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- Over 630 PFI projects delivering infrastructure investment of over £63 billion have been signed since 1992.
- Over 540 PFI projects now fully operational.
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Featured issue:
NAO
This report reflects on refinancings that have taken place under new arrangements introduced by the Treasury in 2002. Previously, it was not mandatory for PFI projects to have contractual arrangements to share benefits arising from debt refinancing.
However, PFI contracts signed since July 2002 have provisions for the private sector to share 50 per cent of gains with the public authorities. In cases where there have not been any contractual arrangements, there has been a voluntary code (“Code”) since September 2002 in place whereby authorities would generally expect to receive 30 per cent of refinancing gains. The PPP Forum has been supportive of the principles of the Code and it is now an accepted base assumption in refinancing proposals.
In total, the NAO found that the government had secured £137 million from PFI debt refinancing of which £102 million related to four large refinancings of projects with three of those sharing gains under the Code.
However, the debt refinancings that have been completed relate to only a very small proportion of PFI contracts and the majority have been undertaken on smaller projects which have yielded small gains for both the public and private sector. The size of the refinancing gain is varied with early projects giving rise to more significant gains predominantly as a reflection of the immaturity of the market when those projects were signed and risks that were taken.
There has been a considerable decline in refinancing gains arising from the Code since 2004. The PPP Forum agrees with the NAO’s conclusion that this trend resulted from additional scrutiny that emanated from two previous NAO refinancing reports (Darent Valley and Norfolk and Norwich) which questioned the value of the public sector accepting both increases to termination liabilities and extensions to the minimum contract period. The Treasury Application Note issued in February 2005 with the intention of providing guidance to public authorities to consider the value for money case for refinancing proposals has also created uncertainty for the private sector as it was not prescriptive in the methodology to be applied in carrying out the value for money evaluation. The private sector has been reluctant to commit finance and resources to a refinancing whilst there is ambiguity as to whether the refinancing will later be determined not to be Value for Money.
Government gains under the Code have so far been £72 million of the anticipated £175 - £200 million that had been estimated by OGC in 2002 and it is questionable whether these estimates can ever be achieved. The Treasury accepts that the Government is receiving less from Code refinancings but its main focus has been on the achievement of value for money through an appropriate balance of risk and reward rather than maximising the gains.
In evaluating possible scenarios, the NAO concluded that it was unlikely that public sector gains of a similar magnitude of Norfolk and Norwich (£34m) will be repeated.
Secondary Equity Market There has been an emergence of a secondary market for PFI equity with shares in successful PFI projects proving valuable to investors interested in established PFI projects. The PPP Forum views this liquidity as an attractive development, providing opportunities to recycle equity. The NAO also recognised that the secondary market may bring benefits to the public sector as this may have a downward effect on the cost of equity thereby improving the pricing of PFI deals.
The NAO is concerned about the lack of transparency of Secondary Market transactions and recommends that Authorities make better use of their contractual rights to information and that HM Treasury discusses with investors what further information investors could provide. The PPP Forum intends to canvass views of its members on this issue and engage in discussions with HM Treasury.
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