Step 3 - Identify Project Rate

A

The Project is essentially an accommodation project with a significant operating component (i.e. maintenance, catering, cleaning, security, utility provision and materials handling services currently represent approximately 56 per cent of the PSC's NPC). For investment purposes, the Project is classified as having "Very Low" Systematic Risk (indicative Asset Beta of 0.3). Further research was conducted to generate empirical information that might serve as a basis for establishing an Asset Beta for the procurement decision. This research is summarised below.

Empirical Evidence

Research was done on Betas for listed corporations on the Australian Stock Exchange ("ASX") that may lend comparable Beta data in terms of facilities management and /or similar infrastructure assets.  Relevant market data obtained in relation to these listed corporations is contained in Attachment 1 found at the end of this Appendix.  The information can be summarised as follows:

Category

Low Asset Beta

High Asset Beta

Mid point Asset Beta

Weighted Average Asset Beta

Arithmetic Average Asset Beta

Facilities Management

0.43

0.59

0.51

0.52

0.50

Energy (c)

0.05

0.36

0.20

0.27

0.24

Property Trusts

0.31

0.63

0.47

0.51

0.46

Property Development / Construction (b)

0.34

0.99

0.67

0.58

0.55

Overall

0.28

0.64

0.46

0.48

0.44

(b), (c) - Refer Notes to Attachment 1.

The market data above suggests that the Project Asset Beta is in the range of 0.28 to 0.64.  A hospital project has risk characteristics, such as a sole government customer, that would place it at the lower end of the range quoted.

Based on the Systematic Risks identified, it could be argued that the Project's Asset Beta should be slightly higher than the health sector Asset Beta of 0.3.  Accordingly, based on an understanding of the industries relevant to a typical PPP hospital contract and available market data, an Asset Beta of 0.45 is used.  This translates into an estimated Project Risk Premium of 2.7 per cent.

The calculation for this is:

Project Risk Premium = Beta * MRP = 0.45 * 6.0% = 2.7%.