HM Treasury's "Standardisation of PFI Contracts" (Version 3, April 2004-hereafter "SoPC"1), provides (SoPC Chapter 35) that the Contractor shall obtain the consent of the Authority to any Qualifying Refinancing, with the Authority sharing 50% of the Refinancing Gain. SoPC requires an Authority to consider carefully the risk and value for money ("VfM") implications of a Refinancing before giving their consent to proceed (SoPC §35.3); furthermore, if a refinancing involves an increase in the Authority's termination liabilities (cf. SoPC Chapter 21), SoPC points out that a separate Authority consent is needed for this and states that:
An Authority should not use its separate approval rights over increases in termination liabilities to agree a greater than 50% share of the refinancing gain. In consequence, an Authority will be unlikely to agree to a refinancing that increases its termination liabilities unless the additional refinancing gain available to be shared, relative to a refinancing which does not involve such increase in termination liabilities, is judged to represent better value. (SoPC §35.3.1.6)
Refinancings of PFI transactions which were originally signed prior to 30th September 2002 are expected to be carried out under a voluntary code of conduct (HM Treasury: "Refinancing of Early PFI Transactions-Code of Conduct" (November 2002), hereafter "the Code of Conduct"). The Code of Conduct adopts the same definitions of Refinancing Gain, etc. as set out in SoPC; it likewise requires that Refinancings should be VfM; it expects that Authorities will generally receive a 30% rather than 50% share of Refinancing Gains.
It is also possible that, in parallel with the Refinancing, the Contractor may propose other amendments to the Contract: as with increases in termination liabilities, the VfM decision on such amendments should be also kept quite separate. Furthermore, the restriction of the Authority's share of the Refinancing Gain to 50%2 does not apply in such cases.
The Application Note therefore considers:
(a) Issues for the Authority in giving consent to a Refinancing, namely:
- Maximum level of Senior Debt (§1.2)
- Increased termination liabilities (§1.3)
(b) Other issues which may arise for an Authority at the time of a Refinancing, and for which further consents are required, namely:
- Contract amendments (§1.4)
- Changes to the Unitary Charge profile or indexation (§1.5)
- Contract extensions (§1.6)
Refinancings and the issues they raise are complex (cf. SoPC §35.2.4) and often create new risks for an Authority and so can make assessment of their risk and VfM far from straightforward. Accordingly, this Application Note has been prepared to help Authorities, and their Contractors who bring forward Refinancing proposals, to undertake a thorough analysis. It is based upon and cross-refers throughout to the existing guidance available in relation to Refinancings, i.e. SoPC, the Code of Conduct, and SoPC Annex 1 (Guidance Note on "Calculation of the Authority's Share of a Refinancing Gain"). The provisions of this Application Note do not alter or replace any of this existing guidance, but are designed to help Authorities and their Contractors apply it more rigorously and consistently. This Application Note does not substitute for the work which the Authority and its own professional advisers will need to undertake; rather it emphasises the importance of Authorities seeking suitable expert advice when assessing Refinancing proposals.
The position of the Government remains unchanged: "…Refinancings can bring benefits to Authorities and the PFI market as whole. It wishes, therefore, to create a climate for mutually beneficial refinancing of PFI projects to take place, provided such refinancings also offer value for money to the public sector" (Code of Conduct §2); and "Refinancings carried out in accordance with this [SoPC] guidance can be of benefit to both the Contractor and the Authority; accordingly, proposals for refinancings made by the Contractor should be welcomed and considered positively by the Authority" (SoPC §35.1.1).
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1 The capitalised terms used in this Application Note follow those set out in SoPC.
2 Or 30% in some cases under the Code of Conduct