34.4.2.1 Authorities should, as always, be seeking to generate strong competition in their procurements. Since successful PFI projects are more likely to generate refinancing opportunities, the effect of this competition should be to encourage the Contractor to anticipate the gain from some refinancings within its original bid price. Such refinancings which are clearly and fully included within the original Financial Close Base Case financial model and taken into account in the calculation of the Unitary Charge should therefore be exempt from Authority consent and gain sharing up to the amount included in the Financial Close Base Case.
34.4.2.2 To guard against the Contractor seeking to use this exemption to bypass the Refinancing Gain sharing provisions, the Authority and its advisers should conduct due diligence over the Base Case prior to Financial Close so as to clarify and agree any refinancing assumptions that have been demonstrably taken into account in the Unitary Charge bid at the time of final bids, i.e. that a reasonable return on equity will only be achieved if and to the extent that these refinancings take place.606 If an Authority receives a bid that claims to take into account future refinancings, the Authority should consult with SIB, and, if appropriate, the Economic and Policy Unit or the Department of Finance & Personnel, before selecting a winning bidder.
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606 In practical terms, a bid that includes a Unitary Charge that takes into account future refinancings may produce a higher Threshold Equity IRR than one, that does not.