5  The Use of Sensitivity Analysis

The Guidance recognises that a single Discount Rate cannot be used to evaluate every bid, or capture every risk in an exact and precise manner.  As a result, the Discount Rate should be considered as a range, as opposed to a single point estimate.

For every assessment it is recommended that two types of sensitivity tests are performed:

•  Uncertainty:  Uncertainty is distinct from risk and the costs of uncertainty are normally shared between the private and public sector.  The PPP Project Agreement will normally transfer some of the risk of uncertainty to the private sector.  An approach to dealing with this uncertainty is set out below.

•  Break Even Analysis:  In the assessment of bids the break-even Discount Rate should be calculated to consider the overall sensitivity of the VFM proposition to changes in the Discount Rate.  A narrow VFM assessment sensitive to small movements in the Discount Rate should lead the evaluator to take additional steps - both quantitative and qualitative to provide a robust VFM assessment.  This is also considered below.