Category: Contracts

What can the next government do about PFIs?

30/4/2015

There has been a great deal of talk recently about the unaffordability of PFI projects and this is given added focus by the imminent General Election.

In October 2014, Daniel Poulter, Parliamentary Under Secretary of State for Health, confirmed in the House of Commons that the Government intended to support NHS Trusts in following the example of Hexham Hospital in reducing their PFI burden by supporting voluntary termination of their contracts where a value for money case could be made. However, this was swiftly followed by HM Treasury guidance on the early termination of PFI projects, that introduced a level of subjectivity over decision-making that makes it easy to block terminations.

It is clear that due to a mixture of concern to maintain off-balance-sheet treatment and the need to find budgetary resources to pay the compensation that arises on termination, real central support is not there for individual Trusts or other Authorities to follow Hexham's example.

So what choices will the new Government have when it comes to reducing the burden that PFI projects place on the public sector? Despite what protesters (such as The People Vs PFI) would like to happen, cancellation of PFI projects is just not an option. The public sector has entered into arms-length contracts for these projects, which the courts would have to uphold. Any incoming government could, and should, ensure that departments examine their PFIs for the potential to use the contracts themselves to effect better value for money. Initiatives to date in this regard have been piecemeal. However, what more could be done?

If an incoming government is not prepared to fund authorities that have the ability to terminate their PFI, then we would advocate the introduction of a new Treasury controlled social investment fund that allows the public to invest directly in PFI projects for a fixed level of return of, say 3%. This, in line with other government led investment schemes, such as the Enterprise Investment Scheme (EIS), should attract tax relief at the basic rate. This would make the return comparable with listed funds on the stock exchange investing in PFI assets.

The fund would be used to support the buyout of PFI projects where termination rights exist, either because voluntary termination rights are already within the contracts concerned, or because the public sector have a right to terminate the contract due to a default by the private sector.

In addition, it could also be used to refinance projects, replacing senior debt, where rates are typically more than double that of the government’s own borrowing.

In terms of refinancing PFI projects, at the present time were the cost of capital to be reduced to 3%, the private sector would be the beneficiary of between 50% and 90% of this gain. Given the taxation support and the aim of this policy, this would clearly be inequitable for the public sector. As such it is proposed that, through primary legislation, all PFI and PPP projects would be required to undergo mandatory refinancing where Treasury and the Authority concerned supported the refinancing. This is similar to rights which already exist on PFI projects signed since the introduction of SoPC4, the standard form of PFI contract introduced in 2007.

Treasury, whilst having a cost of 3% for the capital within the social investment fund, would loan the proceeds to the individual private sector PFI companies at the same level of return that the private sector debt providers currently charge. That way there would be no "refinancing gain" for the private sector to share in. Instead the arbitrage could be gifted back to the Authority concerned. This would halve the cost of debt, which typically forms over 60% of PFI payments.

The replacement of private sector debt would have the added advantage of reducing the cost of change for the public sector. At the present time lenders charge high levels of fees and advisor costs when the public sector wishes to amend or change the project or the levels of service it wishes to enjoy. This often prohibits cost reductions and value for money changes, reinforcing the perception that PFI as a procurement route provides long-term inflexible contracting arrangements.

We hope that whoever forms the next Government after May 7th will join us in making a real difference to the unnecessary burden of PFI contracts.

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What is still wrong with PF2?

15/1/2015

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In 2012 the Treasury issued “A new approach to public private partnerships”, otherwise known as PF2. Whilst an improvement on the original PFI, we believe that PF2 has failed to address some important issues. Here we look at four problem areas that remain in PF2, which continually arise in our work with the Public Sector helping to manage their existing PFI contracts:

1 Use of Advisors
Whilst section 2.2 of the PF2 guidance points to the early appointment of advisors; there is no guidance on the scope of appointments for advisors for the Public Sector. Time and time again we see errors in the operational contracts that are primarily due to the lack of coordination between the legal, technical, financial and insurance advisors’ scope of service. The reality is that a commercial lead should be appointed to oversee the work carried out by these different disciplines to ensure that the awarded contract is fit for purpose.

2 The ability to change the contract
Whilst section 11.2.12 recognises the potential need to change the contract for issues other than Works or Services, unless the standard form explicitly enshrines this right, which it does not, it will remain the subject of continued disputes with the private sector.

