Evidence of Changes in Risk Allocation
The table below provides an overview of the types of amendment to the Payment Mechanism, which may give rise to an adjustment to the Discount Rate. The adjustment will be by reference to the risk transfer proposals in the draft Payment Mechanism, which for the sake of this analysis is assumed to require 50 per cent of the charge to be indexed at CPI and 50 per cent to be fixed.
Evidence | Impact | Adjustment |
Greater proportion of the ASF indexed at CPI. For example, 100% of the ASF to be indexed at CPI. | Government bears a higher proportion of inflation risk - more of the charge subject to CPI risk, all other things being equal, will result in more inflation risk for government. | Reduction in the bid PPP Discount Rate. |
Floor on CPI. For example, the ASF will only be subject to upward increases in CPI. | The government will bear higher risk through exposure only to one side of the risk. | Reduction in the bid PPP Discount Rate. |
Different components of the ASF to be indexed, in accordance with different indices. | The government will bear a higher level of inflation risk through the matching of its payments to the underlying cost movements in the bidders price structure. | Reduction in the bid PPP Discount Rate. |
Bidders may take more, or less risk than is initially anticipated under the Payment Mechanism. The impact that each separate component has on the assessment of inflation risk transferred needs to be considered.