2.2 Very soon after our report on the Fazakerley prison refinancing in June 2000, the Treasury informed departments in July 2000 of the OGC's intention to produce new guidance. The Treasury said that the OGC was commissioning PUK to expand existing refinancing guidance and that the new guidance would be issued by the end of 2000 as part of the update of Standard Contract Terms. The Treasury underlined the need for departments to ensure refinancing gains do not threaten the perceived value for money of their projects.
2.3 The newly formed OGC, created as an office of the Treasury in April 2000, was charged with developing the new guidance. As a first step, following the publication of the NAO report on the Fazakerley refinancing, it immediately made clear to the private sector that new arrangements on sharing refinancing gains would
2.4 The OGC took an early view that, subject to the outcome of research it proposed to undertake, its aim would be to agree with the private sector that 50/50 sharing of refinancing gains would be required in new contracts. The OGC set out to consider whether 50/50 could be achieved and whether any changes in contracts to secure 50/50 sharing would be value for money.
2.5 At the PAC's hearing on the NAO report on the Fazakerley prison refinancing on 1 November 2000, the PAC expressed concern that, with £17 billion of PFI contracts signed, the Treasury had not confronted the issue of refinancing. The Treasury said that changes would be incorporated in new guidance that would be issued in spring 2001.
2.6 On 20 November 2000, the OGC issued a bulletin to departmental Private Finance Units. It repeated that new guidance was being developed that would be available "around the turn of the year". This bulletin focussed on what departments should do if they faced a refinancing on an existing contract. It advised departments to seek an equitable outcome that would protect the taxpayer's interests and be defensible publicly. It said that, where a department's approval was required for a refinancing, it should seek to share the benefits 50/50 - or consult the OGC if this was not possible.
2.7 The OGC did not formally advise departments at this stage what arrangements should be built into new contracts, as it wished to carry out further research before issuing guidance. However, the reference to 50/50 sharing on existing deals, together with the OGC's informal discussions with departments and others created an impression that 50/50 sharing was likely to become the norm in new deals when the new guidance was finalised. The OGC's informal advice to departments at this time was to seek 50/50 sharing in new contracts or to justify why any other arrangement had been negotiated. Both the OGC and PUK reinforced this view in discussions with departments and their advisers but acknowledged that in deals already at an advanced stage of negotiation 50/50 sharing might not be achieved.
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Timeline of production of guidance on refinancing |
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Date |
Guidance |
Recommendations |
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1997 |
Treasury PFI Panel guidance on further contractual issues |
Consider the scope for refinancing and try to capture some of the benefits |
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1999 |
Standardisation of PFI Contracts - HM Treasury |
It may be appropriate to share refinancing gains in limited circumstances |
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June 2000 |
NAO report on refinancing of Fazakerley prison |
Benefits from reducing costs in a developing market should be shared. Compensation should be obtained for increased termination liabilities |
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July 2000 |
Letter to all principal finance officers from HM Treasury |
Departments to consult with experts and the OGC. More guidance will be published later in year. |
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November 2000 |
OGC Circular to PFU Heads |
Departments should seek an equitable outcome on refinancings of existing contracts. Seek compensation for any increased liabilities and 50/50 share if departmental approval is needed |
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December 2000 |
Deutsche Bank appointed as financial adviser to assist with financing issues |
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March 2001 |
PAC report on the refinancing of the Fazakerley prison contract |
Departments should receive a 50/50 share of all refinancing gains |
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April 2001 |
Drafting of new guidance commenced |
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July 2001 |
OGC Circular of November 2000 was posted on the OGC website and PFU Heads and PFOs notified |
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August 2001 |
PUK start to develop approach to negotiating with private sector on sharing refinancing gains on past deals |
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Autumn 2001 |
Letter from the Chief Executive officer of the OGC Accounting Officers which explained the OGC approach to all refinancings Drafts of revised OGC refinancing guidance circulated to departments and discussions take place OGC/PUK conference which conveyed the emerging approach to contract guidance, including refinancing to a large audience |
Revised guidance aimed at 50/50 sharing of refinancing benefits in most situations |
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December 2001 |
New draft revised general guidance (including refinancing) circulated to private sector |
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January 2002 |
Draft report on refinancing of past deals completed by PUK |
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Spring-Summer 2002 |
Ongoing consultation with departmental PFUs and private sector about new guidance for future deals and basis of sharing refinancing gains on existing deals |
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July 2002 |
Revised refinancing guidance in final form available on OGC website as part of revised general guidance |
50/50 sharing of refinancing benefits in most situations |
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October 2002 |
OGC launched voluntary code of practice for early PFI deals with CBI support |
Departments will generally seek to receive 30 per cent of refinancing gains on deals where the contract does not include an explicit sharing arrangement |
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