17 November 2004
Key Points:
In recent privately financed infrastructure projects, Government has sought to capture some of the upside that concessionaires can achieve from refinancing projects when a project reaches a stage when it can sustain more favourable financing. There are arguments for and against the Government seeking to share in such refinancings and there are some practical difficulties in defining what a refinancing is and in valuing the benefits it provides.
An important and growing area of Public Private Partnerships (PPPs) is the area of privately financed infrastructure projects where concessionaires are invited to provide private sector funding for the design and construction of infrastructure assets. In granting concessions for such projects, the Government in New South Wales has previously not sought to share in gains derived by the private sector seeking to refinance a project during the concession term.
Indeed, until the most recent of the New South Wales toll road projects, the Lane Cove Tunnel project, such a sharing of refinancing gains was not sought by the Government for economic infrastructure projects, however, it retained certain rights of consent in relation to the variation of the finance documentation in all of the toll road projects.
There are several reasons why it might be desirable to refinance a project during the concession. The most obvious of which is that a refinancing might be desirable after the project successfully achieves completion of the construction phase at which time the risk of the project is considerably reduced.
It is also possible that a project might be refinanced once the project has established a successful track record of delivering the relevant service or, in the case of a toll road, after patronage has ramped up sufficiently.
In addition, a project may be able to be refinanced if market confidence towards such projects or the particular market has increased.
Usually the first of these opportunities to refinance (that is after the completion of construction) is built into the original private sector tender and finance documentation, leaving little area for profit on a refinancing.
There has been some debate, particularly in the past in the UK, as to whether it is appropriate that the Government should share in the gains derived by the private sector from obtaining cheaper funding for a privately financed project by refinancing.
In particular, to include such a sharing mechanism, in addition to the more usual "super-profit" sharing mechanism, has been perceived by the private sector to be inappropriate.
On one hand, it has been argued that such gains are the private sector's reward for taking the risk of entering into a new market (that is, when Private Finance Initiative (PFI) projects were relatively new) or taking on a project or market which is perceived to be risky.
On the other hand, it has been argued that the Government has not obtained value for money if the private sector is able to realise significant refinancing gains while the public sector fails to receive any benefit. Value for money is a key driver for Government in procuring these projects on a PFI or PPP basis.
In the past in the UK there has been great outrage in the community and consequent embarrassment for the Government in cases where the private sector is seen to achieve huge "windfall gains" from refinancing these projects.
It appears that as the market becomes more and more accustomed to privately financed infrastructure projects and the competition for projects intensifies, including in the UK, New South Wales and Victoria, the private sector is more likely to accept the inclusion of such refinancing gain sharing arrangements.
However, for the very same reasons, there may be much less scope for deriving such gains.
In the New South Wales New Schools Project and the Lane Cove Tunnel, which both achieved financial close last year, the concession arrangements include the right for the Government to share 50 percent of any gain derived by the private sector from refinancing the project.
It will be interesting to see the outcome of the implementation of these arrangements and other similar ones in Australia as there are some practical difficulties.
Firstly, it can be very difficult to define "refinancing". Refinancing can include changes to interest rates, repayment dates, margins, tenor or the level of debt. It can also include changes to the terms and conditions on which financing is provided.
In many cases finance documentation is prepared on such a basis that certain key parameters can be changed without the need for any amendment to the documentation. In such a case it may be very difficult for the Government agency to determine whether a relevant refinancing has occurred.
Secondly, it can be very difficult to value the benefit of a refinancing. This may be due to the difficulty in defining refinancing but also the complexity of the financial documentation itself.
Other than by having the benefit of the base case financial model and financial advice, the relevant Government agency may be largely reliant upon the concessionaire and its financiers to provide the relevant information.
