2.8 Projects falling into more than one Systematic Risk Category

Another factor to be considered is whether some projects could include two, or more distinctly different sub-components. For instance, a hospital PPP may require a private operator to construct the hospital facility and operate a car park. In these circumstances, it may be appropriate to use more than one Discount Rate. These two projects are quite different with potentially different levels of Systematic Risk.

Where the components are material either a separate Discount Rate should be developed for each sub-component, or an appropriately blended rate should be developed.

Where the sub-components of a project comprise of more than 10 per cent of the overall value of the project, by capital value and/or the NPC of the operating costs and/or by the split of the Service Fee payable to the private sector, the Discount Rate should be adjusted to reflect a blended rate.

For projects in which the cash flows can be separated into individual profiles, with distinct cash flows and risks, the use of a separate rate, applicable to each set of cash flows, should be adopted. This will only be practical in cases where the bidder's cash flows are capable of being separated into distinct streams. In cases where this is possible the Discount Rate should be developed and Systematic Risk assessed for each individual cash flow.

In practice it may be more difficult separating cash flows and individually considering risks. Where this is the case a blended rate will be required. A weighted average of the Discount Rate should be developed based upon the overall contribution of each sub-component to overall Systematic Risks. A range of measures should be used to assess the contribution of each sub-component, including the level of capital and operating costs, management arrangements, etc.