Private Finance Initiative (PFI): refinancing gains
As the PFI has evolved, a better understanding of the commercial risks involved has developed. This, and lower interest rates, may result in the private sector operator being able to replace the original loans used to finance a PFI project with new loans at a lower rate of interest.
The operator may not only replace the original loans, but also borrow additional sums. The benefits derived, as a result of taking out such new loans, are often referred to as a ‘refinancing gain’.
As awareness of the possibility of refinancing has increased, many public sector purchasers now include arrangements, within the terms of PFI contracts, to share the benefits of any refinancing arising during the contract period. This may take the form of:
- a reduction of future unitary payments, or
- a lump sum payment, or
- the provision of additional/improved services, or
- a combination of the above.
Many of the early PFI agreements do not incorporate specific terms to deal with refinancing gains. However, in practice, the permission of the purchaser is often required in order to replace the original loan. Furthermore, even when this is not the case, the purchaser will actively seek a share of any benefit arising and, in order to maintain goodwill, the operator will often share the benefit in one or more of the forms detailed above.
Where the intentions of the parties is that the provision of these benefits to the purchaser is part of the commercial trading arrangements, the documentation makes this clear and it accords with the facts, the reductions, payments and costs of providing additional services will satisfy the trading deductions tests.