Guidance on indexation of the Unitary Charge is included in Section 15.2 of SoPC4 and the HM Treasury guidance on indexation.20
Suggested drafting has also been provided in Part II of this Module for the indexation of the Unitary Charge.
This drafting reflects the following principles:
• The Base Payment should typically be partially indexed as it covers some underlying costs which are fixed in nominal terms (principally debt service obligations) and other costs which will vary in nominal terms over the course of the Contract; and
• Other components of the Unitary Charge should be fully indexed to ensure their real value is maintained throughout the Contract.
Section 15.2.4 of SoPC4 addresses the issue of which index to apply. Given the high value of operating costs and their potential for change in the waste sector, consideration should be given to the use of a weighted basket of indices (subject to the considerations set out in SoPC4). This exposes the Authority to greater uncertainty in relation to the real value of the Unitary Charge but can be a useful alternative to benchmarking and market testing arrangements (in this regard see Section 3.3). WIDP is aware that the following indices have been used in signed waste contracts:
AEI
The Average Earnings Index (AEI) is based on information from Office of National (ONS) Statistics' Monthly Wages and Salary Survey (MWSS). This is published in Labour Market Trends by the ONS.
DFI
The Derv Fuel Index (DFI) is published online by the Building Cost Information Service (BCIS).
PRVI
The Plant and Road Vehicles Index (PRVI) is published online by the BCIS.
Baxter
The Baxter Indices are published online by the BCIS.
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20 "Interest rate & inflation risks in PFI contracts", HM Treasury, May 2006 available at: http://www.hm-treasury.gov.uk./media/D/0/pfi hedging120506.pdf