Other Considerations

The assessment of inflation risk will need to take into account a range of adjustments which could be proposed by bidders. Each of these should be reflected in the table and an assessment made of the individual impact of each on the overall level of risk transfer for inflation risk.

The table below considers some common bidder proposals and the considerations that will be made:

Bidder Proposal	Impact	Treatment
Use of a CPI floor	Means price can only increase and government loses the benefit of any downward movements in prices.	Reduces CPI risk transferred. The level of the floor will determine the extent of the reduction in risk transfer.
Use of a specific inflation index	Government will make payments in accordance with specific cost related indices.	Consider the impact of the difference between CPI and the specific index.
More frequent reviewable services	Costs will be benchmarked and adjusted more frequently, reducing the private sector's exposure to unanticipated price movements.	Reduce the level of risk transfer. For example, if there were five review points and the private sector proposes six, then the level of risk transfer in relation to items subject to review would have reduced by 20%.

Example:

The table below illustrates how the table might be populated for a range of bidder proposals:

ASF Component	Indexation Proposal	Assumed Rate	Initial Assumption		Bidder A		Bidder B		Bidder C
			% of ASP	Wtd Ind	% of ASP	Wtd Ind	% of ASP	Wtd Ind	% of ASP	Wtd Ind
ASF 1	Indexed at CPI	2.5%	50%	1.25%	100%	2.5%	75%	1.88%	50%	1.25%
ASF 2	Not indexed	0.0%	50%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
ASF 3	Indexed at LPI	3.5%	0.0%	0.0%	0.0%	0.0%	25%	0.88%	30%	1.05%
ASF 4	Indexed at BPI	5.5%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	20%	1.1%
Total				1.25%		2.50%		2.76%		3.40%

In simple terms each bidder is taking the following inflation risk, relative to the rate on which the initial assessment of risk was performed:

• Bidder A: 50 per cent

• Bidder B: 45 per cent

• Bidder C: 37 per cent