The OGC is helping departments generally to secure a 30 per cent share of future refinancing gains on early PFI deals

4  Refinancing is an established technique whereby improved financing terms can be obtained in projects where risks have been successfully managed. Only one in four of the early PFI contracts, however, had clear arrangements to share refinancing gains. The 1997 and 1999 guidance referred to refinancing but did not recommend seeking particular shares of refinancing gains. This reflected the Treasury's desire to encourage the development of the PFI market and its recognition that contracts for similar projects in other countries did not then normally provide for the sharing of refinancing gains.

5  Deals originally without arrangements to share refinancing gains had been concluded by departments on the basis that they would deliver value for money to the taxpayer. If the taxpayer now gets the benefit of a 30 per cent share of refinancing gains, then such a deal will be even better value for money than it was before. But, as the PAC pointed out, a refinancing that results in rewards for the private sector which are not commensurate with their risks can call into question the value for money of the original deal.

6  Following both NAO and PAC concerns about the lack of sharing by the public sector in such refinancing benefits, the OGC, with assistance from the Treasury Private Finance Unit and Partnerships UK (PUK), has taken the initiative in devising a centrally led strategy to seek a better share of the refinancing gains on these early deals. A new voluntary code of practice, which the OGC launched in October 2002, states that departments should generally receive a 30 per cent share of future refinancing gains on these early PFI deals. This code has been launched with the support of the CBI.

7  If these arrangements work effectively, a 30 per cent share of refinancing gains on early PFI deals will be a considerable improvement over what the contract terms for most of these deals would have achieved. There can be no guarantee that the new arrangements will work, as they are based on a voluntary code and will not be contractually binding - although the emphasis upon public sector contractual approval rights being exercised, to the extent that they exist, does provide some leverage, which has been recognised by the private sector. There are still some concerns in the private sector about, for example, how the gains to be shared will be computed.

8  The OGC acknowledges that a good deal of further work will be required to gain full benefit from the new arrangements. A PUK task force is being established to assist OGC in providing central support to departments whose early PFI deals may be refinanced under the code. The extent to which the new code proves effective will be very important. Although new contracts are now required to include arrangements to share refinancing gains, 61 per cent of contracts we surveyed (covering the whole of the period the PFI has been operating), do not have these arrangements. For the next few years, departments, in most cases, will be reliant on the new voluntary code to secure a share of gains where projects are refinanced.

9  We were advised by departments of 12 projects which had completed refinancings (Figure 7, page 14). The outcome to the public sector varied but in nine of the 12 cases departments received a share of the gains with seven receiving at least 25 per cent. Based on departmental information, the public sector has secured at least £17 million out of total benefits of about £65 million from the 12 cases. But we also found evidence that other refinancing gains may have arisen without departments being aware. A lack of information about the contractors' financing, or understanding of situations where refinancing gains may have arisen, can result in departments not being aware of all refinancing gains.