Lump Sum

Over Time (Unitary Charge Reduction)

Advantages

1  Authority benefits immediately from the refinancing (a capital receipt) which it can use to fund additional building work.

1  Early and later years benefit equally as the authority reduces the annual payments on a PFI project which it expects to utilise for the long term.

2  The contractor should be less highly geared as it does not have to borrow to pay the authority's refinancing gain as a lump sum.

3  No accounting issues.

Disadvantages

1  In some departments, such as Health, under resource accounting, taking the gain as a lump sum results in the Trusts/departments having to create a depreciable asset which means an annual charge on the Trusts'/ departments' accounts has to be funded.

2  Authorities may use the lump sum to address short term financial problems at the expense of future service provision.

3  The contractor will have to take on extra loans to fund the lump sum, particularly if the refinancing just involves paying the original borrowings over a longer period. Increased borrowings to fund the lump sum could in turn increase the authority's termination liabilities.

1  May produce a lower refinancing gain as reductions in the unitary charge will reduce debt cover ratios (hence reduce the amount of new debt that can be raised).

2  An authority could be exposed to uncertainty over recovering its share of the refinancing gain if the contract is terminated early. However, this point is dependent on the contractual arrangements for early termination and the reasons for terminating the contract and is probably only applicable to some early PFI projects.

NOTE

In current contracts, if the contract is terminated due to contractor default, the authority will normally pay its termination liabilities based on the market value of the contract, which will reflect the reduced unitary charge.