1.146 In computing net present values the Spreadsheet can be used by Procuring Authorities in two different ways. On the one hand, all input variables can be determined and the level of the Unitary Charge over the Contract Period can then be computed. This cash flow can then be discounted at the public sector discount rate (i.e. 3.5% if the cash flows are stated in real terms or 3.5% plus the GDP deflator if they are stated in nominal terms) and adjusted for items that impact on VfM but which are not directly captured in the Unitary Charge (for example, externalities). This represents the net present value of the project under the PFI Option, but is not a cash model and therefore should not be used to calculate affordability.
1.147 Alternatively, the Spreadsheet can be used to identify the level of equity return corresponding to the Unitary Charge payable, such that the net present value of the PFI Option to equal the net present value of the Conventional Procurement Option. This assumes that, other than the return on equity, all other variables in the Spreadsheet (for example, the cost of senior debt) remain unchanged.
1.148 In effect, this second approach identifies the internal rate of return ("IRR") for equity that makes Procuring Authorities financially indifferent about the procurement method they choose and gives an upper boundary for the maximum possible return achievable whilst maintaining indifference. Through this approach, Procuring Authorities are able to compare the equity IRR required to make their particular project VfM with typical equity IRRs being achieved in other broadly similar projects. This should enable Procuring Authorities to draw conclusions as to whether the equity IRR likely to be available from their project, should the PFI Option be pursued, will be sufficient to attract and secure potential PFI partners without the Procuring Authority having to increase the Unitary Charge.
1.149 A large number of PFI projects have now been completed and Departments should be well placed to provide Procuring Authorities with credible assumptions in relation to the level of equity IRRs currently being demanded and these assumptions should now be based on a reasonable sample of different-sized projects. Other sources of relevant information are available to Procuring Authorities and these include Infrastructure UK, the 4Ps (particularly for local authority projects), the professional financial advisory firms, HM Treasury and even PFI sponsors themselves.