1.39 In most cases the refinancing will not increase the overall financing costs of a project in cash terms. The total cash which the investors will receive over the contract period will generally decrease as investors exchange later benefits for the right to increased early benefits from the project. Further information on the effect on investors' cash receipts from PFI projects which have been refinanced is set out in Appendix 9. If increased debt is used to improve the benefits to the investors, the project cash flows will include the repayment of the increased debt and related interest charges over the contract period.
1.40 The acceleration of benefits can however, significantly increase the rate of returns to investors. The internal rate of return (IRR) is a standard business measure used to compare the returns to investors in different projects.19 At the request of the PAC, we have analysed the IRRs of PFI projects after refinancing and the rate of change in the IRR as a result of the refinancing. These analyses requested by PAC are set out in Appendix 9 together with other data on the projects which have been refinanced. Although there are other measures of investor returns, the characteristics of the IRR calculation make it very sensitive to increases to investor benefits in the early years of a project which is a feature of many refinancings.
1.41 Treasury guidance notes that: the IRR calculation is relevant for the purposes of calculating the refinancing gain; however the authority should be aware that IRRs are generally not a reliable alternative to Net Present Value measurement for the value of an investment.
1.42 On early PFI deals, the expected IRRs were generally 15 to 17 per cent. Figure 12 shows that, where projects disclosed their IRR after refinancing, the IRRs have varied from below 10 per cent to over 70 per cent. At the top end of this range, in four out of 20 projects (all refinancings under the Code), the IRR had risen to over 50 per cent. As around half of the projects surveyed did not disclose to us the rate of investor returns there may be other projects with high investor returns after refinancing.
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Post refinancing Internal Rate of Return (%) | Number of Code refinancings | Number of other refinancings | Total | ||||||||||||||
70 | 2 | - | 2 | ||||||||||||||
60-70 | 1 | - | 1 | ||||||||||||||
50-60 | 1 | - | 1 | ||||||||||||||
40-50 | - | 1 | 1 | ||||||||||||||
30-40 | - | 1 | 1 | ||||||||||||||
20-30 | - | 1 | 1 | ||||||||||||||
10-20 | 3 | 7 | 10 | ||||||||||||||
0-10 | - | 3 | 3 | ||||||||||||||
Total | 7 | 13 | 20 | ||||||||||||||
No response/Returned incomplete information | 8 | 8 | 16 | ||||||||||||||
Total PFI projects surveyed1 | 15 | 21 | 36 | ||||||||||||||
A full analysis by project is set out in Appendix 9. We set out below the three projects with the highest investor IRR and the three with the lowest investor IRR following refinancing based on the information which project teams provided to us. | |||||||||||||||||
The three projects with the highest investor IRRs following refinancing were: | |||||||||||||||||
Project | Total refinancing gain |
| Pre refinancing internal rate of return to investors | Post refinancing internal rate of return to investors | Main initial investors | ||||||||||||
Debden Park School | £1 million |
| 16% | 71% | Jarvis PLC, Barclays Capital | ||||||||||||
Bromley Hospital | £45 million |
| 27% | 71% | Innisfree, Barclays, Taylor Woodrow Construction | ||||||||||||
Norfolk & Norwich Hospital | £116 million |
| 16% | 60% | Innisfree, Barclays Private Equity, 3i PLC & Serco Group | ||||||||||||
The three projects with the lowest investor IRRs following refinancing were: | |||||||||||||||||
Project | Total refinancing gain | Pre refinancing internal rate of return to investors | Post refinancing internal rate of return to investors | Main initial Investors | |||||||||||||
Tyne and Wear Fire | - |
| 0% | 0% | Jarvis PLC, Barclays Private Equity | ||||||||||||
Calderdale Hospital | £12 million |
| 7%2 | 8% | Bovis Lend Lease, RCO Holdings, HBOS | ||||||||||||
Brooklands Avenue, Cambridge | £0.8 million |
| 9% | 9% | Kajima Partnerships Limited, Japan England Insurance Co Ltd, WestWind Capital Partners Ltd | ||||||||||||
Source: National Audit Office Survey | |||||||||||||||||
NOTES 1 Information was requested from the 36 English PFI projects which have been refinanced. 2 The contract award IRR was used in this table as the pre refinancing IRR was not provided by the project team. | |||||||||||||||||
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19 The IRR is the discount rate at which the present value of the investors' receipts from a project equals that of their payments, including their initial investment. The IRR percentage does not mean the investors will receive this as a constant return each year; the receipts from the project may vary from year to year.