Privately financed government projects are generally financed through a mixture of debt finance (in the form of either bank or bond finance) and equity finance (where investors have shares in the project company which has been awarded the government contract). It is a normal feature of long term projects that there may be refinancing in the form of changes to the debt or equity finance during the life of the project. This is because there is normally greater risk at the construction phase which, once completed, enables better financing terms to be obtained. Also, the maturing PFI market has meant that early PFI projects can now access better financing terms than those available when the contracts were let.
In 2002 the government introduced arrangements for the private sector to share PFI debt refinancing gains with the public sector. In 2003, the Office of Government Commerce, which then had responsibility for PFI policy, told the Committee that it expected the public sector to receive £175-£200 million from the voluntary sharing arrangements on early PFI deals, but up to December 2006 the government had secured the right to gains of only £93 million. Some of these early refinancings which had taken place had generated very high rates of return to the private sector investors and additional risks to the public sector in the form of higher termination liabilities and extended contract periods.
In the PFI equity market there is a developing secondary market which enables investors to acquire shares in PFI projects which are already in progress and some investors are building up portfolios of PFI investments. There is no requirement for the gains on selling shares in PFI projects to be shared with the government.
On the basis of a report by the Comptroller and Auditor General,1 the Committee took evidence from the Treasury on PFI debt refinancing experience, the operation of the PFI equity market and the availability of financial information about PFI projects.
_______________________________________________________________________________________________________________________________________
1 C&AG's Report, Update on PFI debt refinancing and the PFI equity market, HC (2005-06) 1040