1.24 The new voluntary code is being offered to authorities as the basis for negotiations on any future refinancings of their past PFI projects. The code intends that, other than the proposal that 30 per cent of refinancing gains should be shared rather than 50 per cent, many of the details should be consistent with the revised general guidance relating to new contracts.
1.25 As to situations where the new code may be applied, ten authorities (seven per cent of our survey) said they were aware that their contractors had plans to refinance (Figure 6). In addition, the private sector consortium for the Norfolk and Norwich hospital project is thought to be planning a refinancing. This information may, however, be an understatement of all the plans that may be in train to refinance early deals. Authorities may not always receive information about the planning of refinancings and the private sector may have deferred some refinancings because of uncertainty about what share of the gains would be given up. Not all projects will be refinanced. For example, a number of projects are bond financed which are unlikely to be refinanced. In some other situations, such as rescue refinancings, a refinancing may take place but the the public sector would not expect to share in the benefits.
1.26 There are a number of risks that will need to be carefully managed if the proposed agreement that the public sector should generally receive 30 per cent of the refinancing gains on early PFI deals is to work effectively:
6 |
| Projects where we were informed a refinancing is planned |
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| Forest Bank (Agecroft) Prison Dartford and Gravesham Hospital South Manchester University Hospitals - Wythenshawe Hospital Sheffield City Council - Group Schools Projects London Underground Power Newcastle Estate Development Scheme ELGAR (DTI) Manchester High Powered Computing Croydon Tramlink Enfield New School Norfolk and Norwich Health Care NHST - New hospital (thought to be planning a refinancing) |
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| Source: National Audit Office |
■ The agreement is a voluntary code of practice that is not contractually binding
The principle that the public sector should generally receive 30 per cent of the refinancing gains on early PFI deals has been set out in a voluntary code of practice. As these new arrangements are being introduced after contract letting the OGC considered that a contractually binding approach was not appropriate. There will therefore be no legal remedy if a contractor on a particular contract is not prepared to give up 30 per cent of any refinancing gain. The OGC acknowledges this, but considers that such occasions should be relatively few because, in addition to the code being supported by the CBI, a range of private sector participants have indicated that they will support it. In addition, the OGC notes the emphasis on public sector contractual approval rights being exercised, to the extent to which they exist, which does provide some leverage which has been recognised by the private sector.
■ There could be disagreements as to what constitutes a refinancing benefit to be shared with the public sector.
Defining what constitutes a refinancing and calculating the gains that have arisen on a refinancing are complex matters. There are risks that there could be disagreements between departments and contractors given that the sharing arrangements are not contractually binding. Private sector representatives told us that they may seek to have some issues negotiated on a contract-by-contract basis and that they had concerns about how the gains to be shared would be computed. In particular, they considered further discussions were required with the public sector about the discount rate to be applied to the project cash flows in order to compute the gains to be shared.9 The private sector hopes, however, that accepted practices for how the code will operate will quickly develop.
■ Contractors may seek to avoid the need to share the refinancing gains
Because of the complexities surrounding refinancings, there is a risk that some contractors may structure their financing arrangements to receive a refinancing benefit without sharing it. This could arise either because it is not transparent to the department that a refinancing has occurred or because the refinancing has been effected in a way that is outside any definition of refinancing that may have been agreed as part of the code.
1.27 In order to help to implement the code, and to overcome these risks, the OGC is arranging to have additional, dedicated PUK services available to help ensure there is a well-informed and consistent approach to any negotiations based on the new code of practice.
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9 The application note issued by the OGC to departments in July 2002 states that the most appropriate discount rate to use is the original base case equity internal rate of return (the rate investors expected to earn from capital invested in the project).