1. The OGC estimated that the new code sharing refinancing 70:30 on past deals will yield between £175 million and £200 million for the public sector. These impacts are a reflection of the previous work of this Committee and the National Audit Office as well as the more recent work of the OGC. The Treasury should measure the actual impacts from departments applying both the code and also the revised arrangements for new contracts.
2. To obtain the share of refinancing gains to which they are entitled, departments will need to manage their PFI contracts actively. There is evidence that a number of refinancings have occurred without departments noticing them. Recognising that refinancings are complex, departmental officials cannot all be expected to become experts in these matters, but officials concerned with managing PFI contracts should be trained sufficiently to identify when they need to call in expert help.
3. As a source of such expertise, Partnerships UK has established a refinancing taskforce to provide support to departments faced with refinancing situations. It would be prudent for that taskforce not to rely solely on departments to spot refinancings, so the taskforce will need to be proactive in approaching departments where market knowledge suggests refinancing situations are likely to occur.
4. To date, departments have had to rely on contractors notifying them about planned refinancings. 21% of public sector project teams did not have information about their contractors' current financing arrangements. Departments should include in future PFI contracts the right to receive information on their contractors' financing arrangements and any material change to those arrangements.
5. In theory, contractors might respond to the new arrangements for sharing refinancing gains by making compensating increases to their prices. In practice, competitive pressures and the uncertainty as to the timing and amount of refinancing gains might make it hard for contractors to put up their prices. As a further protection from that risk, departments could seek, in addition to the main bid in line with the new refinancing guidance, a variant bid from contractors on how they would price the contract to include the benefit of refinancing gains within the contract price.
6. A further reason for departments to resist any upward pressure on contractors' prices is the important caveat in the new arrangements: refinancing gains will be calculated after allowing the private sector a return at least equal to what was projected at contract letting. Such a provision protects the private sector from a shortfall in profits, even if due to its own under-performance or failure to project accurately the likely returns from the project.
7. There is a risk that, if there is a change in ownership of a PFI project company, the new shareholders may not feel obliged to share refinancing gains under the new voluntary code, particularly if they have no interest in bidding for future PFI contracts. Where there is to be a change in ownership of a PFI project company in a case in which the department needs to rely on the voluntary code for sharing refinancing gains, the department should seek from the new owners a written assurance that they will comply with the code's principles.
8. The new guidance and voluntary code are both complex and the outcome of negotiations. It is possible therefore that there will be scope for contractors to avoid sharing refinancing gains. The OGC and PUK consider it unlikely that contractors would risk their reputation by exploiting such loopholes. Nevertheless, departments will need to be vigilant and should use the audit rights over refinancings which are being written into new contracts to ensure that they receive the correct share of all refinancing gains to which they are entitled.
9. The concept of refinancing gains does not apply so clearly to PFI if financing is provided from a contractor's general finances. The Treasury should monitor whether there is an increase in projects which are being funded in this way. It should take action to share refinancing gains in these projects if there is evidence that contractors are increasingly using such funding arrangements to avoid sharing refinancing gains.