2.41 In the following respects the Trust's approach to accepting higher termination liabilities did not fully comply with current best practice in applying the code and related guidance:
■ best practice would now be for authorities to undertake, prior to a refinancing, the type of detailed analysis of the value for money of increased termination liabilities which the Trust's financial advisers undertook in 2004 to support decisions on whether to accept an increase in termination liabilities when agreeing to a refinancing proposal;
■ to fully comply with the Treasury guidance which was in force when the refinancing was being negotiated the Trust would have been expected to evidence more extensively a consideration of the implications of THC Dartford's intention to increase by 54 per cent the amount of its debt as part of the refinancing. In these situations the Treasury guidance required authorities to obtain appropriate professional advice on the implications of the increased debt to ensure that value for money to the taxpayer is not undermined by the high level of debt.20 Very high levels of debt could affect the financial stability of the private sector consortium, involve the public sector in increased termination liabilities and result in levels of debt which are well above the debt needed to fund the construction and ongoing operations of the asset being provided under the PFI. The Department considers that the Department and Ernst & Young gave the Trust the professional advice required by the Treasury guidance in accordance with expected practice at the time. The Department also notes that the debt rating agency employed by THC Dartford rated the enlarged debt of THC as sound and investment grade which gave comfort that THC would be able to meet the payment obligations of the increased debt. Under current best practice, which reflects the experience of this and other early refinancings completed under the code, authorities would normally be expected to commission external financial advisers to fully assess and report on the value for money issues arising from any proposal to increase levels of debt in PFI project companies; and
■ the Treasury July 2002 guidance said it was unlikely that authorities would agree to a refinancing involving higher termination liabilities unless it was judged better value for money than a refinancing which does not involve such an increase in termination liabilities.21 Best practice would be for an authority, faced with a refinancing proposal involving increased termination liabilities, to obtain and carefully consider the alternative benefits and disbenefits of a refinancing deal which involved no increase to termination liabilities. The Trust did not have an alternative refinancing proposal involving no increase to termination liabilities but it doubts that THC Dartford would have been able to complete a refinancing on this basis.
2.42 Although the Trust's approach did not fully comply with what is now considered best practice in applying the Treasury's guidance which was available at the time the refinancing was being negotiated the Trust considers, however, that it had sufficient information to support its decision to accept the risk of higher termination liabilities at the time it agreed to the refinancing in March 2003.
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20 Paragraph 35.3.1.7 of PFI Standard Contract terms guidance on refinancing (July 2002).
21 Paragraph 35.3.1.6 of PFI Standard Contract terms guidance on refinancing (July 2002).