Over the past two years, the OGC has carried out a large programme of work to change the approach of departments and the market in new contracts

10  During the past two years, the OGC has also been engaged in extensive work to bring about the desired change in the way refinancing is dealt with in new PFI contracts. It has had to define a proposed policy approach, carry out research to confirm that the policy approach was appropriate and deliverable and identify issues involved in implementing the policy. It then had to develop effective new guidance covering many complex issues and to secure the agreement of both departments and the private sector to the new arrangements. In developing this new approach the OGC was able to draw on the commercial experience on financing issues within PUK. As a result of this work, the OGC has changed the approach of departments and the market to how refinancing will be dealt with in new PFI contracts. This has been set out in the new OGC guidance, which ensures wide powers of approval and audit of refinancings for the public sector and that in most situations refinancing gains arising from new contracts will in future be shared 50/50.

11  Following the earlier NAO and PAC reports on refinancing, the Treasury and OGC took prompt steps to start to develop this new approach. The final stage of what proved to be an extensive programme of work - the publication of detailed revised guidance to reflect the new approach which was already being adopted on many new deals - took longer than the Treasury initially informed departments. It had told the PAC that guidance would be issued in spring 2001. The OGC made initial drafts of the detailed new guidance with model contract terms available to departments in autumn 2001 and they were able to use this in drawing up new contracts. Following extensive consultation with departments and the private sector the OGC refined the guidance and contract terms and published it in final form in July 2002.

12  The OGC attributes the time needed to complete the final guidance to the extensive work required to develop guidance for this complex topic and the need to agree it with both departments and the private sector. As potentially very large amounts of money and the continued participation of the private sector in PFI were at stake, the discussions with the private sector in effect became detailed commercial negotiations. The OGC placed importance on developing the new refinancing guidance as part of an update of the comprehensive guidance on PFI contractual issues. It wanted this whole package to be accepted by both departments and the private sector at the same time. The OGC notes that, as the new refinancing provisions were seeking to improve the position of the public sector, there was little incentive for the private sector, made up of its various interests, to reach an early agreement. The private sector told us that it had concerns about the way in which the development of the new guidance was managed and considers that lessons could be learned for the future.

13  In the meantime, there has been a significant improvement in the proportion of new contracts with arrangements to share refinancing benefits. Since June 2001 91 per cent of contracts have included sharing arrangements and 50/50 sharing of refinancing benefits is now the norm (Figure 2). It took some time for this new policy to become established as some deals with other arrangements (often a 30 per cent share for the public sector) were already at an advanced stage of negotiation and detailed revised guidance for new deals was being developed.