Richard Dyton (Simmons

PPP/PFI & Simmons) and Nick

Hopkins (KPMG)
terminology
unravelled 16 January 2007

[or An idiot's guide to the

curious world of Public
Private Partnerships]
 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

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 Part 1: Some Background

 What is the difference between PPP and PFI?

 What is PFI?

 Terminology Quiz - 1

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 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?

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 The PPP Range

PPP

Conventional Outsourcing Strategic Joint Full

PFI Leasing GOCO
Procurement & FM Partnering Ventures Privatisation

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 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

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 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

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 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

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 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

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 Part 2: The Legal Framework

 Basic contractual structure

 Principal documents

 Treasury Guidance

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 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

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 (Basic Contractual Structure)

Shareholders/Sponsors
Lenders
(Shareholders Agreement) Insurers
(Inter-Creditor Agreement)

Loan Agreement
Equity Insurance
Direct Agreement policies/agreements

Direct Agreement

AUTHORITY
Contractor Construction
Construction Contractors
(SPV) Agreement
Concession Agreement
(may include Land transfer
agreement or lease)
Operating Suppliers/
Agreement Subcontractors
Possibly collateral warranties

Operations and Suppliers/

maintenance
Subcontractors
Contractor

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 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

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 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

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 Principal Documents

 Concession Agreement

 Subcontracts

 Direct Agreement

 Loan Agreement

 Insurance

 Shareholders Agreement

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 Principal Documents

Concession Agreement

 Service requirement

 Payment mechanism

 Acceptance of the Service by the Authority

 Performance regime

 Change mechanisms

 Termination

 Refinancing restrictions on Contractor

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 Principal Documents

 Risk allocation
– authority risks
– contractor risks
– operating risks

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 (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

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 (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

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 (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

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 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

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 (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

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 Part 3: Conclusion

 The future of PFI

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 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”

24/RRD/247DB70
 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/247DB70