Recommendations referring to the equipping of the public sector to deal with refinancings | |||
Recommendations linked to Guidance | Report Source | Treasury response on the extent to which action has been undertaken in order to meet the recommendation1 | |
1 Refinancings are complex financial arrangements. Departments will need to consider the implications of refinancings on a project by project basis. There are, however, principles which should guide departments and strategies which can help departments apply the principles. They are that: (a) appropriate benefits should go to those bearing risks; (b) benefits from reducing costs in a developing market should be shared if they have not already been reflected in the contract price; (c) it is reasonable for departments to seek compensation for any increased exposure to termination liabilities arising from a refinancing; (d) substantial refinancing gains to the private sector may threaten the perceived value for money of the project; (e) a refinancing should not jeopardise the stability and success of the long term contractual relationship between a consortium and a department; and (f) if the private sector seeks to improve its returns by renegotiating parts of a PFI contract it is reasonable for departments to seek a share of refinancing benefits. | 1
| These principles are now reflected in the guidance on the standardisation of PFI contracts.
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2 Better guidance is needed to help departments address refinancing issues and how the benefits of refinancing should be shared. | 2 | There are now four complementary guidance documents available to departments: ■ Standardisation of PFI contracts (version 3, 2004) ■ Refinancing of Early PFI Contracts - Code of Conduct (November 2002) ■ Calculation of the Authorities' Share of a Refinancing gain (July 2003) ■ Application Note - Value for Money in Refinancing (Feb 2005) Additionally departments can seek help and interpretation of guidance from the Refinancing Taskforce and the Treasury. | |
3 Although PFI contracts with a capital value of approximately £17 billion had been let by July 2000, there was no central guidance on refinancing until July 1999, by which time most of those contracts had been let or were under development. The Treasury should aim to anticipate future issues where departments may require guidance rather than simply producing guidance in response to situations which have already developed. It should consult external experts and the National Audit Office about emerging issues where central guidance would be helpful. | 2 | Noted. NAO additional comment: The Treasury has presented a number of guidance documents as set out in Appendix 1 and noted in the response given in 2 above.
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4 Many PFI projects, particularly where contracts were let in the early stages of the development of the PFI, are likely to be refinanced. The National Audit Office's analysis shows, however, that only 24 per cent of PFI projects surveyed included arrangements whereby departments are entitled to share in refinancing gains. The Treasury and the PFI Policy Unit in the Office of Government Commerce (OGC) should therefore complete their planned updating of the central guidance on refinancing as a matter of priority. | 2 | These projects will now be subject to the voluntary code of conduct. NAO additional comment: The Treasury followed up the voluntary code of conduct (issued in September 2002) with an Application Note (issued in February 2005) to help Authorities, and their Contractors who bring forward Refinancing proposals, to undertake a thorough analysis. | |
5 All departments must give careful consideration to refinancing issues when they develop contractual arrangements with PFI consortia, taking account of the lessons from the Fazakerley prison refinancing and further guidance which the Treasury and the OGC may develop. | 2
| This requirement has been present in the standardisation of PFI contracts since July 2002.
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6 The OGC should take steps to ensure departments are fully aware of the issues covered in the new OGC guidance. Refinancing issues are complex and our work has shown that departments may not always recognise situations that give rise to refinancing gains. Departments need to: better understand the situations that could give rise to refinancing benefits; to be able to compute correctly their share of refinancing gains; and to manage the risks attached to making the new arrangements work effectively. As well as carrying out its plan to encourage departments to follow the new OGC guidance and to consult PUK on refinancing matters, the OGC has agreed that this issue should also be addressed as part of the new Successful Delivery Skills training programme for the public sector. It also proposes to arrange seminars for departments to improve their awareness of the issues involved and to share experience. | 3
| We do not have the background to comment on OGC's response to the Committee's recommendation, however the OGC guidance has now become the default mechanism for calculating refinancing gains. We have no evidence of resistance by contractors to implementing the calculation methodology of the OGC guidance. The Refinancing Taskforce is available to departments to answer questions on interpreting calculation guidance. NAO additional comments: ■ OGC was originally responsible for issuing PFI guidance but this is undertaken by the Treasury ■ The NAO now engages with the Treasury to deliver joint seminars to departments on financing issues.
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7 Where a complex area of new central policy is to be introduced, initial feasibility work should be undertaken to establish a realistic timetable for the implementation of the policy. If this indicates that a long period will be needed to develop the new central policy, or the guidance that departments will need to implement the policy, the Treasury and OGC should consider carefully whether departments should be given interim guidance. It may be helpful to outline the issues that departments will need to keep in mind pending the finalisation of the new policy and how it will be implemented. | 3
| Noted. Policy is set in a dynamic environment that both anticipates future and addresses historical or current needs.
