6.5.1 Cost of finance

Bids normally assume that the cost of debt finance reflects an agreed margin above a reference rate rather than a prescribed interest rate. This is because the timing of the drawdown of funds is difficult to determine while interest rates move on a daily basis.

The risk allocation reflected in an RFP normally indicates that the risk of movements in interest rates between the submission of bids and financial close are to be borne by government. This means that the service charges reflected in the contract can be settled only at, or following, financial close. Recalculation of services charges is performed within the financial model that was provided with the bid. The means of applying the model for this purpose needs to be agreed with the private party prior to financial close. At financial close, the service charges can be recalculated using the actual interest rates before inserting these charges into the relevant contract schedules.

Given that the risk of interest rate movements generally remains with government until financial close, the length of time from the submission of proposals to financial close can have a material impact on the ultimate price of the proposal. This is further incentive to ensure that the process from submission of proposals is as time-efficient as possible.