2.15 When projects become operational, or market conditions improve SPVs can refinance debt to reduce interest costs. Changes were made following recommendations by the Committee of Public Accounts to ensure that any gains made from refinancing were shared with the public sector.47 The decision to refinance rests with the SPV, not the public sector. There have been twelve projects so far that have reported savings to HM Treasury as a result of refinancing.
2.16 The M25 PFI deal was agreed in the wake of the financial crisis and so has high financing costs which are due to increase.48 While these increased financing costs will not affect the unitary charge that the public sector pays, there is a potential for savings for both the public sector and the SPV should lower financing costs be achieved through refinancing. Highways England stand to gain the majority of any refinancing savings achieved.49 In 2010, we estimated it could recover around £100 million through refinancing.50 However, the net amount of savings may be reduced due to the high cost of breaking interest rate swaps.51 The SPV has been exploring refinancing the deal since 2014; however, this has not yet happened, even though it could yield savings for taxpayers and the SPV. The SPV investors have the final say on whether a refinancing should go ahead, and so far commercial terms have not been agreed with the SPV.
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47 HC Committee of Public Accounts, The refinancing of the Fazakerley Prison PFI contract, Thirteenth Report of Session 2000-01, HC372, March 2001.
48 The bank debt for the 2009 deal was priced at London Interbank Offered Rate (LIBOR) plus 250 bps (basis points -that is, 2.5% above LIBOR). This increased to LIBOR plus 300 bps in 2017, and is due to increase to LIBOR plus 350 bps in 2020.
49 The Highways Agency, which was replaced by Highways England in 2015, negotiated a 50-90% share of refinancing gains, depending on the size of the gain.
50 The estimated saving was based on market conditions in 2010. The level of savings are dependent on market conditions at the time the refinancing takes place.
51 Comptroller and Auditor General, Procurement of the M25 private finance contract, Session 2010-11, HC 566, National Audit Office, November 2010, paragraph 2.19.