UK: Revisions To The Refinancing Arrangements For PFI

Last Updated: 10 November 2008
Article by Alexandra Hardwicke

On 16 October 2008 HM Treasury issued an Addendum to the Standardisation of PFI Contracts version 4 (SOPC4). This amended the existing SoPC4 provisions on refinancing by creating a sliding scale of gainshare between the public and private sectors and giving the Authority a right to request a refinancing.

The Background

Under the original SoPC4 drafting, any gains made through the refinancing of a project were required to be shared 50/50 between the public and private sectors. This was seen by HM Treasury as an equitable position given the factors that would give rise to a gain. In particular, their view was that any improvement in financing terms would not be due mainly to efficiency improvements by the private sector and therefore any benefits should be shared.

The current amendment, introducing a sliding scale of gainshare, has been explained by the Treasury as a response to the challenges in the current funding market. The idea is that the credit crunch has increased margins on financing and therefore the gain to be made on a refinancing if margins move back to pre-credit crunch levels is greater than it would have been previously. It was noted in the covering letter to the Addendum that HM Treasury would review the position in the markets in 18 months time and consider whether to continue the use of the Addendum at that stage. They did not, however, give any indication of the matters that would be taken into consideration at that stage.


The guidance is mandatory for all projects in competitive procurement as at 1 November 2008 i.e. where final tenders have not been received or competitive dialogue has not yet closed. If HM Treasury's covering letter to the Addendum is correct, it also applies to any projects on which the funding terms change after that date. This additional aspect is not reflected in the Addendum and as such its status is unclear. This could, however, have a significant impact, for example, on projects where a post-Preferred Bidder funding competition was being held – the concern being for the private sector that they would not have had an opportunity to price this revised arrangement into their bid.

The Changes

As noted above, the Addendum makes two changes to the existing SOPC4 provisions:

  1. the existing 50/50 gainshare arrangement has become a sliding scale according to the cumulative gain made over all refinancings; and

  2. the Authority now has a right to request a refinancing.

Gainshare Changes

The Authority will now be entitled to 50% of any cumulative refinancing gains up to £1 million, 60% of any further such gains up to £3 million and 70% of any other refinancing gain. The fact that the thresholds are calculated according to aggregate gain means that second and subsequent refinancings will almost certainly have a higher gainshare for the Authority, even if gains are small. For example, if refinancing 1 had a gain of £1 million, the Authority share would be 50%, but if refinancing 2 then also had a gain of £1 million, the Authority share would be 60%.

Concerns have been voiced by the private sector about these arrangements. In the first place, there is no correlation between the actual increases in margins caused by the credit crunch and the increased gains to for the public sector. Secondly, refinancing is already an expensive and difficult process and these amendments are likely to add a further disincentive. The risk is that, by asking for a bigger share of the savings, HM Treasury is actually discouraging the process by which the savings are made in the first place, with the result that Authorities actually lose out.

Authority Right to Request

It would appear that the concern that the private sector will be reluctant to refinance has prompted the second change in the Addendum – the inclusion of a right for the Authority to request a refinancing. Essentially, if the Authority reasonably considers that the funding terms in the market are more favourable than those in the current financing agreements, the Authority can require the SPV to request potential funders provide terms for a potential refinancing. This right can be exercised at any time but not more than once in any two year period.

The SPV is not required to propose a refinancing that would not be approved by a prudent board of directors of a company operating the same business in the UK to that of the SPV in similar circumstances. Also, the Authority cannot insist upon a refinancing if the SPV reasonably believes that it is not possible to obtain more favourable terms and provides evidence to the Authority's reasonable satisfaction both for that belief and that the SPV has complied with its obligations to investigate the potential refinancing.

However, the Addendum does provide that wilful breach of the provisions relating to a request for refinancing will give the Authority the right to terminate. The concern here is that, unlike the termination right which already exists in relation to refinancing which is triggered, effectively, by a failure to share refinancing gains, the triggers for the new termination right are much more subjective and, importantly, could be triggered where no refinancing has actually occurred. This is going to be of concern to funders and SPVs alike.


The current economic climate has clearly affected the financing market and there is the potential for increased gains to be made on a refinancing if the markets stabilise and return to terms that are closer to pre-credit crunch levels. Without doubt, the Government would face a media backlash and political controversy if it were to appear at any stage that the private sector was deriving an economic benefit from the financial crisis.

However, from the private sector perspective, there is no evidence that the revised sharing percentages correlate with the changes in financing terms. Equally, there are currently a number of challenges facing the PFI/PPP market, not least the difficulty of securing funding for projects and the increased costs associated with bidding under competitive dialogue. In the current climate, the amended refinancing arrangements may simply operate as a further disincentive for the private sector to become involved in the PFI/PP market.

For the full text of the covering letter and the SoPC4 Addendum please see (Covering Letter) and (Addendum)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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