PPPPFI terminology unravelled or An idiots guide to

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 n Part 1: Some Background – What is the difference between PPP and PFI? – What is PFI? – Terminology Quiz - 1 n Part 2: The Legal Framework – Basic contractual structure – Terminology Quiz - 2 – Principal documents – Treasury guidance n Part 3: Conclusion 2/RRD/247 DB 70

Part 1: Some Background n What is the difference between PPP and PFI? n What is PFI? n Terminology Quiz - 1 3/RRD/247 DB 70

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? 4/RRD/247 DB 70

The PPP Range PPP Conventional Procurement 5/RRD/247 DB 70 Outsourcing & FM Strategic Partnering PFI Leasing GOCO Joint Ventures Full Privatisation

Headlines Quiz n 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” n…from the Times, The Daily Mirror, Private Eye 6/RRD/247 DB 70

Terminology Quiz - 1 n 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 7/RRD/247 DB 70

Terminology Quiz - 1 n 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 8/RRD/247 DB 70

Terminology Quiz - 1 n 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 cosponsors, 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 9/RRD/247 DB 70

Part 2: The Legal Framework n Basic contractual structure n Principal documents n Treasury Guidance 10/RRD/247 DB 70

Basic Contractual Structure n Contractor usually a Special Purpose Vehicle n Significant up-front investment required – Equity is usually 10 -15% of requirement – Lenders provide the remaining funding n Lenders rely solely on the project cashflows for debt servicing n Risk to cashflow is minimised by appropriate allocation of risk 11/RRD/247 DB 70

(Basic Contractual Structure) Shareholders/Sponsors (Shareholders Agreement) Lenders (Inter-Creditor Agreement) Insurers Loan Agreement Equity Insurance policies/agreements Direct Agreement AUTHORITY Concession Agreement (may include Land transfer agreement or lease) Contractor (SPV) Construction Agreement Operating Agreement Construction Contractors Suppliers/ Subcontractors Possibly collateral warranties Operations and maintenance Contractor 12/RRD/247 DB 70 Suppliers/ Subcontractors

Terminology Quiz - 2 n 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 13/RRD/247 DB 70

Terminology Quiz - 2 n 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 14/RRD/247 DB 70

Principal Documents n Concession Agreement n Subcontracts n Direct Agreement n Loan Agreement n Insurance n Shareholders Agreement 15/RRD/247 DB 70

Principal Documents Concession Agreement n Service requirement n Payment mechanism n Acceptance of the Service by the Authority n Performance regime n Change mechanisms n Termination n Refinancing restrictions on Contractor 16/RRD/247 DB 70

Principal Documents n Risk allocation – authority risks – contractor risks – operating risks 17/RRD/247 DB 70

(Principal Documents) Subcontracts n May be shareholders of the SPV n Construction Contractor n Operation and maintenance contracts n Authority must carry out due diligence n Authority’s rights under collateral warranties arise on termination of Concession Agreement 18/RRD/247 DB 70

(Principal Documents) Direct Agreement n Main purpose: sets out rights and obligations following threatened or actual termination of the Concession Agreement n Rights of step-in and liability during step-in n Rights to replace non-performing Subcontractors n Application of insurance proceeds to reinstate assets on total loss 19/RRD/247 DB 70

(Principal Documents) Loan Agreement n Restrictions on the Contractor to alter the Project’s risk profile n Cashflow requirements and ratio setting: breaches can trigger loan default n Term will be shorter than the Concession Agreement 20/RRD/247 DB 70

Treasury Guidance Standardisation of PFI Contracts, version 3 (April 2004) (SOPC 3), as updated n Guidance for negotiating (and some required drafting) the Concession Agreement and Direct Agreement n Promotes consistency of approach and aims to reduce negotiating time n Assumes: – Contractor is an SPV – there is a construction phase and an operational phase – there is limited recourse debt 21/RRD/247 DB 70

(Treasury Guidance) Standardisation of PFI Contracts (continued) n SOPC 3 must be followed, but: – assumptions above may not apply – large, complex and/or novel projects may need individual treatment – example drafting is not exhaustive – Mo. D standard contract consultation ongoing ( April 2005) n 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 n Document is continually reviewed and amended to reflect differences with market practice or current legislation 22/RRD/247 DB 70

Part 3: Conclusion n The future of PFI 23/RRD/247 DB 70

Future of PFI n Current projects are still in the early stages of operation n 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 n Many governments overseas considering and beginning to use PFI n Considered to be an important UK “export” 24/RRD/247 DB 70

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 25/RRD/247 DB 70