An important issue in the design and implementation of PPPs, which has gained relevance in the past decade, is the sharing of gains that the PPP company realises from refinancing the PPP by replacing the original bank debt (or equity) by new debt on more favourable terms. Refinancing can become feasible if the interest rate drops or if risks affecting the project have decreased. Refinancing can take a number of different forms - e.g.:

□ reduction in interest margins;

□ extension of debt maturity;

□ increase in the amount of debt at the expense of equity (e.g. made possible because reduced risk has lowered the lenders' minimum required debt service cover ratio); or

□ reduction in reserve account requirements.

Refinancing will often result in gains to the shareholders of the PPP company. Part of the gain may be due to the PPP's good performance and the company's efforts in reducing risk. But part of the gain can also be due to greater confidence of lenders in the PPP market in the particular country, or due to macroeconomic factors - all of which are beyond the control of the PPP company. In that case, gains to the shareholders can appear undeserved and create political difficulties. For this reason, it is considered appropriate to share the gains from refinancing in some way between the company shareholders and the public authority to prevent a windfall to the PPP company shareholders.

Current practice is to include detailed provisions in the PPP contract setting out a mechanical method for determining and sharing the gains from future refinancing - rather than to rely on broad principles and unconstrained renegotiations of the contract when a refinancing takes place. The UK started the trend in 2002 with its standardised contract provisions for refinancing and other countries have followed a similar approach.

Refinancing methods are complex and their use requires intensive support from financial and legal advisers. The contract provisions require specialised drafting. The exercise requires several steps: <2><3>

□ calculate the expected gain to the shareholders from the refinancing (e.g. incremental net present value of the refinancing gain to the shareholders);

□ determine the portion of the gain that goes to each contractual party (e.g. 50:50 or a share going to the public authority with step increases up to a final marginal rate of 70% as is the case currently in the UK); and

□ decide how the sharing should take place (e.g. lump sum payment to the authority, decrease in service fee to the PPP company or another method).

There are many other details about the method that need to be specified in advance to avoid later discussion and disagreements - e.g. about the discount and interest rates to be used and about how to treat the possible impact of a refinancing on the termination payment that the public authority might have to make in the future. What is most important, in the spirit of the PPP approach, is to anticipate these questions ahead of time and include detailed provisions in the PPP contract.