Interest-rate and inflation risks require an Authority to make important value-for-money judgements prior to finalising the ITN and, subsequently, prior to appointment of preferred bidder54 and eventual PFI Contract signature. Thorough financial modelling and analysis over a range of interest-rate and inflation risk scenarios and risk management/mitigation options is needed, with the help of suitable professional advisers, to fully inform an Authority about its best course of action, taking all risks and cost:benefit effects into account. It is important for Authorities to remember, in directing their advisers and in considering their recommendations, that whilst market precedents may be helpful indicators of what may be possible, they do not necessarily represent the best value-for-money solution for their particular project. Market conditions and each project's circumstances are unique. Furthermore, the depth and dynamic nature of the financial markets means that derivative instruments (such as interest-rate swaps) procured under competitive conditions should enable Contractors to harness the considerable potential of these markets to deliver innovation and to match Authority needs with good value for money.
Hedging products are sophisticated financial instruments. Even though they may be procured by the Contractor, they will generally involve issues of cost and risk-together impacting on value for money-for the Authority. Therefore, Authorities should require their advisers:
- to explain clearly the implications of all such instruments being proposed by Contractors, and
- to provide support where Authorities are exercising their rights of approval over key elements of the agreed hedging strategies.
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54 And in relation to a funding competition for senior debt, if to be implemented by the preferred bidder.