Guidance on the Standardisation of PFI Contracts90 published in 1999 highlighted the need for public sector managers to make provision to protect a department's interest should the private sector seek to benefit from opportunities to refinance projects. However, departments do not need to have an explicit sharing mechanism or rights in a PFI contract to seek to negotiate a share of such benefits. General approval rights over changes in contracts or financing arrangements, such as termination liabilities, should put departments in a strong negotiating position.
Recent revised guidance from the Office of Government Commerce (OGC) to the public sector has stated that:
It is implicit in PFI that contractors should benefit from effective management of projects. But departments must be alert to the very significant increase in rates of return to shareholders which refinancing may provide.
The decision as to what form of refinancing may be acceptable to a department and what portion of the refinancing gain it is reasonable for the public sector to enjoy are complex. Departments are therefore strongly advised to seek appropriate specialist advice before entering discussion with contractors. If they are in any doubt they should consult the Office of Government Commerce. 91
The scope for substantial refinancing benefits is likely to arise from early PFI deals when the PFI market was less mature than today. OGC's advice about refinancing is that:
[…] consistent with the existing guidance, in considering any refinancing proposals that are put to them, and where the contract does not state otherwise, departments should seek an equitable outcome which will protect the interests of the taxpayer and be defensible publicly. However, it is for Accounting Officers to make decisions on their own department's projects.
In practice, this means that where a department's consent is required to a refinancing proposal (and where the contract does not cover the terms of that consent) before giving its consent, the department should stipulate that it be compensated for any increased risks or liabilities it might be exposed to and should also seek to share the relevant benefits on a 50/50 basis with the private sector partner.
OGC has also realised that in certain cases departments may become aware of refinancing which contractors are implementing which does not require their approval and for which they do not have explicit sharing rights. In such cases OGC guidance suggests that:
[…] they [the public sector client] should seek to ensure with the contractor that such benefits reflect reward for management of risk and costs rather than pure windfall gain.
PFI public services projects where refinancing has occurred include the £32 million Kilmarnock Prison project92 and the £88 million Fazakerley Prison project.
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90 OGC, Guidance on the Standardisation of PFI Contracts, 1999
91 OGC, Guidance for Government Departments: Refinancing of PFI projects, available on the OGC web site as at 13 December 2001: www.ogc.gov.uk/ogc/procurement.nsf/pages/Refinanc170049.html
92 HC Deb 27 July 2000 c874W