The payment to Equity Investors on termination for convenience is component 'B' of the formula. The drafting of this component is intended to:
• set clear expectations for the compensation payable upon termination for convenience (prior to Commercial Acceptance) at the beginning of the Project Deed;
• reflect the risk profile of Equity Investors, particularly during the early stages of a project; and
recognise that Equity Investors can reinvest to mitigate the impact of termination and receive future returns.
Where termination for convenience occurs on or after the Date for Commercial Acceptance, the methodology for calculating the payment to Equity Investors is a cashflow-based valuation of the future returns to equity, determined by an independent expert at the time of termination. This methodology is commonly used for valuing equity investments, and enables the payment to be calculated in a way that places the Equity Investors in a substantially similar position, in respect of equity returns, to that which would have applied if the Project had continued for the Term.
Where termination for convenience occurs prior to the Date for Commercial Acceptance, component 'B' will similarly be a cashflow-based valuation of the future returns to equity, albeit bid upfront by Respondents as part of their Request for Proposal documentation and hard-coded in the Project Deed for each six month period of the Development Phase.
Component 'B' will compensate Equity Investors for the net present value of future equity cashflows applicable to the terminated contract term calculated as at the relevant six month period during the Development Phase in which the termination occurs, with Respondents competitively bidding the discount rate applicable to each six month period from Financial Close to Commercial Acceptance. By hard-coding the fair market value of forgone equity cashflows at defined points during the Development Phase, both the State and Project Co are clear about the consequences of a termination for convenience during the Development Phase.
Clear guidance is provided to Respondents in the Request for Proposal template regarding the methodology Respondents should use to determine the discount rate applicable to each six month period prior to Commercial Acceptance, as follows:
• Respondents must discount the total equity cashflows over the balance of the term of the Project at a discount rate equivalent to market rates of return to equity for projects with a similar risk profile to the relevant Project, and having regard to the target rate of return to equity;
• in bidding the fixed compensation to equity value for each six month period, Respondents may choose to reduce the applicable discount rates over the Development Phase, in order to reflect the diminishing risks faced by equity as the Development Phase progresses, whilst having regard to the overall complexity, risk profile and Development Phase program of the Project.
The State will evaluate:
• the discount rate applicable to the first six month period following Financial Close (the Initial Discount Rate), and
• the methodology and magnitude of change in the discount rate during the Development Phase.
Respondents will be required to provide a written rationale for the calculation which explains how the Initial Discount Rate is determined, and the method, frequency and degree of decline in the discount rate applicable to subsequent periods, for example by reference to the risk profile and complexity of the Project and key construction milestones in the Development Phase program.