Taking account of risk in PPPs with net cash outflows for the State

• In discounting the PSC and bid cashflows, we price the project specific risks into the cashflows.

• In additional to project specific risks, we also need to take account of market-wide risks that affect all asset classes and cannot be reduced by diversification (i.e. systematic risks).

• Systematic risks expose the PPP cash flows to variability in returns. Bidders will price this variability into their bids.

• This variability in return is compensated through a higher discount rate (reflective of the level of systemic risk borne).