2.21 Termination payments are intended to ensure, in the event of a PFI contract being prematurely terminated: firstly that the lenders are repaid in part or in full including any interest due, depending on the circumstances leading to the termination; and in certain cases18 to compensate the investors for the loss of future profit which would otherwise have been derived from the remaining contract period. In the event of contractor default the lenders and investors may not recover all of their investment in the project, but in all termination situations the termination payments are in respect of the surrender of assets which usually return to the public sector.19 The level of payments made by a department depends, therefore, on the reason for the termination and on which party elected to terminate the contract.
2.22 Under the terms of some of the early PFI deals, one method of calculating termination payments is to relate them to the level of the outstanding borrowings of the consortium and any interest which is due and payable. The termination payments may also include the costs of unwinding any arrangement used to fix the applicable interest rate. In certain circumstances, as with the Fazakerley prison contract, the payments may instead be based on the residual value of the contract to the private sector with a cap of no more than the amounts owed by the consortium to its lenders.
2.23 The Treasury guidance on PFI contractual terms which was published in July 1999 advises that termination payments for contractor default should instead be based on the market value of the remaining contract.20 This is intended to make lenders bear a greater amount of risk where termination is due to contractor default.
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18 This may include voluntary termination by a department.
19 In this case the prison would revert to the Prison Service, but this asset is unlikely to have a realisable cash value which the Service could offset against the termination payments.
20 The Standardisation of PFI Contracts paragraph 20.2.6 (HM Treasury July 1999).