billion project.

                                                                Workshop participants are only required to agree whether
   Term             Description                                 the risk should be classified as ‘High’, ‘Medium’ or ‘Low’
                                                                in terms of probability and cost impact, and whether the
   Conformity       When a group of people estimates a          cost impacts on capital expenditure, recurrent expenditure
                    risk, group members tend to gain            or both. These parameters provide a useful guide for the
                    unwarranted confidence from each            Risk Experts to carry out the actual risk quantification in
                    other’s estimates. This results in          the following phase.
                    groups giving a narrower range of           The major outputs of the workshop are an understanding
                    estimates than when done                    of the project risks and a general indication of where the
                    independently.                              risks would lie, i.e. in the High, Medium, or Low category.
                                                                A roundtable discussion brings together the experience of
   Bias             More senior individuals at a session        the risk participants such as engineers, architects and
                    are likely to influence others merely       core service operators, who will assess the risk from the
                    by their presence. Most people will         perspective of their own expertise. The workshop will aid
                    have a bias in a particular direction,      in a better understanding of the risks for those involved in
                    but such biases tend to converge            the project and act as a guide for the Risk Expert.
                    when a dominant person is present.
                                                                Risks that are difficult to quantify due to the high level of
   Personality      Where the loudest voice dominates,          uncertainty in variables or the inherent nature of the risk,
                    and the quietest is not heard.              (for example, risk due to changes in the Private Party’s key
                                                                personnel) should be classified as qualitative in nature,
                                                                and recorded as such.

To avoid such issues in a workshop environment, a               Each risk is also analysed with regard to any correlations
preferred technique is to present preliminary analysis data     with other risks , i.e., to determine the relationships (if
to experts before the session, and use the session, not for     any) between identified risks.
the actual quantification of risk, but rather for discussion
                                                                A1.1.3 PHASE THREE – FURTHER REFINEMENT OF THE
on the level and logical structure of uncertainty and
                                                                RISK QUANTIFICATION BY RISK EXPERTS
correlations between risks. The aim of the brainstorming
session is to ensure that all participants leave with a         The information gathered from the risk workshop process
common perception of the uncertainties of the problem,          provides a useful starting point for the risk quantification
and that Risk Experts understand what is required of them       exercise to be carried out by the Risk Experts.
in the next stages.

                                                                                                             AUGUST 2002
     The Risk Expert will investigate risk more thoroughly, and
     designate it a probability, usually within the
     classifications of High, Medium or Low. The data required
     varies, depending on the risk valuation technique

     Risk Experts should realistically assess the likelihood of
     final costs to be above or below the amount included in
     the Raw PSC. The number of point estimates used in
     valuing the impact of risks (each having a different
     expected consequence) should reflect the materiality of
     the risk and the information available. Where empirical
     evidence is unavailable or incomplete, commonsense
     approximations may be used.

     Impact of Risk = consequence x probability of occurrence

     The quantification of each risk is then the sum of these
     probability-weighted consequences (assuming that they
     are all independent).

        EXAMPLE –

        Consider the risk of plant and equipment price changes during the construction period. The following
        probabilities and consequences have been estimated:

         Assumption                                  Probability     Consequence ($’000)        Impact of risk ($’000)

        Below base amount                               20%                  -5,000                      -1,000

        No deviation from base amount                   10%                    0                           0

        Overrun: likely                                 40%                  10,000                      4,000

        Overrun: moderate                               20%                  15,000                      3,000

        Overrun: extreme                                10%                 20,000                       2,000

                                                       100%                                              8,000

        Note: ‘base amount’ refers to the cost of the raw plant and equipment estimated in the raw PSC

        Timing of risk:

        •   100% during the construction period

        Allocation of risk:

