1.8 The Treasury guidance issued in July 1999 generally puts forward a view that refinancing benefits are gains which should accrue to the private sector, but states that in limited circumstances it may be appropriate for refinancing benefits to be shared with departments. The guidance says, inter alia, that:
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■ the limited circumstances for sharing refinancing benefits include novel projects, because there is a likelihood that more favourable financing terms will emerge as the market develops. The Fazakerley PFI prison contract, being the first prison contract to be awarded under the PFI, would have been a novel contract at the time it was let; | |
■ but contractors' arguments (such as those put forward by FPSL) that the benefits are their reward for taking the risk of entering a new market are entirely justified in certain cases; | |
■ other circumstances where sharing refinancing benefits may be appropriate include those where competition has been poor with the result that the original bid may either have been based on higher than necessary financing costs, or based on a price which did not anticipate the benefits of a future refinancing; | |
■ except where a refinancing removes comforts which a department has relied upon, departments should not seek a share of refinancing benefits if the rights to share in such benefits have not been incorporated in the PFI contract; and | |
■ care must be exercised to ensure that a refinancing does not disturb a pattern of projected returns on the consortium shareholders' equity, or the consortium's contingency reserves that are essential for a stable and successful long term relationship. A refinancing should also not increase debt levels to the point where they could prejudice the contractor's ability to perform over the term of the contract. |