Half of the refinancings in our survey involved increased debt with most resulting in increased termination liabilities

2.7  From our surveys, 17 projects returned information on their debt structure following a refinancing (Figure 13). In eight of these projects the authorities reported increased termination liabilities following the refinancing.21

2.8  The increases in the projects' main borrowings (known as senior debt), where significant, were from £6 million to £106 million (Norfolk and Norwich Hospital). The average increase was £31 million. On average, the increases represented about a 20 per cent increase in the senior debt in the project.

In one project the private sector had accepted that the authority's termination liabilities would not increase

2.9  In one case, on the Highways Agency's A19 PFI road deal, the contractor arranged for their lender to bear the additional risk arising from a £9 million increase in the senior debt. This illustrates that the public sector does not necessarily have to accept increased termination liabilities where the private sector increases its debt.

In other projects, however, the authorities had not appreciated the impact on their termination liabilities

2.10  In some situations, however, it was not always clear whether authorities had been fully aware of the possible impacts on their termination liabilities as a result of a refinancing. For example, one contractor had released cash reserves as part of its refinancing but the authority did not recognise that this would have increased its termination liabilities.22

Some authorities have taken on increased termination liabilities without a full appraisal and exploring alternatives

2.11  In two projects, the authorities' termination liabilities were increased although the projects teams reported in the survey that there had not been a clear value for money case justifying the increase. In four projects, termination liabilities were increased without any exploration between the contractor and the project team of alternative refinancing terms which could have resulted in no increase in termination liabilities.

2.12  The effect on termination liabilities where the private sector has increased its debt on refinancing can be dramatic. As we noted in our report on the refinancing of the Norfolk & Norwich PFI hospital the NHS Trust's termination liabilities could be as much as £257 million higher following the refinancing which increased the PFI consortium Octagon's debt from £200 million to £306 million.

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21  Further details are set out in Appendix 9.

22  Following the refinancing, the authority's termination liabilities would have had to cover that part of the contractor's borrowings which could previously have been repaid out of the cash reserves.