Press Release - Update on PFI debt refinancing and the PFI
equity market
21 April 2006
An update report by the NAO identifies that the government has
secured gains of £137 million from PFI debt refinancings under new
arrangements introduced by the Treasury in 2002. These new
arrangements followed previous reports by the NAO and the Public
Accounts Committee that highlighted the opportunities for the
private sector to benefit from refinancing early PFI deals. There
has, however, been a decline in recent refinancing activity
following two NAO reports in 2005 on hospital refinancings which
drew attention to the risks to the public sector from refinancings
involving increased debt, following which the Treasury
re-emphasised to departments the need to rigorously evaluate the
value for money of all refinancing proposals. The NAO update report
also describes the emergence of the PFI secondary market which is
enabling equity investors in PFI projects to sell their shares on
to new investors.
Of the £137 million government gains from PFI debt refinancings,
£102 million relates to four large refinancings (one of the London
Underground contracts and three hospital projects: Norfolk &
Norwich, Darent Valley and Bromley). £72 million of the gains arose
through a voluntary code whereby private sector companies have
given the public sector 30 per cent of refinancing gains on early
PFI deals which did not have contractual arrangements to share
these gains.
The NAO found that the new sharing arrangements appear to be
generally working well but there have been exceptions: in three
road projects the public sector missed out on at least £1.7 million
because gains were not shared in accordance with the voluntary
code.
Information disclosed to the NAO showed that the profitability
of projects following refinancing has varied. Most early PFI
contracts were let on the expectation of an internal rate of return
(IRR) to investors of 15 to 17 per cent. The IRRs following
refinancing disclosed to the NAO ranged from less than 10 per cent
to over 70 per cent. Around half of the projects showed little
change from expectations when the contracts were entered into but
in four deals (a fifth of the projects providing information) the
IRR including the refinancing gain had risen to over 50 per cent.
On deals closing now, the improved debt financing terms should be
available to government during the procurement thus reducing the
likelihood of significant later refinancing gains.
The report warns that PFI refinancing may bring risks as well as
benefits. The NAO’s reports in 2005 on the Norfolk & Norwich
and Darent Valley refinancings identified risks where, as part of
these early refinancings, the NHS Trusts had accepted a longer
contract period and the possibility of increased termination
liabilities. Those organisations that accepted the share of the
gain over the life time of the project could face uncertainty in
collecting the gains if the project is terminated early. It is too
early to judge whether investors taking accelerated gains from PFI
projects will impact on service delivery in the longer term
although there should still be incentives on contractors to perform
after a refinancing.
There is an emerging secondary market, where investors sell on
their shares in PFI projects, and the report finds that there has
been a change of investors in 40% of projects. Half of the projects
where there has been a change of investors have also undergone a
refinancing. Where share sales have not taken place only 25% have
been refinanced.
The Treasury considers that as the supply of PFI equity
increases this should reduce the cost of equity and improve the
pricing of future PFI deals. The NAO recommends that the Treasury
should report annually on the trends in PFI financing costs. The
report also recommends that, to provide transparency and a better
understanding of the dynamics of PFI equity investment, further
information is required on the full range of costs and benefits
which investors experience from participating in the PFI
market.
Sir John Bourn, head of the NAO, said
today:
"This report gives an update on how much money the
public sector has recouped from PFI debt refinancings which I am
pleased to say resulted from work carried out by the NAO and the
Public Accounts Committee. The public sector is also being more
cautious about entering into refinancing deals after the NAO
highlighted the risks that can attach to these transactions.
We will continue to monitor future developments in the PFI debt and
equity markets including the trends in financing costs as these are
an important component of all PFI deals. More information on PFI
investors’ costs and benefits will assist an understanding of how
the market is functioning"
Notes for Editors:
- The NAO’s 2005 reports on refinancing were Darent Valley
Hospital : The PFI Contract in operation (HC 209 2004-05 published
10 February 2005) and The refinancing of the Norfolk and Norwich
PFI Hospital: how the deal can be viewed in the light of the
refinancing (HC78 2005-06 published 10 June 2005). These two deals
on which the NAO has previously reported, a third hospital deal
Bromley and Debden Park School were the four projects where the
post refinancing IRR was over 50 per cent. Barclays and Innisfree
were the lead investors in the three hospital deals.
-
The internal rate of return (IRR) is the discount rate at which
the present value of the investors’ receipts from a project equals
that of their payments, including their initial investment. The
characteristics of the IRR make it very sensitive to increases to
investor benefits in the early years of a project which is a
feature of many refinancings
Press Notice 32/06
All enquiries to Mark Strathdene, NAO Press Office:
Tel: 020 7798 7183
Mobile: 07748 181 693