3.5.1 Overview

In the situation where the Public Sector retains some Systematic Risk then the appropriate Discount Rate for evaluating bids will differ from the Discount Rate applied to the cash flows of the PSC (assuming the PSC rate is based on the Public Sector retaining all, or predominantly all Systematic Risks). In addition, the PPP Discount Rate will differ from the Project Rate, which assumes all Systematic Risk lies with the Private Sector.

On this basis, the more Systematic Risk that is transferred to the Private Sector, the higher the Discount Rate should be to evaluate Private Sector bids. Therefore, if little, or no Systematic Risk is transferred (i.e. risk remaining with the Public Sector) then the appropriate Discount Rate is correspondingly lower.

Figure 1 indicates how different levels of risk transfer may be categorised and the PPP Discount Rate derived for PPP decisions. Practitioners will need to review all available information to determine the extent of risk transfer (low, medium, or high). By necessity this will involve the use of judgement and an understanding of the commercial dynamics of the project. Practitioners should ensure that the reasoning behind all judgments is clearly documented.

Figure 1 - Estimating Systematic Risk Transfer Using Categories

The following sections provide guidance as to the type of factors practitioners should consider, when exercising judgement as to the extent of risk transfer and the importance of various risks. In some areas, both qualitative and quantitative approaches are provided. It should be noted that the quantitative approaches are intended to provide an indication of how practitioners should analyse the relative importance of particular elements. It is not possible in general guidance such as this to pre-determine a set of "rules" that can be applied from project to project. Therefore, practitioners should ensure that quantitative approaches are adapted, as appropriate for the circumstances and that they be considered along with relevant qualitative factors. These factors should be used in conjunction with the analysis of Systematic Risk contained in Appendix B.