Recommendations referring to the approach by the department or project teams to negotiations | |||
Recommendation | Report Source | Treasury response on the extent to which action has been undertaken in order to meet the recommendation1 | |
1 Where a department has the flexibility to negotiate over refinancing benefits, it should ensure that it prepares a robust but reasonable negotiating strategy. This should be grounded on sound principles and should contemplate the alternative, for both the public and private sector parties, in the event that a negotiated agreement cannot be reached. | 1
| The Treasury agrees with the Committees' recommendation. This principal is espoused in extant guidance.
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2 Departments should consider linking at least part of their advisers' remuneration to the outcome of any negotiations to which the advisers contribute. This will create an incentive for the advisers to help departments achieve the best possible outcome. | 1
| This approach of remunerating advisers is restricted to application where there is no subsequent conflict with the advisor opining on the value for money of concluding a transaction whilst also receiving a success based fee or a value based fee. | |
3 Departments should ensure that they are aware of and use the full strength of their negotiating position when dealing with requests to vary the terms of PFI deals. | 2
| The Treasury agrees with the Committees' recommendation. This principal is espoused in extant guidance. | |
4 When assessing alternative PFI bids, departments should take into account the various revenues which shareholders of a consortium can earn from a PFI project, the likelihood of a refinancing occurring and how this may affect the balance of risk and reward, for both the procuring department and the service provider. | 2
| In assessing alternative PFI bids a department will make the broadest evaluation of value for money, whether that includes the likelihood of a subsequent refinancing will be subject to the specific factors surrounding the bidder and the project in question. | |
5 The opportunity for refinancing benefits appears, in part, to arise from the successful delivery of a PFI project. PFI deals should therefore reflect the benefit of the improved financing terms that are likely to arise through the successful delivery of the project. The benefit may be secured through the pricing of the deal or through a share of subsequent refinancing gains. | 2
| The principal of reflecting refinancing benefits (at the risk of the contractor) is espoused in Standardisation of PFI contracts. | |
6 As a source of such expertise, Partnerships UK has established a refinancing taskforce to provide support to departments faced with refinancing situations. It would be prudent for that taskforce not to rely solely on departments to spot refinancings, so the taskforce will need to be proactive in approaching departments where market knowledge suggests refinancing situations are likely to occur. | 4
| The Treasury agreed with the Committees' recommendation and has given the Refinancing Taskforce a mandate to be proactive in approaching departments where market knowledge suggest refinancing situations are likely to occur. | |
7 In theory, contractors might respond to the new arrangements for sharing refinancing gains by making compensating increases to their prices. In practice, competitive pressures and the uncertainty as to the timing and amount of refinancing gains might make it hard for contractors to put up their prices. As a further protection from that risk, departments could seek, in addition to the main bid in line with the new refinancing guidance, a variant bid from contractors on how they would price the contract to include the benefit of refinancing gains within the contract price. | 4 | The Treasury agrees with the Committee's conclusion. The competitive bid process minimises the opportunity for the contractor to manipulate Equity Rates of Return, which decide at what level sharing begins during the bid process. | |
8 Authorities must assess the changes in risks and rewards to both them and their private sector partners that will arise from a refinancing before agreeing it. In particular authorities should: ■ determine that the private sector parties will still be adequately incentivised to perform well over the remainder of the contract after the refinancing; ■ not agree to extend a PFI contract without very careful analysis of the quantifiable and non-quantifiable benefits and disbenefits of the contract extension including the implications of being contractually committed to a particular PFI project company for longer periods; ■ assess carefully the value for money case for accepting refinancings involving increases to the private sector borrowings and increased termination liabilities to the public sector. Although a low expected probability of termination may suggest that refinancing benefits in return for increasing termination liabilities will be value for money this has to be weighed against the consequence that, should termination be appropriate, it may be expensive to effect, particularly where the liabilities have become greater than the capital cost of the project. Where refinancing proposals would result in increased termination liabilities authorities should explore with the private sector what refinancing terms would be available with no increase to termination liabilities; and ■ consider carefully the options of taking their share of the refinancing gain as a lump sum or over time. This should take into account that the lump sum option can give certainty of receipt of the refinancing gain and mirrors the private sector's approach to immediately realising refinancing gains but may require the private sector to increase its debt. The decision on how to take the refinancing gains should always be based on value for money considerations but there may also be accounting and financing issues for public authorities to consider. | 5 | Items 1-3 were fully addressed in the Treasury guidance "Application Note - Value for Money in Refinancing". The voluntary code of conduct identifies the options and mechanisms for an Authority when deciding whether it wishes to take its share of the gain as a reduction to the unitary charge, a lump-sum gain or as an increase to the scope of services. | |
NOTES 1 In respect of PAC recommendations (sources 2 and 4), the Treasury comments were those set out in the Treasury minute response to the PAC recommendations. NAO/PAC report: 1 The Refinancing of the Fazakerley PFI Prison contract HC 584 Session 1999-2000 2 The Refinancing of the Fazakerley PFI Prison Contract, Thirteenth Report of the Committee of Public Accounts HC 372 (HC 995-I (1999-2000) 3 PFI Refinancing update HC 1288 Session 2001-2002 5 Darent Valley Hospital: The PFI Contract in Action HC 209 Session 2004-2005 | |||