1. PPP/PFI terminology unravelled [or An idiot's guide to the curious world of Public Private Partnerships]
Richard Dyton (Simmons & Simmons) and Nick Hopkins (KPMG)
16 January 2007

2. Introduction to the Private Finance Initiative
Part 1: Some Background
What is the difference between PPP and PFI?
What is PFI?
Terminology Quiz - 1
Part 2: The Legal Framework
Basic contractual structure
Terminology Quiz - 2
Principal documents
Treasury guidance
Part 3: Conclusion

3. Part 1: Some Background What is the difference between PPP and PFI?
What is PFI?
Terminology Quiz - 1

4. What is the difference between PPP and PFI?
Is it:
A) Not a lot?
B) “F” and “I”?
C) That one is a general term for public private partnerships, the other a particular type of public private partnership?

5. The PPP Range PPP Conventional Procurement Outsourcing & FM Strategic
Partnering
PFI
Leasing
GOCO
Joint
Ventures
Full
Privatisation

6. Headlines Quiz These are all headlines: (A) “I.T. Hits The Fan”
(B) “Amey Amiss”
(C) “The Strange case of the Vanishing Hospitals”
(D) “The Great PFI Sell-off”
…from the Times, The Daily Mirror, Private Eye

7. Terminology Quiz - 1
What does “PIN” mean and how does it fit into the PFI process?
A) Personal Identification Number - needed to access funding for the PFI
B) Pesticide Information Network - term only used in specialised agricultural PFIs
C) Prior Information Notice - initial formal announcement of the project
D) Project Identification Number - used to track each project throughout its set-up and operation

8. Terminology Quiz - 1 What is the “OJEU”?
A) Official Journal of the European Union - publication in which new projects are announced
B) Orange Juice officially approved by the European Union for consumption in the course of a PFI
C) Original Jurisdiction of the European Union - regime under which approval for PFI projects must be sought

9. Terminology Quiz - 1 What is the “ITN” in this context?
A) Integrated Testing Network - prototype scheme used to roll out and test the features of a PFI scheme
B) Invitation to Negotiate - discussions and negotiations with co- sponsors, contractors, banks and advisors for the preparation of a deliverable technical, commercial and financing solution
C) The evening news - used to catch up on the latest developments in the scheme
D) Identification Tasking and Networking - allocation of responsibilities between the parties at the outset and provision for interaction between the parties

10. Part 2: The Legal Framework
Basic contractual structure
Principal documents
Treasury Guidance

11. Basic Contractual Structure
Contractor usually a Special Purpose Vehicle
Significant up-front investment required
Equity is usually 10-15% of requirement
Lenders provide the remaining funding
Lenders rely solely on the project cashflows for debt servicing
Risk to cashflow is minimised by appropriate allocation of risk

12. (Basic Contractual Structure)
Shareholders/Sponsors (Shareholders Agreement)
Lenders (Inter-Creditor Agreement)
Insurers
Loan Agreement
Equity
Insurance policies/agreements
Direct Agreement
Direct Agreement
AUTHORITY
Contractor (SPV)
Construction Contractors
Construction Agreement
Concession Agreement
(may include Land transfer agreement or lease)
Operating Agreement
Suppliers/
Subcontractors
Possibly collateral warranties
Operations and
maintenance Contractor
Suppliers/
Subcontractors

13. Terminology Quiz - 2 What is a “Unitary Payment”?
A) One-off payment paid by the public sector for the provision of services by the concession holder.
B) Periodic payment paid by the public sector for the provision of services by the concession holder
C) Periodic payment paid by the project parties to their much valued legal and accounting advisors

14. Terminology Quiz - 2 What is “Financial Close”?
A) The point at which all the contracts are signed by all parties involved in the project
B) The funder’s correspondence address
C) The point at which the final payment is made by the public sector to allow operation of the project to commence
D) The point at which the final payment is made by the public sector upon termination of the project

15. Principal Documents Concession Agreement Subcontracts Direct Agreement
Loan Agreement
Insurance
Shareholders Agreement

16. Principal Documents Concession Agreement Service requirement
Payment mechanism
Acceptance of the Service by the Authority
Performance regime
Change mechanisms
Termination
Refinancing restrictions on Contractor

17. Principal Documents Risk allocation authority risks contractor risks
operating risks

18. (Principal Documents)
Subcontracts
May be shareholders of the SPV
Construction Contractor
Operation and maintenance contracts
Authority must carry out due diligence
Authority’s rights under collateral warranties arise on termination of Concession Agreement

19. (Principal Documents)
Direct Agreement
Main purpose: sets out rights and obligations following threatened or actual termination of the Concession Agreement
Rights of step-in and liability during step-in
Rights to replace non-performing Subcontractors
Application of insurance proceeds to reinstate assets on total loss

20. (Principal Documents)
Loan Agreement
Restrictions on the Contractor to alter the Project’s risk profile
Cashflow requirements and ratio setting: breaches can trigger loan default
Term will be shorter than the Concession Agreement

21. Treasury Guidance
Standardisation of PFI Contracts, version 3 (April 2004) (SOPC3), as updated
Guidance for negotiating (and some required drafting) the Concession Agreement and Direct Agreement
Promotes consistency of approach and aims to reduce negotiating time
Assumes:
Contractor is an SPV
there is a construction phase and an operational phase
there is limited recourse debt

22. (Treasury Guidance) Standardisation of PFI Contracts (continued)
SOPC3 must be followed, but:
assumptions above may not apply
large, complex and/or novel projects may need individual treatment
example drafting is not exhaustive
MoD standard contract consultation ongoing ( April 2005)
Principle of freedom of contract under UK legal system has allowed PPP contract structures to be developed in deals without requiring contract to conform to rigid legal structure
Document is continually reviewed and amended to reflect differences with market practice or current legislation

23. Part 3: Conclusion
The future of PFI

24. Future of PFI
Current projects are still in the early stages of operation
So far the National Audit Office has concluded that PFI deals have saved public money, but early schools deals proved to be more expensive than conventional procurement
Many governments overseas considering and beginning to use PFI
Considered to be an important UK “export”

25. PPP/PFI terminology unravelled [or An idiot's guide to the curious world of Public Private Partnerships] Richard Dyton and Nick Hopkins 16 January 2007