Sharing in windfall and refinancing
gains
22. Departments should consider putting in place
mechanisms to clawback part of any future windfall gains that
contractors may earn so that there is at least a sharing of such
benefits. When faced with a proposed clawback arrangement it is
possible that bidders may adjust their proposed contract price
upwards to compensate for the possible loss of future income.
A department may therefore need to ask for prices from bidders
with and without clawback to help it to determine the value for
money of such an arrangement. The Prime deal (41st
Report, Session 1998-99), the Newcastle Estate deal (19th
Report, Session 1999-2000) and the revised Royal Armouries Museum
deal (4th Report, Session 2001-02) have all included
mechanisms to share the benefits of future windfall gains. In
negotiating a deal with the contractor on the Airwave deal (64th
Report, Session 2001-02), the Department failed to secure any
clawback for the taxpayer of additional profits if other emergency
services decide to join Airwave or if the system is sold to overseas
governments. Failure to negotiate a clawback agreement was partly
a product of the contractor being the only bidder.
23. Investors in PFI deals have on occasions made
substantial gains following the refinancing of contracts. But
only one in four of the early PFI contracts had clear arrangements
to share refinancing gains with the public sector. In our report
on the Refinancing of the Fazakerley Prison PFI contract (13th
Report, Session 2000-01) the contractor had refinanced the project
less than two years after the prison opened. The refinancing generated
£10.7 million of benefits for the contractor's shareholders.
A consequence of the refinancing, however, was that the Prison
Service would be exposed to increased liabilities in the event
of the contract being terminated. The Prison Service secured compensation
of £1 million, which was consistent with the cost of the
additional risks it faced, but did not receive any further share
of the refinancing benefits. Our 13th Report, Session
2000-01, recommended that departments should expect to share in
such refinancing gains in future.
24. As noted in our PFI Refinancing Update report
(22nd Report, Session 2002-03) the Office of Government
Commerce has now issued new guidance on how departments should
provide in future PFI contracts for the sharing of refinancing
gains. The guidance envisages that refinancing gains should be
shared 50:50 between the private and public sectors on all new
deals. The Office of Government Commerce has also negotiated with
the private sector a code of practice applying to past PFI deals
under which a 70:30 (private sector: public sector) split of refinancing
gains would take place, even if no provision for sharing refinancing
gains had been made in the original deal.
Improving project management
skills
25. Staff responsible for managing PFI projects need
to have the appropriate skills. Even where the right contractual
framework has been put in place, departments may fail to realise
the full potential benefits of projects if contracts are not managed
effectively. Effective management requires a thorough understanding
of the project and the contractual arrangements and an ability
to build effective relationships with contractors. In our report
on Managing the Relationship in PFI Projects (42nd
Report, Session 2001-02) we found significant shortcomings in
approaches to managing PFI contracts. Some departments, for example,
provided little or no training on contract management.
