A Contract extension enables the Contractor's debt to be amortised over a longer period. The resulting decrease in annual debt-servicing costs enables either more debt to be raised, which can be used to accelerate distributions to the Contractor's investors, and so produce a Refinancing Gain, or the contracted Unitary Charge to be reduced-so easing a possible affordability constraint for the Authority, or a combination of the two.
But if the Contract extension cannot be justified as VfM on a stand-alone basis, it should not form part of a Refinancing proposal. Prospective improvements in affordability which may come from the Authority sharing in the benefit from the longer-term amortisation of the Contractor's debt are irrelevant to this VfM evaluation. The tests for justifying a Contract extension are similar to those for an Authority considering entering any new contract and, moreover, raise additional issues of management and loss of flexibility for the Authority under the Contract, based on scenarios many years into the future.
As a general principle, Authorities should assume that Contract extensions are not VfM unless there is clear evidence to the contrary.