        •   Transferred to the Private Party

     AUGUST 2002
By this stage, the Risk Experts should be relatively
                                                                  The primary purpose of the risk review workshop is to
comfortable with the task ahead. However, one potential
                                                                  confirm the risk estimates and formulate risk management
problem may be reluctance on the part of the Risk Expert
                                                                  and mitigation strategies. The risk review workshop
to provide probability distributions. People often consider
                                                                  should, as a minimum, cover the following:
it more difficult to provide a probability distribution than
they do a single point estimate. In fact, there are two           •   identification of any further risks missed in the
components of uncertainty that are included in the                    process to date;
distribution: (1) the inherent uncertainty in the variable
                                                                  •   confirmation of the proposed Risk Allocation for each
itself, and (2) the uncertainty arising from the expert’s
                                                                      delivery method;
lack of knowledge of the variable. In a risk analysis model
these are not differentiated, and it is the combined              •   a reality check of the risk estimates provided by the
uncertainty that is required for the model.                           Risk Experts; and

Reluctance in estimating a probability distribution can           •   formulation of risk management and mitigation
arise from the expert’s assumption that lack of knowledge             strategies.
should not be included (whereas in fact there is no
                                                                  At the end of the risk workshop, participants should sign
alternative – there is no perfect expert). The following
                                                                  off the Risk Register so that the risk modelling exercise
points should be highlighted to the Risk Expert:
                                                                  can be completed and incorporated into the PSC.
(a) providing a distribution for a variable does not require
                                                                  A1.1.5 PHASE FIVE – RISK MODELLING
    a greater knowledge of the variable than a single point
    estimate. By contrast, a distribution gives the expert a      The first consideration in model design is how the risks
    means to express their lack of exact knowledge;               should affect the structure of the model. For example,
(b) estimation of a probability distribution does not             although a cash flow model might normally be modelled
    require any great knowledge of probability theory;            in yearly units, the risks may well be quite different in
                                                                  summer to those in winter. In this case, it makes much
(c) all that can be expected of them is that they are 90%         more sense to separate the years out into halves or
    confident that the risk outcome will lie somewhere            quarters for the purposes of the risk analysis. This is a
    within their estimation of the risk; and                      matter of judgement, but in large risk projects simple
(d) there will be an opportunity to revise the estimates of       prototypes may need to be constructed with different
    individual risks at a later stage, particularly if they are   levels of detail to see what the impact the model structure
    found to be significant drivers of the overall risk           has on the outputs. Another factor to consider in
    adjustment.                                                   structuring the model is the timing of the risks and when
                                                                  they are to occur for each Project Delivery Option, and
Considerable reluctance can also be overcome by careful           how to combine and link the risks where correlations have
phrasing of a question. For example, if trying to solicit the     been identified.
rates of failure of an average contractor against a service
requirement, it makes much more sense for a group of
people to be asked, “Over the last ten year period, how
many failures have you had with your present contractor?”
and “How good do you think your contractor is, relative to
the average?” rather than “What is the rate of failure of an
average contractor?”

                                                                                                              AUGUST 2002

        An example of how a risk is quantified using an advanced evaluation technique is as follows:

        a) Phase 1 & 2 – The risk identified during the initial risk workshop is ‘Risk of adverse geological ground
        conditions’. The workshop participants assess this risk as having a ‘Low’ probability of occurrence and a ‘High’
        capital cost impact if the risk were to eventuate. The risk was assessed as a ‘transferable’ risk.

        b) Phase 3 & 4 – The Risk Expert undertook a further review of the risk, placing a probability within the ‘Low’ range
        at 15% likelihood of occurring, and making a three point estimate representing the ‘Best Case’ ‘Most Likely Case’
        and ‘Worst Case’ at $250,000, $325,000 and $600,000. The true distribution of this risk is not known and
        therefore a simple triangular distribution has been selected for modelling purposes. The Risk Expert estimates
        that the risk would occur once (or it may not at all) during the construction phase, i.e., if the risk were to occur at
        the beginning of the construction phase, it does not occur again.

        c) Phase 5 – These details are entered into the risk model. When the risk simulation is run, this risk will only occur
        once (if at all) during the construction period. During simulation, a value of zero will be selected 85% of the time,
        with the remaining 15% of the simulation runs will to be a value from the distribution, as described by the Risk



     The following table details the results of the risk
     quantification using the simple evaluation technique:

        (All amounts are NPV in $ millions)                                  NPV $m                   % of risk adjusted PSC

        Total non-risk adjusted Project Cost (excl. GST)                     324.096                            72%

        Retained risk                                                         10.383                             2%

        Transferable risk                                                    114.267                            25%

        Total risk adjusted Project Costs (excl. GST)                        448.746                           100%

     AUGUST 2002

The following table details the results of the advanced
probability analysis based on the same example. These
are expressed as:

•   “Best Case”, representing the 5th percentile
    confidence limit. In other words, 5% of the simulation
    results for the valuation of risk improved on this
    outcome (i.e., were lower than this outcome) and 95%
    of the results exceeded this outcome (i.e., provide a
    greater value for risk than this outcome);

•   “Most Likely Case”, representing the arithmetic mean
    of the simulation results. The Most Likely Case is used
    to determine the NPV of the risk adjusted PSC against
    which the Private Sector bids will be evaluated.

