To facilitate the establishment of a project, many sponsors contribute equity to encourage other investors - with the expectation of selling their investments when the project becomes a lower risk venture after commissioning. This creates the prospect of changes of ownership of the project and raises questions about the impacts of refinancing.
Because a large component of risk is removed once the project moves from construction to operation, projects may be refinanced to obtain cheaper funding, reflecting the reduced risk profile. If this does not result in any adjustment in the service charge paid by government, the private party may benefit through incremental profitability in which the government does not share.
The benefits of refinancing may be shared, by way of reduced service charges, once the rate of return to the private party reaches an agreed level.
Government's general position is that it will seek to share in any windfall gain to the private party as a result of the refinancing, in accordance with and to the extent of an agreed pre-determined formula documented in the contract. It may be appropriate to set a date beyond which any refinancing would not give rise to government sharing any benefits. In addition, government approval will be required for any refinancing of debt and equity. Government will not unreasonably withhold such approval but prior to making any decision, should confirm that the refinancing does not impact inappropriately the structure, recourse, risk or operational viability of the project.
The costs for assessing (and where appropriate, approving) a refinancing proposal should be met by the private party.