Term

Definition

Asset Beta

A measure of the Systematic Risk of an asset, which reflects the degree to which asset returns are expected to vary with returns of the market as a whole.

Beta

A measure of the variability of returns against the market as a whole which can be used for equity, firms or groups of assets. However, for the purposes of this Technical Note, beta is used interchangeably with Asset Beta.

Capital Asset Pricing Model (CAPM)

An economic model for valuing stocks by relating Systematic Risk and expected return. Based on the idea that investors demand additional expected return (called the risk premium) if asked to accept additional risk.

CPI Bonds

A form of debt instrument in which the coupon is comprised of a real payment and an adjustment for CPI.  This type of debt instrument protects investor's real returns.

Design and Construction Contract

A relatively common form of construction contract in which a contractor provides a fixed price, in response to a project brief, for a construction project.  The contractor normally bears most risks, including price and timing, related to the delivery of assets.

Discount Rate

The rate used to calculate the present value of future cash flows.

Discounted Cash Flow (DCF) Analysis

A general term for analysis which discounts a stream of future cash flows in order to calculate a net present value.

Diversifiable Risk

Risk that is specific to an asset that may be reduced, or even eliminated by the use of Diversification.

Diversification

Investment in a range of assets with the aim of reducing the risk of the total portfolio, ie, gains from some investments offset the losses from other investments.

Diversified Portfolio

A portfolio that has achieved a reduction in Diversifiable Risk by investing in a range of assets.

Equity Beta

The Asset Beta adjusted to reflect the capital structure of the entity.

Expected Value

The Expected Value for a cash flow item is the probability weighted average of all potential outcomes for that item.

Financing Decision

Having made the decision that an investment is a worthwhile investment, the decision as to the best VFM procurement route. In the context of this Guidance the decision is between a traditional public sector delivery and a PPP.

Investment Decision

An economic decision based on society's preferences as to which projects should proceed. The Investment Decision decides if an investment is worth making and takes into account alternative uses of government spending.

Net Present Cost (NPC)

The equivalent cost at a given time of a stream of future net cash outlays (calculated by discounting the actual values at the appropriate Discount Rate).

Net Present Value (NPV)

The equivalent value at a given time of a stream of future net cash inflows (calculated by discounting the actual values at the appropriate Discount Rate).

Net Revenue Project

A project where the Public Sector receives net revenue from the delivery of services to the community.  E.g. construction of road or bridge by the public sector where users will be charged a toll for use of the asset.  This toll covers all capital and operating costs of the public sector in delivering the infrastructure related services and results in no net cash outlay by the Public Sector over the life of the project.

Non-Systematic Risk

See Diversifiable risk

Payment Mechanism

The schedule to the Project Agreement that sets out the payment arrangements under a PPP contract between public and private sector.  This schedule normally includes, detailed proposals about the timing of payments and the methodology for varying payments over time, such as in line with inflation.

Project Agreement

The principal agreement in a PPP contract governing the contractual arrangements between government and the private sector operator of the infrastructure and provider of services. The Project Agreement establishes the risk transfer for the project.

Project Rate

The Project Rate represents the required return from any project in which all Systematic Risk lies with the private sector.  The Project Rate serves as the basis for the determination of the appropriate Discount Rate for specific projects (irrespective of any risk sharing).

PPP Project Documents

All of the documents governing a PPP arrangement including the Project Agreement and associated schedules (such as the Payment Mechanism), services specification and output specification.

Public Private Partnership (PPP)

Public Private Partnership - arrangement where the Public Sector enters into a contract with the private sector to deliver public infrastructure based services where significant upfront capital investment in assets is required.

PPP Discount Rate

The PPP Discount Rate is the Risk-free Rate plus that portion of the Systematic Risk Premium transferred to the private sector as compensation for the Systematic Risk borne by them.

Public Sector Comparator (PSC)

A benchmark against which VFM of private sector bids is assessed.  It is typically a cost estimate based on the assumption that assets are acquired by the Public Sector through conventional funding and that the procurer retains significant managerial responsibility and exposure to risk.

PSC Discount Rate

The PSC Discount Rate is normally the Risk-free Rate.

Project Specific Risk

See Diversifiable Risk.

Risk Free Rate

The Risk Free Rate is the return on capital that investors demand on riskless investments (that is, those that yield a constant return regardless of what is happening in the economy), and the accepted estimate for this is the long term Public Sector bond rate.

For the purposes of this guidance a nominal Risk Free Rate is used to determine the PSC Discount Rate and the PPP Discount Rate.  This rate should be developed at the state level as described in Section 5.

Reference Project

The assumed structure under which the PSC will be delivered.  This includes the method of delivering the design and construction phase and of delivering the whole of life services.  This might be 'unbundled' such as separate design and construction, or bundled, such as through the use of a Design & Construction contract.  The Reference Project makes key assumptions about the quality of the deliverables and outputs under the PSC.  The PSC represents the 'costed' Reference Project.

Service Fee

The amount payable by government to the private sector under a PPP arrangement.  This is governed by the Project Agreement and the Payment Mechanism.  This is normally a periodic payment (typically monthly or quarterly) payable following commercial acceptance (when the asset is in a condition that is acceptable for the services phase to commence)

Soft Services

Services associated with the facilities management of a project, normally including items such as cleaning, catering and pest control, normally including a high labour component and not intrinsically associated with the capital assets.  These services, where transferred to the private sector under a PPP arrangement, will normally be subject to market testing and/or benchmarking arrangements under the PPP contract.

Systematic Risk

Market-wide risks that affect all asset classes and cannot be reduced by Diversification.

Systematic Risk Premium

The Systematic Risk Premium represents the difference between the Risk-free Rate and the Project Rate.  Represents the amount required to compensate an investor for assuming particular Systematic Risk attached to a project.

Value for Money (VFM)

A quantitative and qualitative assessment of the costs and benefits of public versus private provision of services.