The OGC Guidance note (the Guidance) was negotiated with the private sector as part of the acceptance of the retrospective gain sharing arrangements under the Code of Conduct.
The Guidance enshrines, in broad terms, the concept that a refinancing gain is generated from the difference between the distributions to investors before and after the refinancing using a recommended discount equal to the internal rate of return to shareholders (equity IRR) from the original financial model. The Guidance includes an agreed methodology to establish the size of gain including identifying allowable transaction costs that can be deducted from the gross gain. The Authority is only entitled to share in the refinancing gain if the contractor is projected to achieve the original base case equity IRR.
Once the gain had been calculated the Authority must decide whether to take its gain over time as a reduction in the unitary charge or as a lump sum. The Guidance sets out how to calculate the revisions necessary to correctly size the gain if taken over time; relevant factors include the effects of a lower tax bill paid by the contractor (the contractor makes less profit), the need for less new senior debt and the payment of implied interest to the Authority for deferring its gain.
The Guidance uses NPV as the measure to determine the refinancing gain.