The involvement of equity capital in the project's financing mix delivers a significant incentive for the private party to deliver high performance. Equity reserves also provide the private party with the ability to absorb the financial consequences of the risk allocation in the project deed.
A refinancing has the potential to reduce the proportion of equity in the project which may reduce the private party's incentive to perform and may also threaten the private party's ability to deal with project risks as they materialise.
Similarly, refinancing which reduces gearing beyond sustainable levels could create perverse incentives that might motivate the private party to 'cut and run' if the project faces adverse circumstances in future. This situation could come about in a circumstance in which the private party shareholders have taken most of the benefits of refinancing (withdrawn equity or taken higher dividends), and the private party is facing additional costs (due to the adverse circumstances). At such a time, the private party might be less concerned about project performance - leading to the government party considering termination for poor performance.
However, this risk should be partly offset by the due diligence that the lender can be expected to undertake during the refinancing. The lender will be concerned that the repayment of its debt is not put at risk as a result of the refinancing. The debt provider will assess the future profitability of the project and the likelihood of termination before agreeing to the replacement finance. The debt provider will also consider how incentivised the private party will be to continue performing following the refinancing.