(a) If there is no liquid market, or if government otherwise elects, government will pay to the private party an amount equal to the Estimated Fair Value of the project as calculated by an independent valuer.
(b)
(c) Determination of the Estimated Fair Value will be as follows:
(i) in determining the Estimated Fair Value, the independent valuer must determine the net present value of the projected cash flows for the unexpired contract term (ignoring any abatements and assuming no breach had arisen) calculated on a nominal, pre-tax basis, taking into account agreed rates of indexation121 and assuming:
• a reasonable time to achieve Completion;122
• the subsisting grounds for termination of the project agreement have not arisen (but the costs of remedying any default by the private party giving rise to termination, including any rectification costs, must be taken into account); and
• any breach of the project agreement arising prior to the successful tender will not entitle government to terminate the project agreement;123
(ii) the projected cash flows must take into account the amount and timing of any rectification and reinstatement costs required to be incurred to enable the delivery of the Contracted Services to the Services Specifications for the unexpired contract term, as well as all other forecast costs (including everyday operating costs and life cycle maintenance costs), indexed at the agreed or determined rate. These will include any costs forecast to be incurred to achieve Completion and all costs incurred, or to be incurred, by government where:
• it directly completes the works and/or delivers the relevant services; or
• procures the completion of the works or delivery of the services by a third party;
(iii) in addition, the costs identified above will be adjusted for a reasonable contingency over the base amount. The resultant projected cash flows are to be the valuer's estimate of the operating cash flow stream which, had a liquid market existed and the project been tendered, a hypothetical bidder would have valued to determine the amount to bid for the project and must be discounted to its net present value at the Termination Date;124 and
(iv) the discount rate to be used by the independent valuer to establish the net present value of the projected cash flows will be derived using the following formula:
R = ((1 + real base case pre-tax project IRR125 + CB B - CB A) * (1 + i)) - 1
where:
R = the discount rate;
CB B = the real yield to maturity on a benchmark Commonwealth bond traded in the Australian bond markets with a modified duration closest to that of the weighted average life of any outstanding senior debt as shown in the Base Case Financial Model as at the Termination Date;
CB A = the real yield to maturity on a benchmark Commonwealth bond traded in the Australian bond markets with a modified duration closest to that of the weighted average life of any outstanding senior debt as shown in the Base Case Financial Model as at the date of Financial Close; and
i = the assumed inflation rate126 to index the cash flows.
For the purposes of the above formula, government recognises that there may not be a product with an appropriate tenor. If this occurs, an appropriate alternative will be determined at the time in consultation with the private party.
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121 The inflation rate to be used in this calculation will be determined by government. Victoria has traditionally used the forecast general inflation rates from the predictions in the State budget papers. See Partnerships Victoria Advisory Note - Determining the General Inflation Rate for Use in Partnerships Victoria projects (August 2005). If the parties cannot agree any other rates of indexation which are applicable, the relevant indexation rates must be referred to dispute resolution.
122 Where the project agreement is terminated prior to the private party achieving Completion.
123 In making this determination some amendments to the project agreement's terms and conditions may need to be assumed to allow for the incoming service provider to deliver the project (e.g. all things being equal, any accrued warning notices and frequent and persistent breaches will need to be cancelled or where termination occurs during the construction phase, the date for completion and the sunset date may need to be extended).
124 Using the discount rate determined in section 26.1.2(c)(iv)).
125 As at project commencement.
126 That is, the forecast general inflation rate from the predictions in the State budget papers.