2.19 Early PFI deals, in particular, are subject to refinancing opportunities. This is due to a number of factors:
■ The prospect of a future refinancing was not reflected in the price of early PFI contracts. When bidding for the initial tranche of PFI projects many consortia, including FPSL, say that they did not reduce their bid price for the contracts on the expectation of being able to refinance on improved terms and reduce their costs. The procuring authority will have had, therefore, to rely on competitive pressures to drive the best price from the bidders. Consortia took into account that the first PFI projects were not guaranteed to be a success and that, if the projects were subsequently successful, they considered any refinancing benefits would be a reward for bearing the risk of these early projects failing. There is therefore a strong incentive for companies involved in successful early PFI deals to refinance now, where the benefits of doing so largely accrue to them alone.
■ The cost of funding has reduced because more lenders are willing to take the risks of PFI projects and margins are therefore reducing. There is growing confidence within the financial markets that PFI projects are a good investment. A result of this confidence is that more banks and investors have entered the market and reduced their required rates of return from projects.
■ Borrowing rates generally have fallen in recent years. Due to prevailing economic conditions and the competitiveness within the banking industry, rates for all types of borrower have fallen as reflected in lower lending margins charged by banks.
■ Funding is more widely available for longer periods which improves the cashflow for the company undertaking a project. Refinancing now can enable the project company to extend the period over which loans need to be repaid. This reduces the level of instalments payable and the resultant savings can be passed on to shareholders through earlier dividends than would otherwise have been available.