In most cases since the Global Financial Crisis (GFC), the government party accepts the risk associated with fluctuations in the base interest rate (as this is not within the private party's control), from the first refinancing. Partnerships Victoria policy requires the private party to fix the base interest rate until the first refinancing. Thereafter, the government party may choose to either leave the exposure unhedged, or manage the interest rate risk (either by entering into interest rate swaps itself, or requiring the private party to do so on the its behalf).
The floating rate component in the payment schedule is a mechanism which provides for movements in actual interest rates compared to the base interest rate for each interest period from the first refinancing. For each interest period, the calculation will produce a floating rate component amount that is a positive or a negative number, depending on which way interest rates have moved relative to the base interest rate agreed in the model output schedule in the financial model.
Should the government party require the private party to hedge the interest rate exposure beyond the first refinancing, the floating rate component will be a fixed payment each interest period comprising the difference between the hedged rate and the base interest rate. Alternatively, where the government party hedges the interest rate exposure via the Treasury Corporation of Victoria (TCV), the government party manages the floating rate component payments to the private party by entering into a back to back interest rate swap with TCV (outside of the project deed). Cash flow management with respect to the interest rate swap between TCV and the government party will need to be agreed upfront with DTF.
The floating rate component is paid in addition to the service payment. It is not subject to abatement, but may be subject to set-off by the government party where it is an amount payable by the private party.