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8 To date, departments have had to rely on contractors notifying them about planned refinancings. 21% of public sector project teams did not have information about their contractors' current financing arrangements. Departments should include in future PFI contracts the right to receive information on their contractors' financing arrangements and any material change to those arrangements. | 4 | The Treasury agreed with the Committee's recommendation. Standardised Contracts (SoPC) require the contractor to inform the Department of any actions that could fall within the description of refinancing. The fact that failure to comply can result in the contractors' loss of the contract for minimal equity compensation means that there are strong incentives to ensure that the Department is kept properly informed on refinancing issues. | |
9 The new guidance and voluntary code are both complex and the outcome of negotiations. It is possible therefore that there will be scope for contractors to avoid sharing refinancing gains. The OGC and PUK consider it unlikely that contractors would risk their reputation by exploiting such loopholes. Nevertheless, departments will need to be vigilant and should use the audit rights over refinancings which are being written into new contracts to ensure that they receive the correct share of all refinancing gains to which they are entitled. | 4 | The Treasury agreed with the Committee's recommendation and has remained vigilant in ensuring that the work of the Refinancing Taskforce combined with high penalties for non-compliance continues to safeguard department's financial interests. Furthermore there is no evidence of PFI contractors ignoring the Code. | |
Recommendations referring to the equipping of the public sector to deal with refinancings | |||
Recommendations linked to Advice | Report Source | Treasury response on the extent to which action has been undertaken in order to meet the recommendation1 | |
1 As in the case of Fazakerley, when faced with the refinancing of an existing project, departments should enlist the help of experienced legal and financial advisers. This can assist departments in understanding the full implications of the refinancing proposals and in establishing the best way to approach any negotiations. | 1
| The Treasury agrees with the Committees' recommendation. This principal is espoused in extant guidance.
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2 Although this was the first major refinancing of a PFI project, the Service chose not to make greater use of its adviser, NM Rothschild & Sons (Rothschild), in determining a negotiating strategy, and did not ask Rothschild to participate in the negotiations. Given the complexities of PFI refinancing and the potential financial consequences, departments should make appropriate use of experienced advisers in developing, and participating in, refinancing negotiations. | 2
| The Treasury agrees with the Committees' recommendation. This principal is espoused in extant guidance.
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3 Given the complexities and specialist nature of refinancings, departments should seek advice on refinancing matters from suitably experienced advisers including OGC and PUK as appropriate. Advice should be taken, initially, when reviewing bids and financing proposals to identify the scope for refinancing and should always be sought when faced with any refinancing situation (including situations that may have been described as a "financial restructuring"). | 3
| The Treasury agrees with the Committees' recommendation. This principal is espoused in extant guidance.
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4 Refinancings are complex and the potential risks and benefits are often very large, particularly in early PFI deals. It is essential, therefore, that public sector project teams take timely experienced advice. Available sources for advice include departmental Private Finance Units and the Treasury Refinancing Taskforce which provides guidance on policy aspects of refinancings. The Taskforce should be consulted on a regular basis as refinancings are being negotiated. Departments should also take advantage of the training on refinancing issues which the Taskforce is able to provide to project teams. | 5
| The Treasury agrees with the Committees' recommendation and is in regular liaison with departmental private finance units and the Refinancing Taskforce to ensure that they remain proactive in this regard.
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Recommendations referring to the equipping of the public sector to deal with refinancings | |||
Recommendations linked to Skills | Report Source | Treasury response on the extent to which action has been undertaken in order to meet the recommendation1 | |
1 Whilst the new guidance on sharing refinancing gains is welcome, the new arrangements can only work effectively if departments equip themselves to pursue refinancing gains. To date, departments have not been good at recognising refinancings and understanding their complexities. Departmental staff involved in managing PFI contracts will need specific training to enable them to recognise when refinancing situations may have arisen, so that they can seek expert advice on how to handle them. | 4
| The Treasury agreed with the Committee's recommendation and has endeavoured to ensure that the Refinancing Taskforce continues to include education as one of its central roles. Departments and other public bodies are encouraged to make full use of the Refinancing Taskforce, which has been established as a centre of expert advice to educate departments on refinancing issues and assist them on transactions. The Refinancing Taskforce continues to hold training seminars for central government departments, Private Finance Units and Local Authorities. | |
2 To obtain the share of refinancing gains to which they are entitled, departments will need to manage their PFI contracts actively. There is evidence that a number of refinancings have occurred without departments noticing them. Recognising that refinancings are complex, departmental officials cannot all be expected to become experts in these matters, but officials concerned with managing PFI contracts should be trained sufficiently to identify when they need to call in expert help. | 4 | Departments and other public bodies will continue to be encouraged to make full use of the Refinancing Taskforce, which has been established as a centre of expert advice. Alongside it's role of educating the public sector, the Taskforce will continue to monitor refinancing actions and provide advice to departments where necessary. The Treasury will ensure that the Refinancing Taskforce continues to include education as one of its central roles. | |