Treasury: new deal on split of PFI windfall gains

There must be no more easy millions as a result of windfall gains when PFI deals are refinanced – that’s the message from the Treasury.

The Treasury has ordered those public bodies still doing PFI deals – not that easy given the credit crunch – to win a bigger share of any refinancing windfall gains.

What is helping keep new deals afloat is the fact that some banks see PFI schemes’ government-backed income streams as a haven in the financial turmoil.

However the Financial Times reports: “The credit squeeze has seen funders demanding higher margins on the debt put into them and that has opened up the possibility again of significant refinancing gains if investment and interest rates fall to pre-credit crunch levels.”

When PFI was in its infancy, the investors in projects made many million as they refinanced loans, once the project was up and running and through the difficult construction period, and it was only then realised that the taxpayer had a right to a share in such financial gains.

The FT quotes the investors in an early prison project who made a £14m windfall gain and “hugely increased rates of return” when they used falling interest rates to refinance.

This resulted in all contracts since 2001 having a requirement whereby such gains should be split equally between the project’s backer and the taxpayer.

That still applies to the first £1m of any gain.

The FT reports that for new deals the Treasury said yesterday that the next £2m would have to be shared 60/40 in the taxpayers favour and for anything above that the taxpayer would take 70%.

On top of that, the public sector will have the right to demand a refinancing if it believes that it will lead to better terms for the taxpayer – thus far it has been only the contractors who could initiate such a fundamental move.

It might be a surprise to some, but there have been more than a dozen new PFI deals struck this year, with the Treasury adding that as many as nine have been settled in the second half of the year.

The total value of deals agreed since 1 June runs to £600m with most falling into the £20m-£90m value band