22. Departments should consider putting in place mechanisms to clawback part of any future windfall gains that contractors may earn so that there is at least a sharing of such benefits. When faced with a proposed clawback arrangement it is possible that bidders may adjust their proposed contract price upwards to compensate for the possible loss of future income. A department may therefore need to ask for prices from bidders with and without clawback to help it to determine the value for money of such an arrangement. The Prime deal (41st Report, Session 1998-99), the Newcastle Estate deal (19th Report, Session 1999-2000) and the revised Royal Armouries Museum deal (4th Report, Session 2001-02) have all included mechanisms to share the benefits of future windfall gains. In negotiating a deal with the contractor on the Airwave deal (64th Report, Session 2001-02), the Department failed to secure any clawback for the taxpayer of additional profits if other emergency services decide to join Airwave or if the system is sold to overseas governments. Failure to negotiate a clawback agreement was partly a product of the contractor being the only bidder.
23. Investors in PFI deals have on occasions made substantial gains following the refinancing of contracts. But only one in four of the early PFI contracts had clear arrangements to share refinancing gains with the public sector. In our report on the Refinancing of the Fazakerley Prison PFI contract (13th Report, Session 2000-01) the contractor had refinanced the project less than two years after the prison opened. The refinancing generated £10.7 million of benefits for the contractor's shareholders. A consequence of the refinancing, however, was that the Prison Service would be exposed to increased liabilities in the event of the contract being terminated. The Prison Service secured compensation of £1 million, which was consistent with the cost of the additional risks it faced, but did not receive any further share of the refinancing benefits. Our 13th Report, Session 2000-01, recommended that departments should expect to share in such refinancing gains in future.
24. As noted in our PFI Refinancing Update report (22nd Report, Session 2002-03) the Office of Government Commerce has now issued new guidance on how departments should provide in future PFI contracts for the sharing of refinancing gains. The guidance envisages that refinancing gains should be shared 50:50 between the private and public sectors on all new deals. The Office of Government Commerce has also negotiated with the private sector a code of practice applying to past PFI deals under which a 70:30 (private sector: public sector) split of refinancing gains would take place, even if no provision for sharing refinancing gains had been made in the original deal.