3.2  Step 2 - Are predominantly all the Systematic Risks in the project borne by Public Sector?

Where predominantly all the Systematic Risks identified in Step 1 are borne by the Public Sector under PPP delivery, the Risk-free Rate applies to private sector bids and the remaining steps of the Methodology are not required.  The reason for this is that from the perspective of the Private Sector operator (and its investors) the project has no inherent Systematic Risk (as the Public Sector retains all Systematic Risks). Therefore, no risk premium is required to compensate the Private Sector as no Systematic Risk has been assumed by them in the project.

The circumstances where "predominantly all" the Systematic Risks are borne by the Public Sector will be present where the primary factors that are likely to cause significant variability in the cash flows of a PPP project, such as that level of demand risk, or unexpected inflation risk caused by factors in the broader economy, are clearly borne by the Public Sector and are not transferred under the PPP contract.  The necessary information for the assessment will be evident from the matters considered as part of Step 1.  This also recognises the fact that practitioners will not have undertaken the complete analysis required in Step 5. It is considered unlikely that this will apply, i.e. there is typically an element of risk sharing and in most PPP projects experience has demonstrated that some Systematic Risk is transferred to the private sector and priced into the PPP bids.