For Contracts based upon SoPC (SoPC §20.2, or its antecedents) it should not be possible for any Refinancing to increase the compensation payable to a defaulting Contractor (assuming that only Basic Amendments are made to the Contract at the time of Refinancing-cf. §1.4.1).5
For earlier PFI Contracts which do not follow SoPC, however, the position may be different (for example giving Senior Lenders greater protection than available under SoPC), but in such cases the Authority should not consent to a Refinancing which results in an increase in termination liabilities in the case of Contractor default. Instead, the Authority should consider whether a case could be made for the compensation on termination provisions to be changed to comply with SoPC, as part of the Refinancing, even though this could result in increased compensation being paid in certain circumstances including Contractor default.6
The assessment for the Authority in this case is clear: there should be no increase in compensation payable by an Authority to a defaulting Contractor as a result of a Refinancing, unless there is a clear VfM case to the contrary, which will necessarily involve a judgement on the benefits of introducing SoPC provisions to a Contract which previously lacked such risk transfer.
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5 This is because compensation does not relate to the debt outstanding, but rather to the market value (or estimated market value) of the Contract.
6 A change in Contractor default compensation provisions to introduce SoPC (i.e. market value-based compensation) with associated increased risk transfer to the Contractor may make a positive VfM contribution.