Current estimates suggest it is unlikely that the OGC's previous estimate for Code refinancing gains will be achieved in the foreseeable future

1.25 In order to reach the OGC estimate of £175 to £200 million, there need to be further gains of around £105 to £130 million shared with the Government from future refinancings under the Code. To consider the likelihood of this outcome we considered four potential refinancing scenarios and their likelihood of outcome (Figure 8 overleaf). Further details on the four scenarios are presented in Appendix 7.

7	Movement in risk margins on bond finance

Source: Royal Bank of Canada (from Bloomberg information)
NOTE AAA, AA, A and BBB are grades of investment. AAA has the least risk and therefore the lowest risk margin.

8	Four possible scenarios for the future of refinancing under the Code
Scenario	Likely public sector gain	Explanation of Scenario	Likelihood of scenario coming to pass
1	£0 million	The current subdued state of the refinancing market will continue indefinitely and there will be no further refinancing of PFI deals under the Code.	Possible, but the Treasury has been facilitating negotiations in a number of Code refinancings and so it appears probable that there will be more refinancings in the future.
2	£80 million	All early PFI projects with the potential to refinance will be refinanced but the refinancings will not involve contract extensions or the increasing of debt, and gains will only be derived from lowering the cost of the existing finance.	Possible, but there may be some reluctance from the private sector to undertake refinancings with lower benefits than previously.
3	£300 million	Future refinancings under the Code will continue with the average gain, in relation to capital value, that has been seen thus far.	Unlikely. Public sector gains of the magnitude of Norfolk and Norwich (£34m) and Darent Valley (£12m) are unlikely to be repeated and so average refinancing gains in the future will be lower than those seen in the past.
4	£580 million	Future refinancings under the Code will generate the same high level of returns, in relation to capital value, which was seen in the Norfolk and Norwich deal.	Highly unlikely given the current guidance and scrutiny of PFI refinancing deals, and the limited number of deals offering similar levels of return.
Source: National Audit Office

1.26 It is difficult to estimate how much more the Government may secure from Code refinancings as it is currently uncertain whether the recent decline in refinancing activity will continue. In addition, the majority of PFI projects may not have the characteristics to give the public sector the prospect of benefiting from refinancing (para 1.7). If there is some recovery in refinancing activity, our current best estimate is that the future gains under the voluntary sharing arrangements of the Code will probably be somewhere between Scenario 1 and 2, with the future gain to the Government in the £40 to £80 million range. Adding this to the sum already raised (£71.5 million), total refinancing gains from the Code would then be somewhere between £110 to £150 million; still short of the OGC 2002 estimate of £175 to £200 million. To generate more from refinancing in line with OGC's original estimate, the number of refinancings, or the gains arising from each refinancing, would need to increase compared to our assumptions. The OGC's estimate could, however, yet be achieved in due course if there are any further large refinancings. The Treasury accepts that the Government is receiving less from Code refinancings than initially expected but its main focus has been on the achievement of value for money through an appropriate balance of risk and reward rather than maximising the gains.