1.7 Taking advantage of better financing terms through a refinancing is an established technique which can help a project's cash flows. It can, as a result, significantly improve the returns which the shareholders in the project will receive. A key principle of PFI projects is that appropriate benefits should go to those successfully managing risks. In the context of the PFI partnerships which the Government is seeking to establish with the private sector it is reasonable for the private sector to benefit from refinancings where it has successfully managed project risks and its overall returns from the project following the refinancing are commensurate with the risks it has borne. It may also be reasonable for the public sector to seek a share in refinancing gains. Sharing these gains is consistent with the concept of partnership. Refinancing gains, if not shared, could adversely affect the perceived value for money of PFI projects.
1.8 There were references to refinancing in 1997 and 1999 Treasury guidance but these did not establish a general principle of sharing refinancing gains. Early guidance in 19974 said departments and their advisers should consider the private sector's scope for refinancing and try to capture some of the benefits. The 1999 guidance5, based on greater experience of the UK PFI market, said the sharing of refinancing gains is likely to be appropriate only in limited circumstances but also said authorities should bear in mind the potential risks to perceptions of value for money if they were unable to share in significant refinancing gains. This approach reflected the then Treasury view that the value for money of PFI had to be evaluated in the round and that seeking to share in refinancing benefits would not necessarily result in good value. There were risks that contractors might seek an unduly large price increase to compensate for sharing later potential refinancing gains. The Treasury was also aware that, where private finance had been used to fund public infrastructure overseas, these arrangements did not usually include contractual provisions for the public sector to share in refinancing gains.
1.9 The early approach to refinancing also reflected the Government's desire to stimulate the PFI market, which it believed could be damaged if inappropriate claw- back arrangements were entered into. It considered that contractors would be less likely to take on the risks inherent in PFI projects if they were being asked to share the potential refinancing benefits with Government. The Treasury Taskforce was also trying to encourage competitive pricing of PFI contracts and wanted to avoid the possibility of refinancing clauses pushing bid prices higher.
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4 The Treasury PFI Panel guidance on further contractual issues.
5 1999 Treasury Taskforce Standardisation of PFI Contracts.