1.8  Structure of Document

Section 2 covers the supporting theory necessary for practitioners to understand some of the complex background concepts that underpin the Methodology.  Material covered in this section includes an introduction to Discount Rates and risk, the treatment of risk in cash flows, the concept of sharing Systematic Risk and the use of CAPM.

Section 3 provides detailed guidance on the Methodology to determine the appropriate Discount Rates for PPP evaluation.  In this Section the Methodology is presented on a step-by-step basis.  More experienced practitioners, or those that are familiar with the Methodology are likely to rely more on Section 3 in the first instance, referring to Section 2 where necessary.

Section 4 provides details of some specific issues associated with the development of the Discount Rate.  In this section the approach to developing the Risk Free Rate and the inflation assumption is set out.

Section 5 provides details on the use of sensitivity analysis.  The Guidance requires a sensitivity analysis to be performed to test the sensitivity of the VFM assessment to the Discount Rate selected.  The approach to dealing with uncertainty is also established.

Appendices are included as follows:

Appendix A  deals with the treatment of Inflation Risk in PPP projects and how different payment structures may give rise to different levels of Systematic Risk;

Appendix B  considers the factors giving rise to Systematic Risk in PPP projects and considers how risk is allocated;

Appendix C  sets out a detailed Case Study illustrating how the Guidance should be applied;

Appendix D  sets out the approach to determining the discount rate for net revenue projects;

Appendix E  provides references to useful further reading; and

Appendix F  sets out some frequently asked questions.