34. Any gain that accrues to the Department without resulting in an increase in termination liabilities is considered to represent value for money. However, where there is an increase in termination liabilities it is necessary to establish whether the refinancing gain is greater than the likely cost of the additional termination liabilities. To establish whether this is the case it is necessary to undertake some form of probabilistic analysis, which compares the refinancing gain with the additional liabilities, multiplied by the probability of default under various scenarios (force majeure, authority voluntary termination and contractor default) for each year from the refinancing date until the contract end. Where the gain is greater than the likely additional termination costs then it is considered to represent value for money. There are a number of ways in which this analysis can be performed, but Partnerships UK recommends a standard calculation (see below).
| Row | Year | 1 | 2 | 3 |
| 1 | Additional compensation, usually derived from SPV financial model | £120 | £110 | £100 |
| 2 | Additional compensation, in present value ("PV") terms | £113 | £98 | £84 |
| 3 | Probability of termination in a year given non-termination by the start of that year | 1% | 1% | 2% |
| 4 | Probability of having not terminated by the start of this year | 100% | = 100%-1% | = (100%-1%)^2 |
| 5 | Therefore, probability of termination in this year | = 1%*100% | =1%*99% | =2%*98.01% |
| 6 | Additional compensation in PV terms * probability of termination | £113*1% | £98*0.99% | £84*1.96% |
35. The VFM analysis is then performed by comparing the sum of all of the entries in the last row to the refinancing gain - if the total probability-weighted additional compensation exceeds the gain then the transaction is not VFM.
36. An alternative is to perform a 'break-even analysis'. In this case the Department assumes, as a starting point, that the total probability-weighted additional costs equals the gain, and then asks what that requires the probability of termination in any year (i.e. the contents of row 3 above) to be. To do this it is necessary to make some assumptions about the probabilities e.g. that they are the same in every year.