Refinancing a PFI deal after the initial risks have successfully been overcome is one of the ways in which investors in such deals can make financial gains. On occasion, such refinancing gains have been very large and not wholly attributable to private sector enterprise and risk-taking. Yet even in these cases, gains have not necessarily been shared with the public sector. Only one in four of the early PFI contracts had clear arrangements to share refinancing gains. We recommended that departments should expect to share in refinancing gains and that the Office of Government Commerce (OGC), which had been considering updating its central guidance, should do so as a matter of priority.1
Subsequently, the OGC issued new guidance on how departments should provide in future PFI contracts for the sharing of refinancing gains. In addition, the OGC negotiated with the private sector a code of practice applying to past PFI deals under which a 70:30 split of refinancing gains would take place, even if no provision for sharing refinancing gains had been made in the original deal. Since 1 April 2003, policy responsibility for these matters has passed from the OGC to HM Treasury.
On the basis of a Report by the Comptroller and Auditor General,2 the Committee took evidence from the OGC and its advisers, Partnerships UK, on the outcomes departments were likely to achieve from new refinancing arrangements put in place by the OGC.
Our key conclusions are as follows:
• It is a good negotiating achievement for the OGC to have established with the private sector that refinancing gains on past PFI deals should be shared 70:30. In respect of past deals which had not provided for refinancing gains to be shared, individual departments would have faced an uphill task in arguing to share them. Acting for government as a whole, the OGC was successful in its determined approach to the private sector. There may be other aspects of the PFI where a central approach might be worthwhile: for example in respect of the banks' standard terms for external finance of PFI deals, or for associated financial instruments.
• Whilst the new guidance on sharing refinancing gains is welcome, the new arrangements can only work effectively if departments equip themselves to pursue refinancing gains. To date, departments have not been good at recognising refinancings and understanding their complexities. Departmental staff involved in managing PFI contracts will need specific training to enable them to recognise when refinancing situations may have arisen, so that they can seek expert advice on how to handle them.
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1 13th Report from the Committee of Public Accounts, The refinancing of the Fazakerley Prison PFI contract (HC 372, Session 2000-01)
2 C&AG's Report, PFI refinancing update (HC 1288, Session 2001-02)