14 These new 50/50 sharing arrangements should significantly improve the returns that departments receive from future refinancings of new contracts and largely reflects previous NAO and PAC recommendations. Departments will have contractual rights to approve, and audit, any refinancing situation where the department may be entitled to a share of any gains and to generally approve any situation which could increase their liabilities in the event of the contract being terminated. This will enable departments to ensure they receive the appropriate share of any gains and that they have the right to refuse additional liabilities. However, there are risks that departments will need to carefully manage. The main risks are:
■ As some types of refinancing are excluded from the requirements for contractors to share the benefits with the public sector, this may encourage contractors to arrange their refinancings to take advantage of these exclusions.
■ As with the voluntary code for existing deals, there could be disagreements over how the gains to be shared will be computed.
■ Departments depend on contractors informing them of situations in which refinancings occur so there is a risk they could take place without the department knowing about them. The OGC thinks this risk is very small, as contractors would risk termination of the contract for failure to disclose a relevant refinancing.
■ The new arrangements are intended to improve the value for money of the deal for departments. They would fail to do so if contractors, individually or collectively, obtain compensating improvements to the pricing or terms of deals that more than offset the share of refinancing benefit being given to the public sector.
■ The general principle of 50/50 sharing does not apply to refinancing gains which make good any shortfall with respect to the contractor's originally expected returns. This potentially reduces the incentive for the contractor to perform well after the contract has been let. There might also be an incentive for contractors to quote unrealistically high expected rates of return when bidding. The OGC and PUK consider, however, that there is a low likelihood of these risks materialising in practice.
15 The OGC intends to emphasise the need to manage these risks. Authorities will need to follow the new PFI and other best practice guidance and draw upon the expertise of PUK and the authorities' advisers. Monitoring will be carried out by the OGC, supported by PUK and by Treasury expenditure teams.
16 As the growing maturity of the PFI market is increasingly enabling better terms of financing to be obtained at the outset, future refinancing opportunities may be reduced. Nevertheless, it is very likely that the private sector will continue to seek refinancing opportunities wherever possible. As our survey identified, the private sector may also seek new opportunities, such as refinancing a group of projects. Refinancing will, therefore, continue to require careful attention by departments.