VfM Assessment Guidance Workshop Session 3 Risk, Optimism Bias in VFM assessment

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VfM Assessment Guidance WorkshopSession 3
Risk, Optimism Bias in VFM assessment

• Ben King
• SE Financial Partnerships Unit

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Risk Uplifts in PPP Appraisals

• Rationale
• Need to allocate responsibility for risk between
  public / private sector
• Elements
• Internally managed risks (in house)
• Contractual risks
• Quantified risks in PSC / PFI model
• Balance Sheet

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Why Risk needs consideration

• for risk management (best practice)
• impact on affordability
• impact on VfM
• impact Accounting Treatment
• OVERALL AIM allocation of risks in PPP to party
  best equipped to manage / price etc

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Risk identification / evaluation process
Step
What to do?
How to do it?
Output

• List all risks associated with the project

• Use existing experience
• Risk workshop

• Risk matrix

• Categorise impact and probability (high, medium,
  low)

• Risk workshop
• Technical advice

• List all risks associated with the project

• Risk adjustment

• Use existing software to model most likely risk
  outcome

• Use experienced modeller

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Optimism Bias

• What is it?
• Mott MacDonald study
• Pre and Post FBC Optimism
• Relationship to risk workshop
• DH work 30 - 40 _at_ OBC

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Optimism Bias in practice

• Calculated for PSC and PPP options
• Include in cost base / affordability estimate
• No set template for non works Optimism Bias
• Avoid double counting with risk uplift and
  contingencies
• Review calculation examples

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Risk and new VfM Guidance

• At Programme and Project Level stages, can use OB
  rather than bespoke risk uplift
• OB reduces gt quantified risk firms up
• Pre and Post FBC Optimism Bias
• Continued risk identification and management

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Supporting Information from PFCU

• PPP risk matrix
• PSC risk matrix
• Internal risk Management register
• Optimism Bias guidance
• Appendix in VfM guidance
• Expanding public sector business cases

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