2.2 Once the construction phase of a PFI project has been completed there can be opportunities to refinance the deal on more favourable terms as a major risk element of the project has been completed. Thus a refinancing can be seen as an indicator of a successful project. The potential for refinancing gains is greater on early PFI deals because of the better terms which are also available now that the PFI financing market has matured. Through sharing of refinancing gains, refinancings have the potential to benefit both the public and private sectors.
2.3 In this project, once the new hospital had been completed, THC Dartford were able to utilise these opportunities to refinance the contract on better terms and to thereby generate refinancing gains. The particular factors which contributed to the refinancing opportunity were:
■ this contract, let in 1997, was the first PFI hospital contract. The terms of finance which had been available in 1997 reflected risks which lenders attributed to what was then a new, complex and untested form of procurement. On refinancing, THC Dartford had the opportunity to access better terms that reflected the fact that many PFI projects had been successfully delivered, including THC Dartford's new hospital for the Trust; and
■ the successful opening of the hospital in 2000 had eliminated much of the construction risk inherent in the project at the time the original finance was provided. New finance would be on better terms to reflect the lower level of risk which could affect the remainder of the project.
2.4 The above factors gave THC Dartford the opportunity to reduce the risk premium in its interest rate charges, to extend the repayment of its borrowings over a longer period and to negotiate other relaxations in the terms specifying how debt should be repaid. As well as increasing their potential returns by these improvements to the financing terms THC Dartford's shareholders were also in a position through other factors to significantly accelerate the benefits that they would derive from the project. Their plan involved:
■ significantly increasing THC Dartford's borrowings although THC Dartford had no immediate need for additional funds to operate the project. This would create cash resources which could be used to enable THC Dartford's shareholders to draw immediate benefits from the project with the increased borrowings to be repaid out of planned profits later in the contract period; and
■ utilising the benefit THC Dartford had derived as a result of the fall in general interest rates since the contract was let in 1997. THC Dartford had left part of their borrowings exposed to fluctuations in interest rates and the falling interest rates had worked in their favour. By being able to fix its interest rates at lower levels as part of the refinancing THC Dartford had greater funds available for early distribution than it had expected when entering into the contract. As THC Dartford had taken the risk that it would be exposed to higher costs if the interest rates had increased, this benefit from falling interest rates did not have to be shared with the Trust.11
2.5 The factors outlined above created an opportunity whereby the benefits to the shareholders of THC Dartford over the contract period would be both accelerated and increased (in present value terms) compared to the financial plans they had presented to the Trust when bidding for the contract. THC Dartford saw this as a reward for successfully bringing into operation this first PFI hospital project to reach contract letting. It also gave THC Dartford's shareholders the possibility of using the benefits they would draw from this project to help fund bids for other PFI projects.
2.6 THC Dartford's refinancing plans also presented the prospect of important financial benefits to the Trust. When the Trust let its PFI contract its plan was to keep its finances in balance.12 Subsequently, however, although there were no material changes to the PFI contract price, the Trust had an underlying deficit during 2002-03 in the order of £4 million. The deficit had arisen because of the impact of the increases in activity, losses of funding and higher than expected costs arising from running the hospital, for example rates. Securing a share of THC Dartford's refinancing gains was, at the time, one of the measures available to the Trust to help achieve financial balance.
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11 As provided for in Treasury standard contract terms for refinancing paragraph 35.4.4.1.
12 The plan, as described at paragraph 1.13 of the NAO’s report: The PFI Contract for the new Dartford & Gravesham Hospital (HC423 1998-99), was based on the Trust receiving additional financial support from within the NHS and savings being achieved by the consortium and the Trust.