•   “Worst Case”, representing the 95th percentile
    confidence limit. In other words, 95% of the
    simulation results for the valuation of risk improved
    on this outcome (i.e., were lower than this outcome)
    and 5% of the results exceeded this outcome (i.e.,
    provide a greater value for risk than this outcome).

    (All amounts are NPV in $ millions)                        Best Case           Most Likely Case         Worst Case

    Total non-risk adjusted Project Cost (excl. GST)           324.096                 324.096               324.096

    Retained risk                                               0.460                   10.585                  29.629

    Transferable risk                                           25.290                  117.479               246.177

    Total risk adjusted Project Costs (excl. GST)              349.846                 452.160               599.902

The difference between the Best Case and the Worst Case represents the 90th percentile Confidence Limit within which
the final outcome of the Project is likely to fall. This is effectively the measure of the volatility that Government is exposed
to under the PSC.

A bar chart can also be useful to illustrate the range of the risk adjusted PSC:

                                          Risk adjusted PSC
                    600                                                                               Retained Risk
                    500                                                                               Transferable Risk
                    400                                                                               Raw PSC
                              Best Case          Most Likely          Worst Case


                                                                                                                 AUGUST 2002
     Presenting the risk adjustments

     The risk adjustments can be presented in a number of
     ways. Examples of two of the more common presentation
     formats are shown below.

        EXAMPLE 1:

        A table that represents risk as a percentage of the total risk adjusted PSC can be useful in showing the spread of
        risk between the Best, Most Likely and Worst Cases.

        Description                                                  Best Case           Most Likely Case   Worst Case

        Retained risk                                                  0%                       2%              5%

        Transferable risk                                               7%                      26%             41%

        Total risk                                                      7%                      28%            46%

        Note that the range between the “Best Case” and the “Worst Case” are for illustrative purposes only, and each
        project will differ in its range.

        EXAMPLE 2:

        The cumulative distribution chart, shown below, can be generated for both retained and transferable risk. Such
        charts are useful in showing the probability of the value of risk between certain outcomes. For example, the
        Transferable risk chart shows that the percentage likelihood of retained risk having a cost impact of less than
        NPV$100 million is estimated at approximately 55%.

                                                Distribution for Transferable Risk

                                x <= 25289.78                                x <= 246176.81
                                      5%                                           95%
                      0.9                          Mean = 117479.3
                            0                    100                  200                     300            400

                                                            Values in Thousands

     AUGUST 2002
                                                                                                                               construction, finance and ongoing maintenance of the
                                                                                                                               facilities required to provide the operational services. This
                                                                                                                               model incorporates greater Risk Allocation and includes
There are a number of Australian and international
                                                                                                                               financing risks borne by the Private Sector.
precedent models for Private Sector participation in the
provision of services. Broadly, there are five categories of                                                                   DESIGN, BUILD, MAINTAIN, FINANCE AND OPERATE (DBMFO)
PPP model that should be considered:                                                                                           This model includes all of the features of the DBFO model.
•   Wholly Private Sector provider service models (e.g.,                                                                       It is still usually a mixed service model that includes the
    public transport franchise);                                                                                               provision of some supporting infrastructure services such
                                                                                                                               as general estate management and soft facilities
•   Mixed service models                                                                                                       management services, although the exact scope of such
•   Wholly privately financed models                                                                                           services may vary.