3 Persistent Breach
The current guidance (23.2.3) is that minor breaches should be dealt with via performance points, with persistent breach termination rights only being enshrined in the contract if the performance points do not adequately incentivise the private sector to rectify minor breaches. Experience to date has shown that remedies using performance points are treated by the private sector on a purely business case basis. If the performance points are worth a deduction of £1 but the cost of rectification is £10, they will rarely bother to rectify the breaches. As such we believe that it should be mandatory for persistent breach termination rights to be enshrined in the PF2 contract.

4 Due diligence over subcontracts
Section 27 does make a small number of recommendations over the level of due diligence that an Authority should carry out on the subcontracts. In reality this is where any Authority should ensure that a high level of due diligence is carried out. The Authority needs an in depth understanding of a whole range of issues: the way the subcontractors have priced delivery, levels of margins, loss of profit rights for early termination, responsibilities for latent defects, and risk allocation. The list of issues that can fundamentally affect an Authority over the lifetime of the contract is vast and PF2 guidance does not go nearly far enough.

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PFI Code of Conduct revisited

8/8/2014

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Two months ago we took a look at who had signed up to HM Treasury’s PFI Code of Conduct and what this might tell us.

As we showed, although the Code has largely been seen as “modest” and “toothless”, it does at least require signatories to engage in a constructive and timely manner to discuss savings and operational efficiencies.

The public sector is under pressure to reduce expenditure, whilst PFI’s provide the private sector with built-in annual RPI increases. This really matters.

When we last looked at this, there had been 159 signatories. This has now risen to 205. The make-up of those signatories has changed little, however.

New signatories have included no further investors, sponsors, or lenders. With the exception of two advisors (including P2G), new signatories are all Public Sector bodies or SPCs (and over 92% of SPCs have still not signed).

Through our work, we are aware of investors and lenders that have refused to sign up. Perhaps, as we suggested on our last visit to the subject, it’s time to name and shame.

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How flexible is a PFI contract?

8/7/2014

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HM Treasury’s 2013 Code of Conduct for PFI contracts placed commitments on the signatories that are pertinent to the ability of the public sector to make meaningful savings on their existing contracts. These include:

Engage responsively when considering the type and price of variations, waivers, changes or approvals. Not unreasonably refuse to consent to these or make unreasonable charges for such consents.
Engage constructively and in a timely manner when approached by public sector bodies to make savings on a specific PFI/PPP contract or across their portfolio of PFI/PPP contracts, including but not limited to exploring the potential cost savings measures set out in the July 2011 guidance entitled “Making savings in operational PFI contracts”. This approach should be flowed down from senior management to contract managers to support effective engagement.

“Making savings in operational PFI contracts” included a number of recommendations that would necessitate the amendment of the original scope of the project through the variation mechanism contained within the PFI Project Agreement. These include for example, removal of Hard FM and lifecycle risk (para 3.48), removal of Soft FM Services from the scope (para 3.49) and removal of change in law risk (para 3.68).

Every signatory to the Code of Conduct, therefore, must accept that the public sector should be entitled to vary or omit work from a PFI/ PPP contract in order to make savings.

However, even since the introduction of the Code of Conduct, we are seeing a tendency on the part of the private sector (including signatories to the Code of Conduct) to defend the original scope of the Project Agreement in contradiction to this principle.

Variations are an important facet of PFI contracts. The terms of these agreements are typically from 25 to 50 years in length and, given the rate of change in how public services are delivered, flexibility in respect of how and what services are required has always been a key component. To that end, PFI Agreements have detailed drafting contained within them to allow variations to occur.

The first defence that we see the private sector deploying is the principle that variation clauses do not cover a situation where the employer wishes to omit work and give it to others. Put another way, absent clear words in a contract, the right to omit works from the contract does not include the ability to omit work and have it done by someone else. This is not a contract provision of PFI Agreements but a principle of law.

This is the swings-and-roundabouts principle. The legal premise is that a contractor, when pricing the contract, has struck an overall bargain and in doing so recognises that it will gain on some elements and lose on others. Allowing an employer to cherry-pick individual elements to vary and in particular omit from the contract would therefore, in the absence of clear agreement, be unjust as it would deprive the contractor of his bargain.

Where the courts have previously adjudged work to be wrongfully omitted, most often in relation to construction contracts, then they have had to assess the contractor’s loss. Generally, this is the loss of profit on the omitted work.

However, unlike traditional construction contracts in which this principle has been applied, PFI variation provisions keep the contracting counterparty to the public sector, the Special Purpose Company (SPC), whole, i.e. in a no better / no worse position. In such a case there will be no loss on the part of the SPC as a result of the variation.

