APPENDIX 3
ANALYSIS OF REPLIES TO PARLIAMENTARY QUESTIONS
TABLED BY THE RT HON ALAN WILLIAMS MP (SWANSEA, WEST) (LABOUR)
ON REFINANCING ARRANGEMENTS IN CONTRACTS LET UNDER THE PRIVATE
FINANCE INITIATIVE (PFI) (PAC/1999-2000/256)
Memorandum from the National Audit Office
INTRODUCTION
1. The Rt Hon Alan Williams MP tabled a
series of Parliamentary Questions in July 2000 asking for the
following information in respect of contracts let by departments
under the PFI:
(a) A list of contracts which the department
had let under the PFI showing the date of commencement of each
contract;
(b) the value of each contract;
(c) whether the contracts had been subject to
a refinancing; and.
(d) whether the contract had a clawback arrangement
which would entitle the department to share in refinancing gains.
ANALYSIS OF
ANSWERS TO
PARLIAMENTARY QUESTIONS
2. Annex 1 summarises the replies provided
by the departments to the Parliamentary Questions tabled by the
Rt Hon Alan Williams MP.
COMMENTARY ON
ANSWERS TO
PARLIAMENTARY QUESTIONS
PFI contracts which have been subject to refinancings
3. The answers to the Parliamentary Questions
disclose just two examples of PFI contracts which have been subject
to a refinancing: the refinancing of the Prison Service's contract
for Fazakerley prison which has been the subject of a report by
the Comptroller and Auditor General (HC584 1999-2000) and a smaller
contract (capital value £10 million) let by the Home Office
for the Hassockfield Secure Training Centre.
4. There may, however, be a number of further
refinancings of PFI contracts in due course. As the Comptroller
and Auditor General's report on the Fazakerley prison refinancing
explains, there are likely to be similar opportunities in other
PFI contracts, particularly those signed in the early stages of
the development of this new form of procurement, and where the
required service has subsequently been successfully provided by
the private sector consortium. We are aware that consideration
is currently being given by private sector consortia to the refinancing
of a number of PFI contracts.
The extent of clawback arrangements entitling
departments to share in refinancing gains
5. The replies to the Parliamentary Questions
show that only 25 (24 per cent) of the 105 PFI contracts listed
include arrangements whereby departments are entitled to share
in refinancing gains (Figure 1).
FIGURE 1—PROPORTION OF PFI CONTRACTS
WITH ARRANGEMENTS TO CLAWBACK REFINANCING GAINS
| |
| Number | %
| Capital Value £m |
% |
| Contracts with clawback | Y
| 25 | (24%)
| 6,384 | (54%)
|
| Contracts without clawback | X
| 80 | (76%)
| 5,449 | (46%)
|
| |
| 105 | 100%
| 11,833 | 100%
|
6. The Channel Tunnel Rail Link contract, which with
a capital value of £4.2 billion accounts for 36 per cent
by value of all the PFI contracts listed by departments, has been
disclosed by DETR as having an arrangement for the clawback of
refinancing gains. DETR's note to its response says that although
there is no clause for sharing in refinancing benefits it would
directly benefit from a refinancing as it would reduce the requirement
for an operating subsidy in future years. In addition we are aware
that the contract contains a provision which will enable DETR
to share in any profits that Railtrack as service provider might
make through securitising the income stream it will receive by
way of access charges.
7. If one excludes the large Channel Tunnel Rail Link
contract, then only 29 per cent by value of the remaining contracts
include clawback arrangements (Figure 2).
FIGURE 2—PROPORTION OF PFI CONTRACTS (EXCLUDING
CHANNEL TUNNEL RAIL LINK WITH ARRANGEMENTS TO CLAWBACK REFINANCING
GAINS
| |
| Number | %
| Capital Value £m
| % |
| Contracts with clawback | Y
| 24 | (23%)
| 2,206 | (29%)
|
| Contracts without clawback | X
| 80 | (77%)
| 5,449 | (71%)
|
| |
| 104 | 100%
| 7,655 | 100%
|
8. Most of the clawback arrangements relate to the contracts
let by the NHS which has nine contracts with such arrangements
(50 per cent of the PFI contracts listed by the NHS) and the Ministry
of Defence which also has nine contracts with refinancing clawback
terms (30 per cent of the Department's PFI contracts).
9. Although only a minority of the PFI contracts listed
by departments have been disclosed as having refinancing clawback
arrangements there are a number of notable large value contracts
which do include clawback provisions (Figure 3).
