The State requires the base interest rate under Project Co's financing arrangements to be fixed from Financial Close to the date of the first Refinancing. Project Co may elect to implement appropriate hedging arrangements (or fund the Project with fixed interest rate financing instruments) to achieve this outcome. The State will retain the long term risk of variations in the base interest rate after the first Refinancing.
In order to reflect the 'cost to the State' of managing this base interest rate risk, the State requires Respondents to add a margin of 15 basis points to the base interest rate assumed in the Financial Model after the first Refinancing. Instructions on how to derive the base interest rate to be assumed in the Financial Model after the first Refinancing are detailed in Proposal Requirement C4.3 (Hedging Strategy) in Volume 1, Part B (Evaluation Criteria and Proposal Requirements). This State margin will be removed from the Financial Model at or before Financial Close.
Should Respondents wish to include any alternative base interest rate risk allocation or hedging strategies that would deliver greater value for money benefits to the State, such proposals should be provided as value for money enhancements in accordance with Proposal Requirement E3.1 (Value for Money Enhancements) in Volume 1, Part B (Evaluation Criteria and Proposal Requirements).
The Project Deeds includes provisions to adjust the Quarterly Service Payments payable to Project Co to reflect Project Co's actual funding costs that result from movements in the assumed base interest rate after the first Refinancing. Details of this adjustment regime are set out in Schedule 3 (Payment Schedule) to the Project Deed set out in Volume 3, Part A (Project Deed (including Schedules and Annexures)).