Assessing Allocation
Factor | Risk Allocation |
A Payment Mechanism with a single inflation index, such as CPI, increases the risk for the Project Company that individual underlying costs will be materially different to the cost indexation allowed in the Payment Mechanism. The greater the mismatch between the basket of goods on which CPI is based and the underlying indexing cost base, the greater the risk that CPI will inadequately compensate the Project Company for specific inflationary pressure. | More likely to be Project Company risk |
Reviewable services regimes which restrict increases in costs transfer more inflation risk than those that allow full cost recovery. For example, if the Project Company must bear the first, say, 10 per cent of any cost increase, transfer more risk than those which all additional costs to be recovered. | More likely to be Project Company risk |
Non-benchmarked services will be reliant only on the inflation adjustment in the overall Service Fee to compensate for any movements in underlying costs. Payment Mechanisms with fewer categories of benchmarked, or reviewable services transfer more risk than those with more categories of costs subject to future adjustment. For non benchmarked services - the Project Company bears the risk that the actual real price increases over the Concession Period is greater than that estimated for the build up of the Service Payment. | More benchmarked services / more frequent benchmarking - more likely to be government risk Less benchmarked services / less frequent benchmarking - more likely to be Project Company risk |
PPP arrangements with fixed price construction contracts transfer all construction inflation risk to the private sector. Any unanticipated inflation, often from bid submission, will be transferred to the Project Company. | More likely to be Project Company risk |
Where a Project Company has a high proportion of its Service Fee unindexed then it will bear more risk of unexpected price movements than those with more of its Service Fee subject to indexation. | More likely to be Project Company risk |