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The public sector now has the prospect of securing a bigger share of the gains arising from the refinancing of PFI projects, under new arrangements introduced by the Office of Government Commerce (OGC). The OGC negotiated these measures with the private sector following earlier concerns of the National Audit Office and Public Accounts Committee (PAC) about the sharing of the benefits of refinancing. However, head of the National Audit Office Sir John Bourn warned today that, for the taxpayer to benefit, government departments would have to manage the complexities of the new arrangements effectively.

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The National Audit Office conducted a survey which found that 61 per cent of PFI contracts which have been let to date did not have contractual arrangements to share refinancing gains. These are the gains which arise from more favourable financial terms negotiated between the private sector PFI contractor and their lenders as the risk in the project diminishes. In its survey the NAO was informed of 12 completed PFI refinancings from which departments had secured benefits of at least £17 million out of total gains of about £65 million. But the NAO also found evidence that some refinancings have taken place without departments being aware.

To address these problems the OGC issued revised guidance in July, addressing future PFI deals, where refinancing gains are to be shared 50/50. It also launched in October, with CBI support, a code of practice to help departments to secure 30 per cent of future refinancing gains on most early PFI deals. Over the past two years the OGC has been changing the approach of departments and the market so that 50/50 sharing of refinancing gains has been adopted in most contracts let since June 2001.

These new measures by the OGC followed the publication in June 2000 of the NAO’s report on the refinancing of the Fazakerley prison PFI contract. The NAO report, and a subsequent report by the PAC, highlighted that there are opportunities for the private sector to generate significant benefits from refinancing PFI projects. Better financing terms can be obtained once the initial risks of introducing the required service have been dealt with and early PFI projects can also take advantage of the better terms that are available now that the PFI market has become established.

Included in the NAO’s recommendations are that the OGC should take steps to ensure departments are fully aware of the refinancing issues covered in the OGC’s new guidance and departments should obtain information from their contractors about their financial situation to ensure departments are aware of all refinancings for which the benefits should be shared.

"I welcome the new arrangements which the OGC has introduced. They should put the public sector in a much better position to share with the private sector the benefits which refinancing can bring to a PFI project. But this is a complex area and departments will need to become more expert in this topic to enable them to manage the new arrangements effectively."

Sir John Bourn

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