Assessing public sector projects

Much of the book has been welcomed: it is clear and focuses on long-term assessment and non-financial benefits, and there is sensible consultation.

But players in the PFI market have been nervous of its arrival. The key issue is the proposed reduction in the rate at which costs and benefits are discounted to a net present value, from 6% to 3.5%. Because the PFI defers costs, a lower rate will increase the net present cost of PFI procurement, potentially making it an unattractive option.

The rationale for the reduction is greater transparency. The 6% rate bundled the time value of receiving benefits now rather than later with risk and uncertainty factors. The 3.5% discount rate addresses solely time value, leaving risk and uncertainty to be considered in the assessment of options for project delivery.

On those points the Treasury has published detailed guidance covering so called ‘optimism bias’, the tendency of the public sector to underestimate costs and overestimate benefits. This will inject more rigour into the production of public sector comparators (PSCs) against which PFI projects are compared and may raise PSCs, favouring the PFI alternative.

But the effect is likely to vary, with those already applying rigorous PSC methods finding little reason to change.

PFI players therefore face challenges as the policy is worked through, with the real possibility that PFI’s relative value for money may improve in some sectors but worsen in others.

The industry needs to respond in two ways. First, by continuing to offer innovative, competitive bids that provide good long-term value, but also by contributing to the work that departments now need to do to improve consistency and transparency in the preparation of PSCs.

  • Charles Lloyd leads PwC’s PPP and PFI corporate finance practice in the UK.

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