Worked Example
The assessment of Systematic Risk transferred for a project has been conducted. Systematic risk transferred is described in the following table:
Systematic Risk type | Weighting (Scale 1 - 5) | Estimated Portion of Project Risk Premium | Allocation of risk based on Step 1 analysis | Project Risk Premium Transferred to Private Sector % |
Demand | 4 | 1.08% | 0.2 | 0.22% |
Inflation | 3 | 0.81% | 0.5 | 0.40% |
Asset Residual value | 1 | 0.27% | 0.0 | 0.00% |
Financial distress / insolvency | 2 | 0.54% | 0.5 | 0.27% |
Total Premium | 10 | 2.7% | NA | 0.89% |
In determining the Systematic Risk transferred it was assumed that bidders would index 50 per cent of the ASF with CPI.
Bidder A has responded with an amended Payment Mechanism. This is described in the table below:
ASF Component | Initial Assumption | Bidder A | ||||
% of ASP | Weighted Indexation | % of ASP | Weighted Indexation | |||
ASF - Component 1 | Indexed at CPI | 2.5% | 50% | 1.25% | 100% | 2.5% |
ASF - Component 2 | Not indexed | 0.0% | 50% | 0.0% | 0.0% | 0.0% |
100% | 1.25% | 100% | 2.5% | |||
In this example Bidder A is taking only ½ of the inflation risk that the government had anticipated in its draft Payment Mechanism. More of the government's fee will vary with inflation which means it is exposed to greater risk.
In this example, the level of inflation risk transferred might be considered to be ½ that on which the initial assessment of Systematic Risk was based. This would generate a revised Systematic Risk premium as follows:
Systematic Risk type | Weighting (Scale 1 - 5) | Estimated Portion of Project Risk Premium | Allocation of risk based on Step 1 analysis | Project Risk Premium Transferred to Private Sector % |
Demand | 4 | 1.08% | 0.2 | 0.22% |
Inflation | 3 | 0.81% | 0.5 | 0.20% (from 0.40%) |
Asset Residual value | 1 | 0.27% | 0.0 | 0.00% |
Financial distress / insolvency | 2 | 0.54% | 0.5 | 0.27% |
Total Premium | 10 | 2.7% | NA | 0.69% |