Another issue brought to the Committee's attention is that private sector parties might make additional gains from refinancing after the contract has been entered into. The Committee was briefed by officers from the United Kingdom Treasury about the considerable adverse publicity that arose from what had appeared to be huge 'windfall gains' for private sector parties after they refinanced.
The officers advised the Committee that it is now a requirement in the United Kingdom that any refinancing gains are equally shared between the public and private sectors. And in relation to existing PFIs deals, the private sector has agreed to provide the government with 30 per cent of any debt refinancing gains.
A recent report from the UK National Audit Office identified:297
• debt refinancing gains (to February 2006 from PFIs) for the UK government of £137 million (GBP);
• there is now an emerging secondary equity market in PFI shares;
• refinancing provides scope for significantly increasing the investor's internal rate of return;
• certain situations are exempt from gain sharing arrangements, including corporately financed projects, projects where the base care IRR (internal rate of return assumed in the bid) has not been achieved and projects where the contractors bears the risk of increased interest rates following financial close.
The Committee understands that for two of the major Victorian projects (County Court and the Spencer Street Station redevelopment) the sponsor (ABN Amro) sold its majority interest at a profit within 18 months of signing the deal. In relation to the redevelopment of Spencer Street Station this represented a profit of $50 million. Lessons learnt from this resulted in the next public private partnerships project, EastLink, having refinancing built in to the contract.
The Committee acknowledges that the guidance material for Standard Commercial
Principles provides:298
• all re-financings other than those contemplated at financial close will require government consent; and
• any re-financing gain is to be shared between government and the private party on a 50:50 basis provided the projected equity at the time of the re-financing (taking into account any re-financing) is above that reflected in the original base case financial model.
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297 National Audit Office, (UK), Update on PFI debt refinancing and the PFI equity market, 21 March 2006, pp.3-6
298 Department of Treasury and Finance, Partnerships Victoria Guidance Material, Standard Commercial Principles, July 2005, p.121