3.4  Step 4 - Are predominantly all the Systematic Risks in the project borne by the Private Sector?

Where predominantly all the Systematic Risks identified in Step 1 are transferred to the Private Sector by the Public Sector, the Project Rate applies to the evaluation of any Private Sector proposals 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) they have assumed the full Systematic Risk of the project and would require the risk premium to compensate them for bearing the risks.

Where it is evident from the identification of Systematic Risks undertaken in Step 1 that any Systematic Risks likely to be retained by the Public Sector are clearly insignificant to the overall Systematic Risks that have been transferred to the Private Sector, then it is reasonable to proceed as if all Systematic Risk is with the Private Sector.  In this case, the Project Rate applies to the evaluation of any Private Sector proposals and the remaining steps of the Methodology are not required.

For most projects there is likely to be risk sharing between the Public and Private Sectors.  This will generally result in a lower risk to the Private Sector than if there were no Public Sector involvement.  This usually occurs because the Public Sector, in practice, is not able to avoid bearing some Systematic Risk in the project. For example, most Payment Mechanisms include adjustments for CPI risk and for most social infrastructure projects based upon an availability payment structure that the government will normally bear the majority of the demand risk.  As a result, the appropriate Discount Rate to evaluate options will lie somewhere between the Project Rate and the Risk Free Rate, reflecting the fact that some, but not all Systematic Risk have been transferred.