3.23 When departments negotiate PFI contracts, they need to give thought to the implications of any future refinancing and to consider whether, in certain circumstances, they wish to have the right to consent to a refinancing before it proceeds. In the refinancing of Fazakerley, there was some uncertainty as to whether the Prison Service's consent was required, but FPSL's lenders asked for consent because they recognised that their ability to recover their loans in the event of a premature contract termination might otherwise be impaired (paragraph 1.21).
3.24 Departments should ensure that their PFI contracts are quite clear on the circumstances under which their consent to a refinancing proposal is required. There are two situations in particular, namely:
■ if the refinancing will produce any adverse outcome for the department (paragraph 3.25); and
■ if the department wishes to reserve the right to negotiate a share of the refinancing benefits (paragraph 3.26).
3.25 Departments should ensure that their consent will be needed for any refinancing proposal which could produce an adverse outcome for them. This should include any proposal which could increase the department's termination liabilities. Departments should also have the right to object to any refinancing arrangement which could destabilise the project and threaten the service delivery. If, for example, a consortium significantly increases the gearing of the project (the proportion of the total funding represented by bank borrowings), then this could increase the financial risks for the consortium possibly leading to insolvency or other default under the PFI contract.
3.26 Departments should also consider, on a contract by contract basis, whether they wish to have broader rights to approve refinancing proposals so that they have a strong position from which to negotiate a share of any refinancing benefits. They should bear in mind, however, that such rights may affect the pricing of the contract at the outset, whereas if there is strong competition, contractors may price their bids more keenly in the knowledge that they will keep the benefits from any future refinancing.
3.27 The situations where a department may wish to have the right to negotiate a share of future refinancing benefits include29:
■ where the PFI contract price does not represent good value for money;
■ where it may be difficult to form a view on this because the contract was not priced under competitive conditions (in these circumstances there may be doubts as to whether anticipated future gains from a refinancing are already reflected in the consortium's pricing of the contract);
■ where the project is novel and there is a likelihood that the financing charges for similar projects will reduce within a short timescale; or
■ where the department is bearing any risk relating to future movements in interest rates during the contract period.
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29 See also paragraph 1.8.