Costs
10. Despite the Government's commitment to repay
95% of the debt in the event of termination and limited project
risks, the debt was given a BBB grade rating by the rating agencies.
Perceived risks leading to this low rating included potential
disagreements about the appropriate level of funding between central
and local government, and uncertainty around what might happen
at the end of each 7½ year periodic review. Under a BBB rating,
the lenders are charging about £450 million more in interest
on the amount borrowed than they would charge on some £3.8
billion of direct Government loans with AAA rating.[15]
11. On the basis of the Infracos meeting their performance
targets, London Underground will be likely to pay nominal post
tax equity returns to investors of 18 to 20%, a premium of about
15% above the risk free rate of return of 4.5% at deal close.
These returns are some 50% more than most deals with an established
PFI structure. Investors may receive lower returns if the Infracos
use all their standby funding or fail to achieve upgrades through
inefficient and uneconomic behaviour.[16]
12. The Tube Lines deal was refinanced very early
in the life of the PPP, in May 2004. The refinancing was in contemplation
when the contracts were finalised, suggesting that a better deal
for the public sector might have been possible. Refinancing reduces
borrowing costs and the gains are shared between the public and
private partners. Tube Lines has refinanced £1.8 billion
of debt. TfL receives £50.4 million of the benefit initially,
which represents a 60% share of the total £84 million gain.
Its share rises over time to £58.8 million (70% of the total).
This percentage is higher than that suggested in Treasury guidance
on the sharing of refinancing gains, which calls for a 50-50 split.
The public sector share is paid over to TfL, is not subtracted
from the grant provided to it by the Department, and may be used
in any part of London's transport network.
13. There is some scope for Metronet also to carry
out a refinancing to achieve lower interest payments on its debt,
which is held mostly in bonds. The amount of any such refinancing
benefit will only be determinable at the time of refinancing and
would be dependent on factors such as the underlying interest
rates, the financing structure available at that time and the
level of pre-payment penalties to its existing bondholders.[17]
12 