•   Mixed finance models                                                                                                       FRANCHISE MODEL
                                                                                                                               This model is typically used for transport type projects,
•   Publicly funded models
                                                                                                                               where a certain amount of revenue risk is borne by the
Some suggested PPP models are described below (note                                                                            Private Sector but where, equally, Government may need
that this list is not intended to be exhaustive):                                                                              to subsidise the services. The Franchise model is usually a
                                                                                                                               wholly Private Sector serviced and financed model.
This model is essentially publicly funded, (with the                                                                           REGULATED
possible exception of short term construction financing)                                                                       This model was used extensively as the premiere model
and is probably the simplest of the PPP models. It                                                                             for the power transmission and distribution industry in
includes the provision of the infrastructure asset via a                                                                       Australia. A regulated market is usually necessary for this
Design & Construct lump sum contract, coupled with a                                                                           type of asset class, due to the monopoly status of the
maintenance contract. This is also likely to be a mixed                                                                        service. This is usually a wholly Private Sector serviced
service model with the Public Sector retaining                                                                                 and financed model.
management of the core operations, resulting in a
significant level of interface between Public Sector and
Private Sector service delivery. An example of this model                                                                      Under the Market model, the Private Sector assumes all
is a simple serviced infrastructure arrangement that might                                                                     risks for the project including product pricing, supply and
be put in place for office accommodation.                                                                                      demand. One example is a concession provided by
                                                                                                                               Government to the Private Sector to exploit natural
DESIGN, BUILD, FINANCE AND OPERATE (DBFO)                                                                                      resources or to generate power supply into a spot market.
This option builds on the DBO model and includes greater                                                                       This is always a wholly Private Sector serviced and
risk transfer coupled with the provision of finance by the                                                                     financed model.
Private Sector (although this could also be structured as a
                                                                                                                               The following diagram illustrates the range of services that
mixed finance model). The DBFO is usually a mixed
                                                                                                                               may be provided in respect of a new prison facility,
service model with the Private Sector’s participation in
                                                                                                                               utilising some of the aforementioned PPP models.
service provision generally limited to the design,
                                                                                                                               Potential PPP Models

                                                           Service Requirements Identified
                                                                                                                                               Education & Training
                                                                      Estate Management

                                                                                                                                                                                         Custodial Services
                                                                                          Medical & Health
                                                  Security Systems

                                                                                                                                                                      Program Delivery
                                                                                                                               Work Programs

                                                                                                             Soft Facilities


                                 The arrows below illustrate how the various PPP models could
                                 encompass the service requirements identified:





                                                                                                                                                                                                                          AUGUST 2002
     The following are ‘cut-down’ examples of Output
     Specifications, designed to highlight the type of
     information that may be including within this document.
     Detailed examples are available from the IPT and from
     various online PPP resources.



        The Service Company will be required to provide Services relating to the treatment of waste water from the defined
        catchment area.


        The Service Company will be required to treat and dispose of all sewage sludge generated as a result of the
        proposals for the treatment of waste water derived from the defined catchment.


        When developing solutions for storm water overflows, the Service Company shall, at all times, develop river
        quality models and sewer hydraulic models to the satisfaction of environment standards.


        All equipment provided for measuring, testing, sampling or monitoring the volume, strength, quality or
        characteristics of influent, effluent, or sludge, or concentrations of odours, shall comply with applicable defined


        The Service Company will be required to take and test daily composite samples of the influent and effluent of each
        treatment plant. The Service Company will be responsible for ensuring that the adopted waste water sampling
        programme meets the requirements of the relevant water authorities.


        The Service Company will ensure that the accuracy of the flow monitoring equipment is checked by an
        independent party every three months for the first year of the Contract Period and annually thereafter. If an
        inaccuracy is found at an annual check, then checks will revert to a three-month interval for a period of no less
        than one year.

     AUGUST 2002


Project Co shall provide Car Parking Services, include:

•   the provision of car parking;

•   the management of the Facility car parks;

•   traffic control within the Site; and

•   the management of administrative procedures associated with the provision of the Car Parking Services.

Project Co shall provide the Car Parking Services:

•   in accordance with this Service Specification and defined Service Standards;

•   in accordance with core service operator’s reasonable requirements from time to time.

