Type of risk | Allocation | Comments |
Finance |
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17 Interest rate changes increase Defence Management's costs. | Defence Management pays interest on the loans it has taken to finance the construction of the new facilities. In order to limit its exposure to the risk of increases in its financing charges due to movements in interest rates, it has entered into interest swap deals which fix the interest rates that it will pay. | |
18 Changes in the tax regime increase Defence Management's costs. | Defence Management will meet any extra costs arising itself. However it can seek to increase its fee accordingly for market-tested services at each market testing. | |
19 Inflation increases Defence Management's costs. | Shared | Defence Management's fee is subject to annual indexation by a pre-agreed formula. This formula is based on a mix of indexation by the Retail Price Index and Average Earnings Index and of no indexation at all, with the mix varying depending on whether the fee is for a student place, residential accommodation or married quarters. If Defence Management's costs increase by more than the increase to the PFI fee under the above indexation, it will meet the excess (until, for the market-tested services, the next point at which it can reset its fee levels in line with market rates - see risk 8). |