Excess profits through refinancing
The issue of refinancing gains has been among the most scandalous aspects of public-private partnerships.
Download this section with full references >
Several scandalous cases have cropped up in the UK such as the Norfolk and Norwich Hospital in which the Octagon consortium gained GBP 82 million and the investors’ rate of return increased from a predicted – and already high – 19 percent to 60 percent. The public sector did get GBP 34 million, but had to agree to a contract extension in return, plus it was to gain the money over the period of the contract rather than immediately.
Following this the UK government gradually implemented a policy of ensuring that the public sector gets 50 percent of any refinancing gains, however it is not clear that this has brought private sector gains down to a level which is in any kind of proportion with the risks undertaken during the project.
If an authority decides to use PPPs, the contracts should always ensure that the public sector gains a minimum of 50 percent of any refinancing benefits, preferably with a ceiling for maximum gains by the private sector.
Most early PPP contracts did not have any specification on sharing the gains with the public sector, although it has been addressed in many countries now.
What is re-financing in PPPs?
Refinancing involves the private partner paying off its original loan by taking out a new loan after the construction of the infrastructure is completed. Since most of the risks for the project have been removed at this stage, financing is available at much lower interest rates than before the construction, and thus the price of the project decreases.
However, the fee that the public sector has to pay is calculated to cover the original, higher price loan, and unless there are relevant clauses in the contract to include gains for the public sector from refinancing deals, there is a danger of excessive private profits.