The contract terms in a PFI arrangement look back to the position that the parties agreed on at the point the contract was signed. Within the Financial Model, there is expressed an Internal Rate of Return (IRR) for the SPC, on which the private sector will bid, and which is measured against the funds they invested. It is this that is protected by the ‘no better/no worse’ provision.

This is fair and reasonable for two reasons. Firstly, all bidding parties were required to openly declare the IRR they expected to receive on the project. Secondly, there was never an expectation, by the public or private sector, that SPCs would make a profit on the underlying provision of services. The profit element on service provision was contained either within the Construction Agreement or the Facilities Management Agreement. This position was also driven by project lenders who did not want SPCs (which, by their very nature, are thinly capitalised companies) taking risk on PFI projects, given that this could lead to loan default.

The private sector agreed to the principle that, when valuing variations, as long as the SPC was left in a no better / no worse position when measured against the Project IRR, they were content and the variation had to be implemented.

Time has moved on. The original shareholders in SPCs have often sold out, at high levels of return, and the new shareholders from the secondary market are attempting to squeeze out as much profit as they can, often in order to justify large fund management fees. In doing so, they have sought to make a return on the underlying service delivery, rather than just on the capital they invested. They are therefore incentivised to fight against the removal of elements of the underlying service delivery, even when the mechanics of the contract leave them in a no better/ no worse position, and where the public sector can perform these services at a lower cost.

The second common defence is to argue that the contract limits variations to the statement of requirement for the services in question and do not extend to, for instance, changes to the price and the payment mechanism. Mechanically, this is because many PFI projects define Variations as a change to the Works or Services and Works and Services are defined in turn by reference to a specific Schedule to the PFI Agreement.

The argument runs that, unless the proposed variation is limited to matters contained within the Schedule that defines the Works or Services, then the changes the public sector are seeking fall outside the scope of the variation procedure.

Were this truly to be the case then no variation would have ever been allowed under PFI Agreements and as such it is, in our view, an extremely narrow interpretation of the contract. PFI Agreements are a complex suite of documents where, for instance, the price and payment mechanism are often contained within a different Schedule of the Agreement to the definition of Works or Services. By their nature, almost all variations will require changes to more than just the statement of requirement, not least because of the financial element of any change.

For instance it is logical that almost every variation to a PFI Agreement will affect the amount the SPC is paid and the basis of that payment. As such it is difficult to envisage any change that could comply with this wholly unrealistic construction. The private sector is basically arguing that, unless they agree, no changes can occur.

The intention of the Variation procedure for PFI contracts was never to restrict Trusts from adding or removing services or obligations from the scope of the Agreement, so long as the public sector did so in a manner that left the SPC in a no better / no worse position with regard to both profitability and risk. Indeed, where Trusts have added scope into PFI contracts, the private sector have never raised such arguments.

To spell it out clearly, the variation mechanism in a PFI contract allows for change and protects the equity return on which the contract was bid. In order to make savings the public sector now needs to enact changes, Rather than fight each change, the private sector, as outlined in the Code of Conduct, should assist knowing that the agreed equity returns are assured.

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PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

10/6/2014

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Hexham Hospital is about to go through a voluntary termination. Reportedly, this involves Northumbria NHS Trust paying compensation to the private sector Special Purpose Company (SPC) of £114m. As a result, the Trust will regain ownership and management of the facility in all aspects and save £3.5m per year (£67m over the original life of the PFI contract).

What does this mean?

It means that, for this particular deal, the Trust was able to borrow sufficient funds (in this case from the Local Authority). It means that the cost to the Trust in re-procuring the services to run the hospital for the remaining years of the PFI, together with paying off the private sector for their contractual loss of profit, was £67m less than the cost of continuing to pay the PFI unitary charge.

To put all this in context, according to HM Treasury, the capital cost of the hospital was originally £54.1m.

The Trust Chief Executive called the hospital a “fantastic facility” that could never have been built without PFI. Nevertheless, the PFI was not seen as offering value for money in the current climate. Northumbria NHS Trust are to be congratulated for assessing their options and to have negotiated their way into a significant saving. It has taken them two years to do so.

Is this a model that other NHS Trusts and Local Authorities can follow? Unfortunately not all PFI contracts allow for voluntary termination. In addition, the compensation provisions vary, making termination more or less attractive.

And, crucially, not all PFI contracts are a bad deal for the public sector.

It is true that many PFI contracts have proved expensive, particularly the earlier deals. However, over time, the Treasury refined the standard form of PFI contracts. Mistakes were rectified, the imbalance between amount paid and the risks transferred was addressed.

