3.3.2 Determining an appropriate Asset Beta
Selection of an appropriate Asset Beta is an important step in determining the Project Rate. This determination is essentially a matter of judgement. In this context it is worth noting that Asset Betas are not reflective of, or characterised by, physical (or intangible) assets. Rather, they reflect the variability of returns associated with the use to which those assets are put.
Correspondingly, to assist practitioners in identifying an appropriate Asset Beta, Table 2 provides an Asset Beta range representative of the risk characteristics of typical PPP availability based social infrastructure contracts ie projects with net cash outflows for government. This table may be updated from time to time.
The Asset Beta range has not been derived from an examination of private sector companies operating in the relevant industry. Instead the range has been derived from companies that operate in the PPP space and therefore exposed to risks as similar as possible to the PPP cashflows being evaluated, noting that such companies have diverse businesses which also include non PPP activities. This range has also been inferred from relevant and recently concluded PPP contracts. It is recognised that the nature of the PPP contract may alter the Systematic Risk of a private provider relative to purely Private Sector activity. Table 2 is relevant to procurement analysis, which is the main focus of this Volume 5.
Table 2: Procurement Decision - Asset Beta range
| Category | Description and risk characteristics | Examples of project category | Asset Beta range | Risk Premium range |
| Availability-based social infrastructure projects | Key Systematic Risks borne by the PPP relate to inflation risks, market downturn risks and demand risk where it has a material impact e.g. variable demand impacting upon FM and replacement lifecycle costs | • Affordable & student housing • Retirement & nursing homes • Healthcare • Education • Prison facilities • Renewable energy • Technology • Utilities • Telecomms • Roads • Public Transport | 0.3 - 0.8 | 1.8 - 4.8 |
While the range in Table 2 is a guide, each Project should be assessed on a case by case basis to ensure that an appropriate Asset Beta is selected. It is noted that the level of Asset Beta is relative to the level of Systematic Risk for each project. Care needs to be exercised in the selection of an Asset Beta to ensure that a project's risks are correctly assessed. A detailed analysis of the project and its particular characteristics (eg size, complexity, the range and mix of services provided etc) may be required to understand the Systematic Risks inherent in the procurement's cash flows. An example of how similar assets can be categorised differently is discussed below.
| Example: Hospital projects This example concerns projects of the same asset type, a hospital, but with different outputs purchased by government. A hospital project might fit appropriately into the 'very low' Asset Beta range (0.3) if the emphasis is in providing accommodation and facility services. On the other hand, if the project included the provision of health services, it may not fall into that category and an assessment will need to be made of which end of the Asset Beta range the project falls within. |
As an alternative to using the range provided in Table 2 bespoke asset betas can be calculated for specific projects based on market data. This may be appropriate for projects with unique systematic risk profiles.