In providing the Car Parking Services, Project Co shall:

•   provide and maintain all facilities, equipment and signage necessary for the provision of Car Parking Services;

•   provide, maintain and replace as necessary access and egress equipment or facilities (mechanical or otherwise)
    required for the provision of the Car Parking Services, including barriers to the staff car parks;

•   ensure all equipment and barriers in the car park are fully operational at all times;

•   keep the entrances and exits and all internal roadways within the car parks clear at all times from vehicular or
    other obstructions;

•   ensure that all entrances and exits to the car parks are adequately controlled;

•   ensure that where a payment system is used for car parking, records are maintained

In providing Car Parking Services, Project Co shall:

•   provide and be responsible for traffic control procedures within the car park and across the Site to ensure free
    traffic flow and access to the Hospital and the Facility at all times;

•   ensure that entry to any “permit holder only” areas of the Car Park is restricted to authorised persons or permit

•   follow appropriate action and reporting procedures with regard to observed or reported instances of vehicle
    theft, theft of property from vehicles, damage or vandalism;

•   provide supervision and assistance to users of the car parks in relation to passenger set down, parking and
    traffic flow through the Site;

•   implement and carry out any car accordance with Southern Health policies; and

•   take reasonable steps to ensure that car drivers comply with traffic control measures on the Site.

Project Co shall ensure that appropriate provision is made for core services operator’s employee car parking (300

                                                                                                         AUGUST 2002

      Project Company shall:

      •   provide a scheduled and reactive Cleaning Service on a day to day basis to meet the requirements of
          Government in all Areas of the Site in accordance with this paragraph of this Service Level Specification and the
          Service Standards;

      •   ensure the routines and government processes in all Areas are not adversely affected by the Cleaning Service;

      •   undertake Specialist Cleans at no less than the frequencies indicated below:

          Theatres                    Quarterly
          Aseptic Suites              Weekly
          Wards                       Annually
          Laboratories                Annually By Arrangement

      •   comply with the standards laid down in:

          –   relevant Guidance Materials and any subsequent issues of this guidance in the cleaning of aseptic areas;

          –   safe working and the prevention of infection in clinical laboratories – model rules for staff and visitors;

      •   ensure Domestic Staff working in Clinical Areas receive training for working in such Clinical Areas;

      •   ensure safe working practices are followed in public areas, laboratories and corridors;

      •   ensure that meeting rooms are cleared of all function hardware and crockery and waste promptly and efficiently,
          and in any event prior to the commencement of the next meeting;

      •   liaise frequently with the relevant Government Employees to confirm Access Times to the meeting rooms and
          notice of meetings ending; and

      •   provide the Cleaning Service to the Areas during the Access Times set out below provided that Government may
          require Project Co to provide, in writing, more precise Access Times:


          Office Areas – Outside the hours of 9.00 a.m. and 5.00 p.m.

          Outpatient Areas – Outside the hours of 8.00 a.m. and 5.00 p.m.

          Theatres – Outside the hours of 8.00 a.m. and 5.00 p.m.

          Ward Areas – Outside the hours of 7.00pm and 7.00am

          Laboratories, Entrances and Toilets – Outside the hours of 9.00am and 5.00pm.

          Public Areas – At any time, provided that Project Co has a due regard to the operation of the Hospital

      Project Company shall provide a planned and ad-hoc Waste collection service in accordance with the Service
      Standards to this Service Level Specification.

      Collections shall be at a frequency such that refuse containers achieve no than more than [75]% capacity and, in any
      event, at least daily.

      Project Company shall collect Waste in accordance with Policies, the Waste Management Service Level Specification
      and the requirements of the Waste Regulating Authority.

      Project Company shall implement security procedures to ensure that Confidential Waste is collected and disposed of
      according to Policies.

     AUGUST 2002
Refuse storage areas, both internal and external shall be:

•   segregated in accordance with relevant procedures;

•   kept clean, free from loose litter, malodour, spillages and debris;

•   free from pests and vermin;

•   secure and with access restricted to authorised personnel only; and

•   stored to minimise the risk of fire.

Project Company shall establish an effective and user-friendly system to provide Medical Gas Services. Project Co
shall be responsible for the full provision of appropriate medical gases (both portable and piped) in all patient
treatment areas throughout the facility. Duties shall include, but not be limited, to:

•   maintaining appropriate safe stock levels in liaison with wards and departments;

•   ordering, receipt and storage;

•   the loading/unloading and exchange of cylinders at service points;

•   maintaining gas pressure records; and

•   collection of empty cylinders from Site(s) and transportation to central collection point.

