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Financing components

229.An offer to supply a product or service, or build an asset, sometimes includes terms for delayed payment. An offer that includes a delayed payment is equivalent to an offer that requires immediate payment, plus a loan from the seller to the buyer.

230.These two components should be evaluated separately. In order to do so, the seller should be asked to quote a price for immediate payment, as well as a price for delayed payment.

231.Where this is not possible, or the seller is unwilling, the loan should be assumed to be provided on the same terms as government stock issues of the same maturity. In other words, the price should be discounted to the date when the immediate price would be due using a discount rate equal to the yield on government stock of the same maturity.

232.Where an immediate payment (“pay now”) option is available, delayed payment options should always be rejected if the effective cost of finance is greater than the cost of government borrowing.

233.Note that in practice, it is most unlikely that a private sector supplier will be able to offer to the Government finance terms that are more favourable than the terms at which the government can borrow in wholesale markets. Finance leases, for example, are not generally attractive to Government for this reason. The only realistic exception is where the delayed payment terms benefit from some kind of subsidy provided by a foreign government, such as a tax concession or concessional export credit.

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