26.1.2  Determination of Estimated Fair Value

(a)  If there is no liquid market, or if government otherwise elects, government will pay to the private party an amount equal to the Estimated Fair Value of the project as calculated by an independent valuer. Jurisdictions may provide different mechanisms for calculating what the Estimated Fair Value of the project is.

(b)  In some jurisdictions, the Estimated Fair Value of the project will be determined as follows:

(i)  Prior to Completion:

(A)  the lower of:

•  the design and construction costs properly incurred by the private party up to and including the Termination Date; and

•  the design and construction costs forecast to be incurred from Financial Close (as set out in the Base Case Financial Model and Works Program) less the capital costs to be incurred by government (including a reasonable estimate of cost overruns) from the Termination Date to ensure Completion is achieved by the Date for Completion,

less:

(B)  all deductions determined in accordance with section 26.1.3.

(ii)  After the Completion:

(A)  the forecast service fee to be paid from the Termination Date until the expiry of the project agreement (ignoring any abatements and assuming no breach had arisen), discounted at the Base Case Weighted IRR,

less:

(B)  the total costs to be incurred by government as a direct result of termination, including the cost forecast to be incurred by government in providing the Contracted Services, a reasonable risk assessment of any cost overruns which will occur and any rectification costs required to restore the operating services standards, discounted at the Base Case Weighted IRR.

(c)  In other jurisdictions, determination of the Estimated Fair Value will be as follows:

(i)  in determining the Estimated Fair Value, the independent valuer must determine the net present value of the projected cash flows for the unexpired contract term (ignoring any abatements and assuming no breach had arisen) calculated on a nominal, pre-tax basis, taking into account agreed rates of indexation117 and assuming:

•  a reasonable time to achieve Completion;118

•  the subsisting grounds for termination of the project agreement have not arisen (but the costs of remedying any default by the private party giving rise to termination, including any rectification costs, must be taken into account); and

•  any breach of the project agreement arising prior to the successful tender will not entitle government to terminate the project agreement;119

(ii)  the projected cash flows must take into account the amount and timing of any rectification and reinstatement costs required to be incurred to enable the delivery of the Contracted Services to the Services Specifications for the unexpired contract term, as well as all other forecast costs (including everyday operating costs and life cycle maintenance costs), indexed at the agreed or determined rate. These will include any costs forecast to be incurred to achieve Completion and all costs incurred, or to be incurred, by government where:

•  it directly completes the works and/or delivers the relevant services; or

•  procures the completion of the works or delivery of the services by a third party;  

(iii)  in addition, the costs identified above will be adjusted for a reasonable contingency over the base amount. The resultant projected cash flows are to be the valuer's estimate of the operating cash flow stream which, had a liquid market existed and the project been tendered, a hypothetical bidder would have valued to determine the amount to bid for the project and must be discounted to its net present value at the Termination Date;120 and

(iv)  the discount rate to be used by the independent valuer to establish the net present value of the projected cash flows will be derived using the following formula:

R = ((1 + real base case pre-tax project IRR121 + CB B - CB A) * (1 + i)) - 1

where:

For the purposes of the above formula, government recognises that there may not be a product with an appropriate tenor. If this occurs, an appropriate alternative will be determined at the time in consultation with the private party.

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117  The inflation rate to be used in this calculation will be determined by government. Victoria has traditionally used the forecast general inflation rates from the predictions in the State budget papers.  See Partnerships Victoria Advisory Note - Determining the General Inflation Rate for Use in Partnerships Victoria projects (August 2005).  If the parties cannot agree any other rates of indexation which are applicable, the relevant indexation rates must be referred to dispute resolution.

118  Where the project agreement is terminated prior to the private party achieving Completion.

119  In making this determination some amendments to the project agreement's terms and conditions may need to be assumed to allow for the incoming service provider to deliver the project (e.g. all things being equal, any accrued warning notices and frequent and persistent breaches will need to be cancelled or where termination occurs during the construction phase, the date for completion and the sunset date may need to be extended).

120  Using the discount rate determined in section 26.1.2(c)(iv)).

121  As at project commencement.

122  That is, the forecast general inflation rate from the predictions in the State budget papers.