The later PFI deals were a vast improvement on the earlier incarnations. If we look at later deals, in particular those done in Scotland, PFI was cut down to design, build and maintain. The provision of soft services (cleaning, equipment, catering, portering etc.) was generally outside the PFI. In our desire to rectify the wrongs of early deals we should not be blind to the fact that later deals provided a competitive procurement avenue. We should not throw out the baby with the bathwater.

What should a Trust (or Local Authority) do?

An Authority should be aware of the the difference between the costs of the PFI to the contract term, and the costs of running the facility under self-procurement. An Authority should also assess whether the contract can be terminated, and the amount of compensation payable. If the procurement saving is greater than the compensation payable, then the Authority should seriously consider its options.

Importantly, however, PFI contracts contain variation provisions. This means that the Authority has rights to change the contract. In many cases, significant savings can be made in this way. In assessing value for money, therefore, Authorities need to conduct a full review of their PFI contracts.

PFI contracts are complex and, to date, much of the experience and expertise has sat on the other side of the table. It’s different now. We would urge Authorities to seek expert advice and develop a plan for their PFIs. If value is already being achieved, that’s great. If not, then there is work to be done.

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PFI Insurances

24/10/2013

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Under a typical PFI contract, insurance is procured by the private sector. In the operational phase this generally includes cover for material damage, business interruption, public and third party liability.

At Financial Close, insurance has historically been priced on the basis of a stand-alone project to ensure that insurance can be re-provided in the event of Lender or Authority step-in.

Over time, insurance premia for PFI risks have reduced considerably for two main reasons:

Underwriters increasingly view PFI as a well maintained sector with relatively low risks and the last few years has seen a number of new entrants into the PFI sector, eager to do business.

Post operational commencement, many projects have grouped their insurances under a portfolio arrangement facilitated by the major PFI shareholders. Whilst still being individual project policies, the private sector has aligned renewal dates on projects with the resultant benefit of lower premiums from underwriters. This is commonly referred to as the “portfolio effect”.

Most PFI contracts since around 2003 have benefitted from Gain or Risk Sharing Mechanisms with respect to insurance premiums. These typically allow for the public sector to benefit from reductions (or contribute to increases) in actual insurance premiums when compared to the original contract price at Financial Close.

However, we are seeing many instances where the private sector has argued, when presenting risk share savings to the public sector, that the “portfolio effect” is an issue that should be carved out from the mechanism due to the fact that it is entirely down to their actions. Often, the public sector have accepted this argument. In addition, although most portfolio insurance placements include a low claims rebate, the private sector tend to omit this from their calculation of any gainshare. Together, this approach means that the private sector is top slicing the benefit that risk sharing was there to give.

It should be remembered that the private sector is partnering with the public sector for long periods. The terms of the agreement generally require the private sector to cooperate, pursue good industry practice, and mitigate costs. We would argue that actual means actual and shouldn’t be subject to manipulation. More importantly, the public sector can obtain insurances in line with those obtained by the private sector.

P2G, through its frameworks with a well known PFI insurance broker, is able to facilitate equivalent cover at market rates for the benefit of the public sector that at least match the premiums that the private sector can procure at, inclusive of their “portfolio effect”.

What does this mean for public sector bodies?

No longer should a public sector body allow the private sector to run any sort of argument about portfolio rates being excluded from a sharing mechanism. The result should be real returns to public sector budgets. There are over 900 PFIs and the benefit accrued from this one small measure is gained annually. The benefit to the exchequer is huge.

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Renegotiating PFI contracts

3/7/2013

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One of the most common questions we are asked is whether our involvement on a PFI project will have a detrimental effect on relationships with the private sector provider and ultimately will lower performance. The short answer is that it will not.

If you have a PFI contract, deciding to renegotiate elements of it is a complicated affair fraught with potential pitfalls. However the private sector expect it to happen and are often astounded that it doesn’t happen more frequently. PFI contracts are not as inflexible as many people choose to believe.

It is possible to cut costs in a successful PFI partnership. It certainly isn’t always easy, but with the correct approach and buy-in from key stakeholders, one can reach an agreement that benefits all parties in the long term.

Before you do anything you need to gain a better grasp of exactly what you hope to achieve through renegotiation. “Cutting costs” is all well and good, but you need to consider how costs will be cut. Renegotiating a contract under such circumstances is a delicate enough process as it is, so it is important that you equip yourself with an understanding of your intended outcomes before you approach your partner.

