F44 Residual value risk is the risk that the actual residual value of the property at the end of the contract will be different from that expected. This risk is more significant the shorter the PFI contract is in relation to the useful economic life of the property. Where it is significant, residual value risk will normally give clear evidence of who should record an asset of the property. In part, residual value risk stems directly from the economic conditions of the market for the property, ie the rise or fall of prices relevant to the property. The price aspects of residual value risk cannot be reduced or increased by the contract. The contract can only influence those aspects of residual value risk relating to the condition of the property at the end of the contract.
F45 Where this risk is significant, who bears it will depend on the arrangements at the end of the contract. For example, the purchaser will bear residual value risk (providing evidence that the property is its asset) where:
(a) it will purchase the property for a substantially fixed or nominal amount at the end of the contract;
(b) the property will be transferred to a new operator, selected by the purchaser, for a substantially fixed or nominal amount; or
(c) payments over the term of the PFI contract are sufficiently large for the operator not to rely on an uncertain residual value for its return.
F46 Where the purchaser has an option to purchase the property or, alternatively, an option to 'walk' and leave the property with the operator, the practical effect of the option should be carefully analysed. In particular, where there is no genuine possibility that a purchase option will not be exercised (or, alternatively, that a 'walk' option will be exercised), the option will not transfer residual value risk to the operator.
F47 The significance of a minimal payment for the residual interest at the end of the contract depends on other features of the contract. If the property has a significant remaining useful economic life, such minimal payment will be evidence, in the absence of evidence to the contrary, that the purchaser paid for the property over the term of the PFI contract. This in turn is evidence that the property was an asset of the purchaser throughout.
F48 Conversely, the operator will bear residual value risk (providing evidence that the property is its asset) where:
(a) it will retain the property at the end of the PFI contract; or
(b) the property will be transferred to the purchaser or another operator at the prevailing market price.