6.8 A key principle of PPP is that there should be a single unitary operating payment. The indexation formula forms an important part of the payment mechanism.
6.9 A proportion of the cost base of the project company will initially be determined by the funds raised for the project from the private sector. Typically, such debt is fixed in nominal terms and repayment to financiers is not indexed. Hence its value in real terms will fall over time. To reflect this, rather than apply RPI to the unitary payment, RPI - x% or RPI ÷ x may be appropriate. Participants may be invited to bid values for x. Other formulae may also be considered. It is common for NHS projects to have fully indexed payment mechanisms/unitary payments.
6.10 The structure of indexation is also relevant to the accounting treatment of schemes. A typical PPP contract will have RPI indexation as a proxy for inflation. This is a transfer of pricing risk as the private sector takes the risk of differential inflation. The presence of RPI indexation is seen by some as an important factor in determining the accounting treatment of schemes. If indices are mixed and matched to allow the private sector to gain cost recovery, it is more likely to reflect a financing arrangement rather than a contract for the provision of services. The accounting treatment of schemes is discussed in Chapter 4 in this Section of the guidance.