Project Company shall be responsible for ensuring that only staff trained in the handling, storage and supply of
medical gases will undertake duties associated with them. Appropriate training records shall be available for
inspection by the Sponsor Representative.



A school design that will inspire all who use it day-to-day, and which will also make a positive statement to the
community. The design of the school must also meet all other requirements of this Output Specification in respect of
technical and operational performance, compliance with regulations, safety, and so forth.

Bidders are required to demonstrate that their designs for the school:

•   Maximise the potential of the site.

•   Locate new building on the site in a manner that will permit possible future extensions.

•   Create spaces, where appropriate, that combine functionality with an environment that will stimulate and
    inspire young people.

•   Make creative use of natural light and materials.

•   Embody the school’s vision statement.

•   Have imaginative design of social spaces, both internal and external.

•   Are sensitive to the local environment/context.

•   Are appropriate to accommodate listed buildings or conservation areas where applicable.

•   Allow for repair to existing buildings, if appropriate, in sympathetic materials.

•   Produce clarity – for example, the juxtaposition, physical design and planning logic of entrances, main
    circulation routes and key spaces should minimise the requirement for direction signage.

                                                                                                       AUGUST 2002
       •   Use materials and finishes chosen and detailed in a manner to avoid weather staining which would detract
           from the appearance of the building

       •   Are, with regard to building services, based on careful selection and location of components to achieve
           physical integration with the architectural and structural design.

       •   Maximise flexibility of space and usage capability. A method statement is required from bidders on the
           capability of premises to respond to change over time. In particular, account must be taken of changes
           resulting from small variations in pupil numbers, changes affecting dual use of facilities, curriculum changes
           (influencing, for example, services requirements and acoustic separation of spaces), new IT requirements,
           security techniques, and environmental performance.


       •   The entrance area for the school shall create an appropriate sense of arrival and welcome for pupils and
           visitors, and shall be of adequate size for peak use.

       •   Advisory: there shall be one supervised and clearly identified entry point to the buildings for visitors.

       •   Entry/exit points for pupils must be strictly controlled.

       •   The design of internal circulation spaces shall form part of an overall architectural concept and strategy, a
           hierarchy of spaces with a clear organisation and identity. These spaces must not be institutional in character
           and should be enlivened by views of activities and into rooms where appropriate.

       •   Corridors and circulation areas must comply with Fire Safety requirements (see School Premises Regulations
           and Constructional Standards).

       •   All structural engineering design must be to relevant Codes of Practice. It is the responsibility of bidders to
           ascertain required floor loadings for specialist areas.

       •   Noise of rain on certain roofing materials must be considered, and a solution to abate such noise

       •   Roof glazing must be provided with means to control solar gain and glare if appropriate, and safety
           arrangements incorporated for external access.

       •   Windows must comply with relevant directives on glazing and workplace regulations.

       •   All windows must be safe in closed or open positions, and must combat solar gain and glare at all times.

       •   Where significant areas of external glazing are exposed to direct sun, Bidders shall provide peak summertime
           temperature analysis. Where projected temperatures are excessive, steps shall be taken to mitigate them.

       •   Large windows with low sills providing vistas to the outside are desirable.

       •   All doors in the school buildings must be suitable for their intended purpose, and be sized to meet the
           anticipated movements within the school.

       •   Locations and requirements for doors for building compartmentation must be agreed with the Fire Authority.
           Fire standards must be in accordance with relevant School Premises Regulations and Constructional

       •   Doors must be designed to allow disabled access where appropriate, including access for motorised electric
           wheelchairs (new facilities only).

       •   All doors must have vision panels where appropriate in new-build situations.

       •   Separate doors are required for deliveries where use of general access routes would create excessive
           disruption to the operation of the school.

     AUGUST 2002
•   Finishes, carpets, etc. for new facilities, and repairs to existing finishes, must be chosen in line with the
    Council’s Environmental Policy (available in the Data Room), and must meet the environmental standards for
    computer specialist use areas.

•   Design and choice of finishes must be used to control noise, particularly adjacent to rooms where ambient levels
    need to be minimised (music, exam rooms).

