Refinancing and the sale of equity in PPP projects are two separate transactions. Banks and financial companies are usually prepared to refinance projects offering better terms to reflect the lower risks following the construction phase (National Audit Office, 2002). The prime objective of refinancing is to increase the rate of return. This is usually achieved by increasing the level of debt and extending the contract period. Projects can be refinanced by replacing the bank-funded debt or by issuing bonds, which will be sold, to insurance companies, pension funds and hedge funds. The large number of bondholders and bond conditions usually make any further refinancing prohibitively costly.
Refinancing projects has resulted in significantly increased rates of return, for example, the Altcourse (Fazakerley) Prison had an annual 13% rate of return at financial close of the contract, but this increased to 39% following refinancing of the project (NAO, 2000). The Norfolk and Norwich University Hospital annual rate of return was increased from 16% to 60% after refinancing (NAO, 2005). Early PPP contracts did not contain a profit-sharing requirement and a voluntary code called for the public sector to receive 30% of the gains, later increased to 50% in the standard PPP contract.
UK refinancing rules were amended in 2008 to ensure"…potential additional refinancing gains may be generated on projects signing in the current market, if credit margins or other terms were subsequently to move significantly towards pre-credit crunch levels" (HM Treasury, 2008). Further changes were made in the standard contract in April 2012 (HM Treasury, 2012).
This part of the report set out the objectives, methodology and theoretical framework developed for the PPP equity research. The next part reports on the scale and scope of PPP equity transactions 1998-2012 and identifies the sellers and purchasers of equity. A case study illustrates how some SPC are engaged in multiple transactions.