FIGURE 3—LARGE VALUE CONTRACTS (CAPITAL VALUE OVER
£5 MILLION) WITH ARRANGEMENTS TO CLAWBACK REFINANCING GAINS
| |
| Capital Value £m
|
| Seven PFI hospitals (each over £50m) |
(NHS) | 503
|
| PRIME | (DSS)
| 350 |
| MOD Main Building Refurbishment | (MOD)
| 350 |
| Three Flying Training Contracts | (MOD)
| 330 |
| Croydon Tramlink | (DETR)
| 205 |
| Treasury Building | (HMT)
| 118 |
| | | 1,856
|
| Channel Tunnel Rail Link | (DETR)
| 4,178 |
| |
| 6,034 |
10. There are, nevertheless, many large value PFI contracts
which have been disclosed by departments as not including an arrangement
to clawback refinancing gains (Figure 4).
FIGURE 4—LARGE VALUE CONTRACTS (CAPITAL VALUE OVER
£50 MILLION) WITHOUT ARRANGEMENTS TO CLAWBACK RFINANCING
GAINS
| |
| Capital Value £m
|
| Six1 roads contracts | (DETR/Highways Agency)
| 1,078 |
| Four1 London Underground Projects | (DETR/London Underground)
| 1,009 |
| Seven1 PFI hospitals | (NHS)
| 690 |
| Five1 defence projects2 | (MOD)
| 568 |
| IT Partnership | (Employment and Education)
| 116 |
| A55 | (Wales)
| 110 |
| Berlin Embassy | (FCO)
| 50 |
| |
| 3,621 |
Notes:
1 Each contract with a capital value over £50 million.
2 Relating to various projects (IT, training, accommodation, telecommunications and vehicles).
|
11. The information disclosed by departments indicates
that the proportion of contracts which have included arrangements
to clawback refinancing gains has, however, shown some signs of
increasing during the last year, most notably by two of the largest
users of the PFI, the NHS and the Ministry of Defence (Figure
5). This probably reflects a greater awareness that private sector
consortia are considering refinancings and also the publication
of the Treasury's guidance on standard contract terms in July
1999 which made reference to refinancing issues. But Figure 5
also shows that other departments are still, on the whole, not
including arrangements to clawback refinancing gains in their
PFI contracts.
FIGURE 5—PROPORTION OF CONTRACTS LET SINCE OCTOBER
1999 WITH ARRANGEMENTS TO CLAWBACK REFINANCING GAINS
| Department | Number of contracts let since October 1999
| Number of contracts with clawback
| % of contracts with clawback
|
| NHS | 4 |
4 | 100%
|
| Ministry of Defence | 4
| 3 | 75%
|
| DETR | 31 |
— | —
|
| Others (less than 3 contracts each) | 7
| 2 | 29%
|
| | 18
| 9 | 50%
|
Note
1 Includes the London Underground Connect contract
|
Contracts without arrangements to clawback refinancing gains
12. The analysis set out in this memorandum has focussed
on the questions asked in the Parliamentary Questions tabled by
the Rt Hon Alan Williams MP, in particular the question as to
whether the PFI contracts listed by departments had a clawback
arrangement which would entitle the department to share in refinancing
gains. While contracts with a clear clawback arrangement will
give departments a fixed formula for sharing refinancing gains
(provided that the department and the consortium are in agreement
that a refinancing appropriate for the clawback has taken place)
the absence of a clawback provision in the contract would not
preclude a department negotiating over the sharing of refinancing
gains if it has given itself sufficient contractual powers to
approve situations where a refinancing is proposed. Because refinancings
can occur in a number of ways, and the issues relating to refinancing
tend to be complex, arrangements which give departments flexibility
to negotiate over refinancing gains, depending on the circumstances
surrounding the refinancing, may be a satisfactory alternative
to a fixed clawback arrangement.
Information on signed PFI deals
13. The information disclosed in the answers to the Parliamentary
Questions also highlights problems that arise in keeping track
of all signed PFI deals. The contracts disclosed by departments
in their responses have an aggregate capital value of £11.8
billion (Annex 1). The latest central list of all signed deals,
maintained by the Office of Government Commerce (OGC), shows the
capital value of all signed PFI deals as at 31 July 2000 (the
same time the Parliamentary Questions were answered) as £17.3
billion, or £15.7 billion if contracts let in Scotland are
excluded. Some of the difference is accounted for by small value
DETR local authority schemes and small value NHS projects which
were not disclosed in the answers to the Parliamentary Questions
but which are included in the OGC list. Also, some departments
not covered by the Parliamentary Questions have let single PFI
projects, for example National Savings.
| 
