Refinancing of PPP projects after a few years of operation has enabled the private sector party, and in some cases also the public-sector party, to greatly benefit from the maturing PPP market. Refinancing gains can result from interest rate reductions, extensions of debt maturity, increases in the amount of debt facilities, etc. Most of the time refinancing is attributable to exogenous factors, such as a change in macroeconomic conditions or the revelation of asymmetric information between borrowers and lenders while the project gradually reaches the mature stage; but they may also be due to a particularly good performance of the borrower.
A decision to include provisions in the contract implementing a refinancing gain-sharing scheme should address a trade-off. On the one hand, the private-sector party improves efficiency and performance during the contract life, lowering the risks of the project and therefore the capital cost. Refinancing gains can be viewed as a reward for improvements that should be distributed mainly to the private-sector party. Therefore, a refinancing gain-sharing scheme could weaken the incentives for the private sector party to seek for improvements. On the other hand, refinancing gains may have an impact on the compensations that are paid by the public-sector party on early contract termination. In the event of voluntary termination by the public-sector party, the private-sector party is generally compensated for the future profits it would have received had the contract not be terminated. Since refinancing increases both current and future profits, the compensations payable by the public-sector party will be higher if a refinancing occurs. Consequently, there is need to the inclusion of a refinancing gain-sharing scheme: termination liabilities for the public-sector party are lower when refinancing gains are shared during the contract life (Iossa, Spagnolo, Vellez, 2007).