In years gone by, Treasury has been left somewhat red-faced by the extent of refinancing gains being made by investors on some of the early PFI deals, with the public sector merely being entitled to discretionary contributions. Quick to address the imbalance, compulsory guidance was introduced by Treasury to ensure any gains in future projects were shared 50/50 between the public and private sector.
However, with funders now looking for higher margins on their debt, there are renewed concerns from Treasury that, if the cost of funding falls to pre-credit crunch levels in the future, the public sector has no ability to force a refinance.
Key Changes to SOPC4 Guidance
In order to address these concerns (and others), HM Treasury has issued an addendum to version 4 of Standardisation on PFI Contacts (known to most as SoPC4). The addendum revises guidance in two key ways:
- Refinancing gains are no longer automatically to be shared 50/50 between the Authority and the Contractor.
- The Authority will now have a right to request a refinancing.
The application of the revised guidance is mandatory for all projects that were still in competitive dialogue as at 1 November 2008. For all other projects, adoption of the revised guidance is being encouraged but is not mandatory.
Refinancing Gain Sharing
Rather than the public and private sector sharing 50/50 in any refinancing gains, it is now compulsory that the Authority be given the right to receive:
- 50% of the aggregate of refinancing gains up to £1 million;
- 60% of the aggregate of refinancing gains between £1 million and £3 million; and
- 70% of any other refinancing gains.
The thresholds are intended to encourage refinancing within projects of all sizes.
Authority Right to Request a Refinancing
Previously it was possible only for the Contractor to initiate refinancing deals. Now the Authority will have that right too, where it believes that refinancing will lead to a better deal than that passing under the existing agreement. The Authority and the Contractor must act reasonably, in their request and their response respectively. The Authority will not be entitled to request a refinancing more than once every 2 years.
Although not without some difficulty, PFI/PPP projects are continuing to reach close amidst the "credit crunch" turmoil and, for banks still open to lending, government-backed revenue streams are likely to be viewed as one of the more solid types of investment. These changes are therefore intended to give the public sector some clout as to when it might be appropriate to refinance deals, and to encourage refinancing within projects of all sizes. The market's response is awaited, particularly in light of some of the issues posed by the Not for Profit (NPD) model in Scotland.