Most PFI providers have a large exposure to the public sector and many will have signed up to the new Treasury Code of Conduct, so it is important to use these levers to help bring pressure to bear on them to assist. However, far more important is your approach to them as an organisation.

All PFI contracts are “owned” by Special Purpose Companies (SPC’s). Their raison d'etre is to deliver long term sustainable returns for their shareholders. Given the length of PFI contracts, it is not in their interests to maintain their margins to a point where their public sector partner is put in serious financial jeopardy; but ultimately they are there to make a profit for their shareholders and weaving a path between these positions is a balancing act that requires finesse to deliver.

If you operate a traditional buyer/supplier relationship, this will make delivery harder as your private sector partner is likely to take a short-term and solely profit-driven approach to the contract. You may find that renegotiation or re-shaping is more adversarial in these circumstances.

If, on the other hand, you do have a true partnership/alliance operating model, your partner will understand your financial challenges and they are far more likely to work with you on potential solutions that can appeal to both their sense of partnership and moral obligation to work together for the public good.

Ultimately, a wise private sector partner will understand the long term benefits of working in true partnership with a public sector organisation, be it a local authority, NHS trust, police force or the like.

Partnership also extends to the way the contract fundamentals are handled. Knowing exactly what you should be getting and holding the private sector to account for failure to deliver are key components of successful contract management. Doing so will, in the long term, improve your ability to successfully renegotiate elements of the contract to deliver savings. However the way you conduct yourselves and your ability to think through the issues that your ‘partner’ will face, as a result of the changes, is vital.

There is nothing simple about the process of renegotiating a PFI contract. However, a healthy dose of common sense (including pro-actively helping the provider open new doors so it can address new opportunities) and a willingness to work in true partnership with your provider will take them and you a very long way towards achieving a positive outcome.

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The PFI Secondary Market

13/5/2013

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Traditionally companies, who invest in PFI/ PPP transactions, do so though a Special Purpose Company. This Company borrows using either traditional bank debt, or through bond issues, around 80-85% of the capital needed to construct the facility and pay back the winning consortium the costs associated with bidding and closing the transaction.

The remaining 15 – 20% of the required capital comes from the investors in the project, traditionally structured as a split between nominal equity and subordinated debt, in order to provide a tax shield for investors.

When PFI/PPP transactions complete construction and pass into their operational phases, the original equity (and subordinated-debt) investors often look to recycle their capital in order to re-invest in new primary transactions or to realise a return on their investment. Alongside this maturing market, new investors in PFI/PPP projects have emerged such as infrastructure investment funds and, indirectly, pension funds. These investors are attracted by the reduced risk profile of PFI/ PPP infrastructure assets and by the long term, stable profile of investment returns generated, which are often index linked. As a result there is now an active trading market for equity and investment products within the sector, whether by disposal, acquisition, or portfolio creation.

Private Finance Initiative equity is an attractive and growing asset class. PFI equity, post construction completion, historically offers income generation at low risk. Long duration, inflation adjusted, concession payments by the UK government provide index-linked bond-like characteristics, with clear attractions for matching against pension fund liabilities.

There are two main types of secondary deal in the market presently, a true arms length acquisition by 3rd parties, or disposal by a related entity to a fund or portfolio. Valuation methodologies are similar in each, although in the case of investment funds buying secondary assets from a related primary origination team, the actual return that investors in the fund may see can be diluted by fund management fees and highly overpriced subcontract arrangements, again with related entities, in order to suppress the headline IRR.

For the Public Sector a change in ownership is not necessarily a bad thing, although with bidding levels for secondary assets often delivering around a 6-7% yield; whilst many investors are seeking actual yields of 8-9%, many management teams are highly incentivised to enhance the cash flows of the project, a process often referred to as value enhancement.

Value enhancement is a process whereby private sector management, on behalf of the investors, will seek to analyse the base returns of the project, as evidenced within the Financial Model, and then look to increase these through the actions they take.

These can often take the form of just good management actions, such as better management of the supply chain, competitive tendering of things like insurance, or reduction of overhead. In these cases the private sector should be actively encouraged; as these will lead to better-run public assets with lower termination liabilities for the public sector. Unfortunately, all too often it can also engender a more commercial and claims orientated mind set amongst private sector managers that has, in many cases, created the bad publicity for this method of procurement as a whole.

For many commentators the term secondary market in PFI has been painted as intrinsically bad for both the public sector and us, as a tax paying public. Like most things in life, the truth is somewhat more complex.

