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Value for money savings for DBFO projects and PSC explanation
This information was supplied to the Environment and Transport Regional Affairs Committee - Transport Sub-Committee on 16th July 1998 as supplementary information.
| Project | Public Sector Comparator (See Note 1)(£m) | Winning DBFO Bid(£m) | Value for Money(£m) | Percentage Saving |
|---|---|---|---|---|
| M1-A1 | 344 | 232 | 112 | 32.6% |
| A1(M) | 204 | 154 | 50 | 24.5% |
| A419/A417 | 123 | 112 | 11 | 8.9 |
| A69 | 57 | 62 | (-5) | +8.7% |
| M40 | 276 | 182 | 94 | 34.1% |
| A19 | 177 | 136 | 41 | 23.3% |
| A50/A564 | 77 | 67 | 10 | 13.0% |
| A30/A35 | 149 | 148 | 1 | 0.7% |
| A1DD | 245 | 203 | 42 | 17.14% |
| A249 | 98 | 100 | (-2) | +2.04% |
| Total | 1750 | 1396 | 354 | 20.23% |
The result of the comparison between the public sector comparator and the winning DBFO bid were calculated using an 8 per cent real discount rate, which was the Treasury's recommended rate for assessing road projects when these contracts were awarded in 1996. The Highways Agency undertook sensitivity tests to assess the impact of different discount rates. The effect of using a 6 per cent real discount rate (which then became the recommended rate for assessing road projects), reduces the total saving to about £229 million (14.4 per cent). The advice in Her Majesty's Treasury (HMT) book entitled "Appraisal and Evaluation in Central Government" (The Green Book) has now been revised and the discount rate reduced to 3.5%.
Note 1: A Public Sector Comparator (PSC) is a benchmark against which value for money, in undertaking projects under the PFI, are assessed. The PSCs used by, for example the Highways Agency, are cost estimates for a notional project that has the same scope, outputs and timing as the PFI project. Costs are compared over the whole life of the contract and therefore include the operational/maintenance costs as well as the construction and financing costs. The PSC differs from the PFI project in that it is assumed to be undertaken under a traditional procurement route, resulting in greater risk being retained by the public sector, the costs of which are estimated in the PSC.
