34.1.1 The key principles underlying the Government's approach to Refinancing are as follows:
• Refinancings carried out in accordance with this guidance can be of benefit to both the Contractor and the Authority; accordingly, proposals for refinancings made by the Contractor should be welcomed and considered positively by the Authority.
• A refinancing will normally constitute a material change to the financial and economic structure of a PFI project as originally agreed at Financial Close between the Authority and the Contractor. An Authority should therefore have the right to be fully informed of any refinancing, and approval rights over refinancings other than those which were part of the original Financial Close Base Case financing plan or do not lead to a gain for investors compared to the original Base Case.
• A long term contractual commitment by an Authority to purchase a service, at a pre-determined price, with contractual certainty for financiers through, for example, the operation of termination provisions, is likely to be central to the original financing of the Project and to any refinancing gain arising. The Contractor could not itself achieve such fine terms of finance, particularly as regards gearing and pricing, without such Contract terms. The Authority has a natural right to share in gains which are made possible by the strength of this contractual credit.
• An increase in returns to investors in the Contractor due to improved efficiency or performance, over and above what was anticipated when the Contract was let should be for the investors' account unless it falls within the scope of benchmarking, market testing, upside sharing or similar provisions of the Contract. However, improvements to loan margins, and beneficial changes to the term and leverage of any debt finance raised to fund the project are not viewed as mainly due to efficiency improvements and, consequently, any benefits that arise from such changes should be shared between the Authority and investors.
• As the PFI/PPP market matures and its stability is assured, and if margins and other terms move towards pre credit crunch levels substantially better financing terms may become available. In the broadest sense, both the public sector and the private sector will contribute in bringing about this improvement. Through refinancings, projects are able to gain access to these finer terms as they become available and, given their joint contribution to this state of affairs, both the public sector (in this case the Authority) and the private sector (in this case investors in the Contractor) should share in the benefits arising. The Public Accounts Committee has highlighted the importance of the public sector sharing equitably in "windfall gains" associated with a PFI project. This has particular relevance to changes in available terms of finance which are often heavily influenced by factors external to the Project.
• A sharing of refinancing gains in the manner set out at Clause 34.2 between the Authority and the Contractor gives a reasonable balance between these factors .
• Refinancing gains should be measured by reference to the Project as it is performing at the time of refinancing, to enable the investors to benefit from improvements in efficiencies achieved by the Contractor to date and forecast to be achieved in the future; but if the Project is performing below the levels projected in the original Financial Close Base Case financial model, the investors are entitled to apply the benefits of refinancing to restore this Base Case projected performance prior to sharing with the Authority.
34.1.2 This Section takes account of the NAO report "The Refinancing of the Fazakerley PFI Prison Contract" published in June 2000, as well as subsequent recommendations of the House of Commons Public Accounts Select Committee and HMT's Application Note dated 9 February 2005 entitled "Value for Money in Refinancing" on the HMT website, and the addendum on refinancing issued by HMT in October 2008.