3.2 The OGC's new refinancing guidance was published in July 2002 as part of its revised guidance on the standardisation of PFI contract terms. It includes contractual terms on refinancing to be included in new contracts. These were developed after extensive consultation with the private sector and departments. It also sets out guidance notes for departments explaining the Government's approach to refinancing.
3.3 An important aspect of the contractual arrangements are departments' approval rights. Departments will have rights to approve any refinancing situation where the department may be entitled to a share of any gains and to generally approve any increase to their termination liabilities14. For a refinancing to be subject to gain sharing, it must be a "qualifying refinancing". This covers all refinancings other than certain situations that are excluded. Excluded situations include refinancings of a contractor's general finances (as opposed to project specific finance, which would be a qualifying refinancing). Gains made by contractors and other investors from the sale of shares in project companies are also excluded.
3.4 The private sector is not required to notify a department of a refinancing unless it is of the type that requires the department's approval.
3.5 The situations that need to be carefully managed are:
■ The private sector may seek to exploit the exclusion clauses by arranging refinancings in a way that will fall within these excluded situations.
■ As a department does not contractually have to be informed about all refinancings, it cannot immediately check to see whether or not any given refinancing is one that needs its approval and requires benefits to be shared. It must rely on the private sector to apply the approval process correctly. The OGC says that penalties for not seeking a department's approval for a qualifying refinancing, which would include contract termination without compensation for shareholders, will be a big incentive for contractors to adhere to the correct approval procedures.
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14 There are limited exceptions to departments' general rights to approve any increase to their liabilities in the event of contract termination. These exceptions are where the increased liabilities arise in connection with the exercise of lenders' step-in rights if a project is in difficulties or where additional bank facilities are used to fund construction contingencies. In these situations termination liabilities may be increased without the authority's approval but by an amount not exceeding 10 per cent of the original bank debt.