•   Suitable colour schemes and textures must be provided to assist people with visual or hearing impairments.

•   Suitable barrier matting must be provided and maintained at external entrances.

•   In some areas, particularly robust finishes are required to withstand heavy usage.

•   Pipework, cables and equipment should be easily accessible for maintenance but, wherever possible, hidden
    from view and made tamper-proof.


A school design that will facilitate the successful delivery of the curriculum, and meet all other educational and non-
educational requirements as set out in the Output Specification.

Requirements with respect to:

–   teaching space requirements;

–   non-teaching requirements, including sanitary, medical, storage and preparation areas;

–   administrative accommodation;

–   community facilities; and

–   external space.

Room data sheets are not provided for existing accommodation. If bidders intend to retain existing spaces, output
requirements for environmental and other performance must nevertheless be met.

Bidders’ attention should be drawn to detail which gives guidance on school accommodation.

Spatial relationships must be as required by the Sponsoring Agency. Spaces must perform as required by room data
sheets. Bidders are expected to pay particular attention to the need for different types of storage in the school,
which should be well integrated and contribute to the good performance of the building. Room data sheets refer to
the particular requirements per space.

Teaching rooms should normally be of square or rectangular plan (of proportion approximately 4:5) unless there are
special reasons for designing otherwise.

Bidders must assess peak loading in circulation spaces and functional relationships within the facility in order to
avoid overcrowding. This assessment must take account of safety of occupants, use patterns, functional
relationships between different parts of the building, and location of staff and pupils in relation to toilet facilities.

                                                                                                              AUGUST 2002


      The Private Sector will be required to deliver the required outcomes for the project by meeting the commercial
      terms outlined and in the specified timeframes. In doing so, the Private Sector will be required to:

      •   transfer the appropriate risks from Government to the Private Sector.

      •   achieve safety in design that incorporates the requirements of the users of the infrastructure.

      •   design and construct the infrastructure to meet defined environmental requirements

      •   incorporate innovative practices in delivery, design and management.

      •   ensure that the infrastructure is handed over in the specified condition at the completion of the period.

      •   maintain effective management systems for Occupational Health Safety and Welfare; and

      •   comply with the “National Code of Practice for the Construction Industry” and its “Implementation Guidelines”,
          published by the Australian Procurement and Construction Council Inc.


      The Private Sector will be responsible for the total infrastructure. Responsibilities will include, but not be limited to,
      the following activities:

      •   design and construction;

      •   ensuring the infrastructure is fit for its intended purpose;

      •   environmental, safety, functional and technical requirements;

      •   statutory approvals;

      •   arrangements to ensure minimal disruption to local and through traffic;

      •   maintenance of the existing capacity of all arterial and local roads;

      •   preparation of plans to ensure delivery of the project requirements;

      •   implementation of marketing and community involvement plans

      •   repair of all defects for the concession period;

      •   operation for the concession period;

      •   maintenance for the concession period; and

      •   hand over in a condition consistent with the specified requirements at the conclusion of the concession period.

      In particular, the Private Sector is to undertake the following tasks:

      •   development of a detailed design that complies with the environmental, safety and technical requirements;

      •   provision of all temporary, permanent and associated road works;

      •   provision of a strategy to ensure that traffic flow suffers minimal disruption;

      •   ensure that the completed structure complies with the Output Specifications;

      •   development of a strategy that ensures the safety of the users and the public is maintained;

      •   development of incident response protocols;

      •   development of a strategy to ensure a positive relationship with stakeholders and the local community
          throughout the construction and operation phases of the infrastructure;

      •   develop a maintenance strategy which meets the Output Specification;

     AUGUST 2002
•   develop a environmental management system which meets the Output Specification;

•   develop a project schedule which allows for commissioning and opening of the infrastructure at the earliest

•   develop a project-specific Occupational, Health and Safety Management System in accordance with relevant
    acts and regulations;

•   comply with all appropriate industrial relations industry awards; and

•   provide and maintain appropriate insurances.

                                                                                                      AUGUST 2002


  Department of State Development
  PO Box 168

  Phone: (07) 3224 2971
  Fax: (07) 3224 2978

Description: Example Ofa Project Business Case document sample