4.2  Preparing the Raw PSC

The Raw PSC includes the capital and operating costs associated with delivering the output specification over a defined period. Preparing the Raw PSC is the first step in going from the reference project to a spreadsheet model forecasting the costs and expected revenues. The Raw PSC is an estimate of the cost to government of delivering the reference project before taking into account adjustments for competitive neutrality and risk.

Preparing the Raw PSC is about preparing financial forecasts. Points to note include:

•  Only financial costs and revenues are included. The PSC is intended as a quantitative financial benchmark against which to assess bids. Therefore, only financial costs and revenues should be included in the PSC. Economic and cost-benefit analysis form part of the investment rationale for the project and will have been considered already at the investment decision stage.

•  The PSC is a cash flow forecast. The PSC should only include cash inflows and outgoings, not accrual items, such as depreciation and other accounting concepts. This is because the financial forecasts in the PSC will be used for project appraisal by applying the discounted cash flow (DCF) method.

The focus on project cash flows rather than accrual and other accounting concepts has caused some confusion,. Some of the main rules to follow in this respect are:

Fixed assets. The PSC should include the cost of fixed assets when purchased. Depreciation should not be included in the PSC.

Maintenance. Actual cash expenditure on maintenance should be included in the PSC. Note that the whole-of-life maintenance cost estimates are a critical component of the Raw PSC. Appropriate technical advisers must be engaged to advise on suitable costs and phasing of works over the proposed contract term.

•  Exclude risks and contingencies from the Raw PSC. Most items in the financial forecast cannot be predicted with certainty. Because risks are addressed separately in a later step in the process, allowances for contingencies and cost overruns should not be included in the Raw PSC.

All forecasts in the Raw PSC should be prepared on the basis of 'everything going well'. Risks and contingencies are considered in Transferred Risk and Retained Risk adjustments to the Raw PSC.

While the preference is to split out all contingency amounts from the raw costs and include them in the risk valuation, there will be circumstances where the Raw PSC cost estimates will include some risk contingency. In this instance, it is important to recognise what contingency amounts have been included in the Raw PSC and to ensure they are not double counted by being included in the risk component of the PSC.