The private party may take refinancing gains as an immediate lump sum payment. However, the government party can elect to take its share of any refinancing gains as:
• a lump sum;
• a reduction in services payments over the remainder of the term of the project deed; or
• a combination of these two.
There are benefits and risks associated with each option.
If the government party elects to receive its share of the gains as a lump sum, the private party may need to take on additional debt to fund the lump sum, especially if the refinancing would otherwise only have involved repaying the original borrowings over a longer period. Increased borrowings to fund the lump sum could in turn increase the government party's termination liabilities.
On the other hand, taking the gains as a reduction in service payments might reduce the refinancing gain itself because a reduction in service payments will reduce the project's debt cover ratios, which will in turn reduce the amount of new debt that can be raised.
The decision may also involve considering the equity internal rate of return, and the impact this may have in eroding the potential gains to the State over the contract term. That is, if the equity internal rate of return is quite high (which would be a function of financial market conditions prevailing when the contract was executed), there may be reduced value to the State in receiving an upfront payment (measured in net present value terms).