On the plus side the secondary market has both sharpened costings within the industry, leading to better value primary deals and lower cost of infrastructure; and allowed the recycling of capital so that primary players can continue to support this method of procurement; where government feel it is still appropriate to pursue.

Unfortunately it has also effectively diluted many of the plus points of PFI in terms of having long term contracts supported by long term relationships; allowing some primary investors to do some very bad deals with the public sector and then exit these projects with massive windfall profits.

A January 2011 report by the European Services Strategy Unit found that there had been more than 240 secondary deals, with profits averaging over 50%. The report also found that government recording of these transactions is inadequate and grossly under-estimates the scale of the transactions.

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What is a PFI and how does it work?

4/5/2013

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Many people find PFIs hard to understand. Most reports in the press are riddled with poor assumptions and inaccuracies. People on the street certainly don't understand them. I regret to say that even many who work in the industry don't really have a firm grasp of how a PFI project is supposed to operate.

Simply put, PFI is a way for the public sector to build and subsequently operate an asset in an arrangement that requires the private sector to invest the upfront capital and results in the public sector paying a Unitary Charge. As its name suggests a Unitary Charge is one payment (made monthly) that encompasses the costs of building the asset, financing it, and operating it for the whole length of the contract. Think of it as a mortgage for your house, maintenance costs, insurance and housekeeping all rolled into one payment. If the lighting doesn’t work in your kitchen or your dining room is unavailable because of lack of maintenance then you don’t need to pay for that portion of your house.

Often in the press you see references to a £100m hospital which will costs many times more than £100m over the life of the contract. Embarrassingly often, the press neglects to tell their readers that the fee also includes the maintenance, cleaning, catering, portering and other services for more than 20 years.

We believe that PFIs should be better understood. In the first instance let's begin by looking at the various players and their relationships to one another:

The Authority - this is the NHS trust, local authority, or government department that is the initiator of the PFI deal. They want a hospital / school / road built and maintained, and certain services delivered.

The Constructor - the company that builds the asset.

The Service Provider - One or more companies that provide hard (maintenance) and soft (cleaning, catering, portering) services through the life of the contract.

The SPC / SPV - Special Purpose Company / Vehicle (both terms are widely used) that is a limited company set up to run and operate the project. The shareholders are normally made up of the private sector parties that are successful in the PFI bidding process. These can include the Constructor, the Service Provider, and a financier or specialist PFI organisation. Often these parties' shares are subsequently sold in the secondary market to other parties. The secondary market, how it works, and its implications will form another article soon.

The Lenders - the banks or bond holders that provide the majority of the financing to construct the asset.

The Manager - Sometimes the SPC is staffed by direct employees, or those seconded from shareholder companies. Often, however, the SPC is managed by one of the private sector parties, or a specialist PFI management organisation.

Below is a simplified diagram that seeks to show the contractual arrangements between the parties in a typical PFI. In practice there are also a number of direct agreements in place between the parties.

Let's look at each of those agreements:

Project Agreement (PA) - this is the fundamental agreement underpinning the PFI. It states what will be built, how it will be operated, and what risks are retained by the Authority or transferred to the SPC. It also governs relations between these two parties, including what happens when things go wrong, or when the parties cannot agree, or when one or other party wants to change the contract. The PA will typically run for a term of 20 - 30 years.

Construction Agreement - This is a contract between the SPC and the Constructor to determine what will be built, by when, and for what sum.

Facilities Management Agreement (FMA) - This is the agreement between the SPC and the organisation that will do the work of maintaining and operating the asset. Hard services will typically run for the entire length of the contract (PA term), whereas for Soft services there may be provisions to benchmark or market test the cost of those services, typically every five years.

Credit Agreement (CA) - This is the loan agreement and is also sometimes referred to as the Facilities Agreement. The SPC will be borrowing a lot of money (typically 90% of the costs) to build the asset and fund the other up front costs required prior to income being received from the public sector. This agreement details the period over which the money must be paid back and what happens if things go wrong. Some PFI assets are financed by private or public placement bond issues. We won't go into the differences here for the moment.

So that’s who’s involved in a PFI deal and what the relationships are between the parties. In future posts we want to tackle:

- the secondary market and how this works
- benchmarking and market testing
- RPI and its implications
- what happens when there are disagreements
- lifecycle

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What can the next government do about PFIs?

What is still wrong with PF2?

PFI Code of Conduct revisited

How flexible is a PFI contract?

PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

PFI Insurances

Renegotiating PFI contracts

The PFI Secondary Market

What is a PFI and how does it work?

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