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

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

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

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?

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

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

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

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

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

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

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

(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

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

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

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

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

Principal Documents Risk allocation authority risks contractor risks operating risks

(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

(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

(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

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

(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

Part 3: Conclusion The future of PFI

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”

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