• Inflation indexation within the Unitary Charge payment mechanism impacts on the assessment of value for money and affordability. • Financial instruments which hedge inflation risks, whether through the derivatives or bond markets, raise important value-for-money issues for an Authority. |
Unlike the position with interest-rate risk (cf. §2.2), Authorities are generally willing to assume some level of inflation risk in a PFI Contract, partly to balance the mixture of their own funding resources, and partly because passing all inflation risks to the Contractor is unlikely to be value for money.
However there are a number of complex and inter-related issues to be considered in this respect, namely:
- proportion of the Unitary Charge to be indexed (cf. §3.2)
- measures of inflation (cf. §3.3)
- inflation assumptions in bid evaluation (cf. §3.4)
- inflation-indexed financing or hedging by the Contractor (cf. §3.5)
- interaction between inflation swaps and interest-rate swaps (cf. §3.6)