2.6 PPP Created Systematic Risk

It is possible that Systematic Risk may be created through the use of a PPP structure. Intuitively any such risk should not be reflected in the adjustment to the Discount Rate, this will need to be a pricing disadvantage that the private sector needs to address in other components of its bid, such as better risk management.

However, it is unlikely that any created risks will be material. In fact the presence of private sector finance may act to mitigate the impact of Systematic Risk. The additional due diligence and structuring under a PPP project may create structures less rather than more susceptible to Systematic Risks. For example, the use of construction bonds, liquidated damages, retentions, close monitoring and detailed scrutiny of the construction price, mitigates against the potentially negative consequences of a down-turn in the market leading to contractor failure.

Certain financial structures do create additional Systematic Risks. For example, CPI Bonds normally require a Payment Mechanism that transfers less inflation risk than Payment Mechanisms structured around nominal debt. This issue is addressed in Appendix A which sets out the approach for adjusting the PPP Discount Rate for different payment structures.