The private sector sees the opportunity to make windfall profits from infrastructure investments—particularly investment banks and financiers who often receive big upfront fees from refinancing the debt.
Indeed, concession holders will likely seek to refinance their project debt on more favorable terms with a greater amount of leverage. However, this need not necessarily prove a particular problem for governments. For one thing, some of the biggest refinancing gains from PPP transactions came in the early stages of PPP development when the market was less mature and interest rates dropped worldwide to historically low levels. With market maturity, the likelihood of the private sector making huge gains from refinancing falls.
Second, where it makes sense, governments have the option to negotiate with their private partners to share in refinancing gains. Gain clauses can be included in contracts, where the government's share can be either taken as a cash lump-sum at the time of the refinancing or in the form of reduced service charges.74 It is important to recognize, however, that such "clawback" mechanisms, while they may make the profits more politically acceptable, may also result in more expensive contracts upfront.
Third, explicit sharing mechanisms don't necessarily have to be built into the contract for the public sector to share in the gains. General approval rights over changes in contracts or financing arrangements, such as termination liabilities, should put the public sector in a strong negotiating position.75 In numerous cases, government agencies have capped the rate of return of the provider and negotiated revenue sharing arrangements. Both can help in certain cases to enhance the long term political viability of the partnership.
When refinancing gains are not shared, such benefits should reflect reward for effectively managing risk and costs rather than a pure windfall gain. The key thing is to seek an equitable outcome that protects the interests of the taxpayer and is defensible publicly.