5.27 Refinancing is where the Project Company's shareholders rearrange the terms of their debt financing. It is often done to get cheaper funding either because of more favourable market conditions or because the project has demonstrated that some risks are less likely to occur. For instance, after the building is complete, construction risk is no longer relevant. There were particular opportunities to refinance early PFI contracts because better financing terms became available once the PFI market became established.
5.28 As a result of a report by the NAO on an early refinancing,96 and a subsequent report by the PAC,97 the Government negotiated with the private sector arrangements to share refinancing gains. Initially the public sector was entitled to 50% of the gains in new contracts. The public sector share has now been increased to 70% in deals which may benefit from refinancings if the financing markets recover after the credit crisis.98 In addition the Government agreed with the private sector that the public sector would receive 30% of refinancing gains on early PFI contracts which had been entered into without any contractual mechanism to share refinancing gains.
5.29 The NAO recommended in its review of refinancing that authorities assess the impact of refinancing proposals on the future of the project. Factors to consider are particularly service delivery incentives, increased termination liabilities, and the impact of receiving the gain over time if the contract is terminated.99
5.30 New sharing arrangements appear to be working well, but there have been exceptions. We criticised one of the early refinancings, the Norfolk and Norwich PFI Hospital, for only securing the NHS Trust 29% of the £116 million refinancing gain, whilst increasing the contract's termination costs.100
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96 The Refinancing of the Fazakerley PFI Prison contract, National Audit Office (HC 584, 1999-2000).
97 The Refinancing of the Fazakerley PFI Prison contract, PAC (HC 372, 2000-01).
98 Standardisation of PFI contracts, Version 4, Addendum, Amended Refinancing Provisions, HMT (April 2009).
99 Update on PFI debt refinancing and the PFI equity market, National Audit Office (HC 1040, 2005-06).
100 The refinancing of the Norfolk & Norwich hospital: how the deal can be viewed in the light of the refinancing, National Audit Office (HC 78, 2005-06).