Where relevant, the Procuring Authority should also consider the potential benefits it can receive as a result of a refinancing through a relevant refinancing gain regime, if this has been provided for in the PPP contract. It is common in developed markets for the Procuring Authority to require any such financial gain be shared between the parties.
Although a refinancing has the potential to be detrimental to the Procuring Authority, it can also provide a benefit when managed correctly. For example, where additional finance is required to complete works not contemplated at financial close.
| EXAMPLE Refinancing opportunity On the Queen Alia International Airport Expansion project in Jordan, the refinancing for an accelerated expansion of the airport due to higher than forecast traffic volumes was arranged through both additional debt raising by the Project Company and voluntary contribution from the Procuring Authority. Parliament approved such contribution as it was considered to be value for money to bring forward the planned expansion by three to four years and make a voluntary contribution from the scheduled investment payments. For more information, see the Queen Alia International Airport Expansion Case Study. |
A financial gain can also be generated through a refinancing due to a change in the risk profile of the project or due to a change in market conditions.
How gains are shared between the Procuring Authority and the Project Company needs to be calculated and agreed upon, ideally agreed upon in the PPP contract. Where the PPP contract clearly states how gains are to be share d, this process will be more straightforward. However if the PPP contract does not clearly outline this calculation method then the two parties may have to reach a negotiated outcome.
The financial gain can be distributed to the Procuring Authority in a number of ways including as a lump sum payment, as a reduced unitary charge, as a combination of the two, or by some other mechanism. In a few rare cases, the financial gain is taken 'in kind' as a pre-funded scope change financed with the government's refinancing gain share. This may be difficult to do due to the difficulty in estimating the value of the scope change.
Where a refinancing gain is agreed in a PPP contract, it is also common for some refinancing gains to be excluded. For example, this can occur where a refinancing is contemplated at financial close because the Project Company knows it can get better financing terms after financial close. In these situations the Project Company will argue that these refinancing gains are being taken into account as part of its bid for the project and so should not be shared. In this context, it is important to specifically establish in the PPP contract which circumstances will entitle the Procuring Authority to share in a refinancing gain and when it will not be entitled. Contract managers should be aware of when refinancing gains can be shared to ensure they are making the most of the Procuring Authority's entitlements.