104. No consideration appears to have been given to the fact that the absolute fixed funding rates for creditworthy borrowers were at historic lows, in an inverted yield curve environment. A hedging strategy of this nature creates exposure (higher cost/lost benefit) to both higher variable versus long fixed interest rates and an upward shift in rates across the curve. Analysis of actual interest cost versus unhedged interest rate cost shows a significant advantage was foregone in favour of protecting against falling variable rates.
105. However, given the nature of the project, and the public sector funding at risk, we do not consider it unreasonable that the primary aim was the certainty of cashflow. If the project had been robust enough to borrow without the Government guarantee, we should expect private sector funders to have demanded a comprehensive hedging strategy which would have left little room for management to exploit movements in interest rates.