1. Most of the negotiating of refinancing deals is undertaken by the public sector at a local level where officials often lack commercial awareness. Some of the locally negotiated refinancings have produced very high investor returns and increased risks for the public sector such as higher termination liabilities and longer contract periods. All staff undertaking refinancing negotiations should undergo suitable training to equip them for this role.
2. The Treasury's refinancing taskforce is a small team whose role is mainly advisory. To ensure its experience is brought to bear on refinancing negotiations the Treasury should approve the final terms of any refinancing involving sub
3. stantial gains to investors.
4. To date, proceeds for government from refinancing under the voluntary code amount to only £93 million. This amount is well below the indication provided by the Office of Government Commerce at the PAC hearing in 2003 that proceeds would be in the order of £175-200 million. The shortfall may be a reflection of some investors opting to defer refinancing in favour of realising gains through selling their shares in the secondary equity markets.
5. Proceeds from refinancing would also be affected if gain-sharing was a disincentive to smaller refinancings. There may therefore be a case for a more flexible sharing arrangement. Should there be any revision of the voluntary code a sliding scale of gain-sharing could be introduced which would help stimulate investors to undertake smaller value refinancings.
6. The Department of Health currently advises NHS Trusts to take refinancing gains over time. Taking the gains upfront would minimise any future risk to the public sector and is therefore preferable. The Treasury should ask the Department of Health to require NHS Trusts to take refinancing gains as an immediate lump sum unless there are convincing value for money grounds for an alternative basis.
7. The Treasury view that the public interest is not affected by sales of PFI equity is only credible if there is an efficient equity market in which investor returns can be left to find their own level as the equity is being provided on the best possible terms. The Treasury needs to demonstrate that the efficiency of the market is not prejudiced by factors such as lack of liquidity, market dominance, political risk or lack of transparency.
8. There has been growth in new investors in the PFI market mainly through the establishment of secondary market funds. It is reasonable to expect this expansion in the volume of equity available for PFI projects to produce a lower cost of equity for new deals. The Treasury should be tracking the market to assess whether pricing is improving.
9. The PFI equity market has shown signs of consolidation in recent years. If shares become too narrowly held these investors may be able to dominate the market with less competition in the pricing of the equity for new deals. The Treasury should have a strategy for managing these risks if they arise.
10. Transparency of information is one of the essentials to market efficiency. The Treasury should complete its database of PFI information, and use it to increase the range and quality of summarised data about PFI deals. For example, the Treasury should publish annual updates on the number and value of PFI investments held by the main PFI investors.
11. Public bodies surveyed by the National Audit Office were unable to promptly provide financial information about their PFI projects. They need to be more aware of their contractual rights to obtain financial information about their projects. Such data should include the current returns being achieved by investors, and project companies should be asked to provide annual updates of their financial models setting out the investors' returns.