1.1 The Internal Rate of Return (IRR) is most commonly used in PFI Contracts as a measure of the rate of return expected to be earned by private sector capital in the project, and is thus the basis for:
• calculation of the Unitary Charge at Financial Close;
• recalculation of the Unitary Charge to take account of capital expenditure resulting from Compensation Events, Authority changes in Service and Qualifying Changes in Law, where this expenditure is being financed by the Contractor (cf. Section 5.2.3.5 of SoPC4);
• calculation of compensation for Authority Default / Voluntary Termination (cf. Sections 21.1.3 / 21.5 of SoPC4);
• calculation of the Estimated Fair Value of the Contract, on Contractor Default (cf. Section 21.2.9 of SoPC4); and
• calculation of the Refinancing Gain to be shared with the Authority (cf. Section 34 of SoPC4).
1.1 It is therefore fundamental to the negotiations, and Authorities should take care to understand thoroughly the definitions, methodology for calculation and correct usage of IRRs in PFI Contracts.
1.1 Capitalised terms used in this Guidance Note are as defined in Standardisation of PFI Contracts Version 4 ("SoPC4").