Dec-2013 | Oxand launches a new model to optimise financial forecasts for PPP contracts | The Netherlands
As long-term Public-Private Partnership contracts can extend over 20 to 30 years, cost estimations over the contract period are subject to variable inflation rates. In order to hedge these uncertain inflation costs, contracts have a so-called ‘indexation’ formula. The formula is designed to cover the cost of inflation during the entire contract period – but it is based on a model which is inherently imperfect. This imperfection makes room for strategic choices.
Oxand, with its dutch subsidiary (ex-Iter Fidelis), has developed a new financial model that is able to provide insight into these strategic choices. Using the Monte Carlo sampling technique, the new model simulates inflation rate forecasts of different commodities using an advanced econometric technique. In addition, the tool simulates uncertainty in the planning of maintenance activities based on different strategies. Together, the tool provides insight in the effects the different strategies, the expected inflation cost and the inflation compensation based on the ‘indexation’ formula. This is expressed in the Inflation Cost Cover Ratio (ICCR) as presented in the figure.