8/10/2019 PFI PPI

1/24

PRIVATE FINANCE INITIATIVE /

PUBLIC PRIVATE PARTNERSHIP:

A CONTRACTORS PERSPECTIVE

A paper given to a meetingof the Society of Construction Law

in London on 15th October 2002

Martin Lenihan

December 2002

www.scl.org.uk

8/10/2019 PFI PPI

2/24

1

PRIVATE FINANCE INITIATIVE /

PUBLIC PRIVATE PARTNERSHIP:

A CONTRACTORS PERSPECTIVE

Martin Lenihan

This paper looks at the commercial and legal aspects of the private finance

initiative (PFI) and public private partnership (PPP) which are of particular

concern to the contractor, and considers how the contractors legal team

attempts to manage risk when drafting, reviewing and negotiating PFI

documentation. The main reason for a contractor moving into PFI is the need

to make better margins and more profit by being different and innovating, incircumstances where there are many (often too many) construction companies

seeking a limited supply of traditional construction work. All the early PFI

projects and many of the later ones have been largely contractor driven, rather

than investor or operator driven. Over time, different trends may emerge.

PFI/PPP general context

The first major opportunity for the private sector came in 1981 with what are

known as the Ryrie Rules.1 These allowed projects to be privately funded so

long as:

they provided better value for money than publicly funded alternatives;

they were not additional to public expenditure (ie there must be an

equivalent public capital cut); and

risk was transferred to the private sector.

In the early days, projects were not known as PFI but by various other

acronyms, principally BOT (build, own, transfer), BOOT (build, own, operate,

transfer) and BOO (build, own, operate). Since early projects such as the

Dartford River Crossing the buzz words have moved on and we are now into

PFI and the perhaps more politically palatable (and indeed, accurate) term

PPP. For simplicity, the term PFI is used in this paper.

Early privately financed opportunities, following Ryrie, included the Channel

Tunnel and the Dartford-Thurrock crossing (better known as the QEII

Bridge).2 By about the mid-1990s, it was apparent from a number of earlier

BOT type projects that PFI could work and was, to some extent, tried and

tested. This said, however, there were questions as to why success on earlier

1 So called after Sir William Ryrie, chairman of the committee set up by the NationalEconomic Development Council to review the investment rules for nationalisedindustries and to devise criteria under which private finance might be introduced into the

public sector.2 The bridge linking the northern sector of the M25 to the southern sector across the River

Thames: the project had a capital value of some 180m.

8/10/2019 PFI PPI

3/24

2

projects3was not being replicated in other sectors of government, for example

health and education, all of which have a high spend.

At about this time, as the PFI process was evolving, one of the most

distinguishing characteristics of PFI was becoming more discernable, namely

that the process is all about the purchase ofservices not just assets. It had tobe recognised that rather than merely talking about a 12 month construction

contract, the participants had to get to grips with agreements which were to

run for 25-30 years. Problems with transfer of risk, lack of assurance that

contracts would be honoured by the public sector, excessive transaction costs

there were still no guidelines or standard documents were real constraints

on the spread of PFI to other sectors.

Arguably, the big breakthrough for PFI came with the first Bates Review in

1997, when Sir Malcolm Bates undertook a review of how PFI was working.4

His recommendations included the following:

Stronger central direction which would determine commercial viabilityof projects. This was achieved by setting up the Treasury Taskforce

with the necessary skills to assist in the selection and driving through of

projects;

Legislation to empower public sector bodies to enter into PFI contracts;

and

Standardisation of PFI documentation: prior to standardisation, all

documentation was bespoke with much reinvention of the wheel and

correspondingly excessive deal costs.

The Bates Review resulted in a number of major health schemes actually

being built and coming to fruition.

It is thought by many that this heralded a new era of sharing of responsibility

between the public and private sector, rather than the pass the buck approach

of earlier deals. The new mantra become optimum risk allocation,

characterised by the new understanding that value for money is maximised

when risk is placed with the party best able to manage it. Risk and control go

together; the party to whom risk is allocated must have the freedom to

determine how to manage it and all risks should be identified, allocated and

priced at the outset to allow flexibility on the project.

It now seemed to be generally understood that where there is an interface

between services being provided by the private sector and the public sector,

the latter would need to have some limited obligations. For example, in the

hospital context, the hospital trust would need to sign off clinical adjacencies;

they would take the risk of occupancy and indeed decide where the hospital

was to be situated. The government also accepted the risk of project specific

legislation (for example, if a subsequent government abolished the

concessions for hospital operations this would be a government risk).

3 Such as the QEII Bridge and the Tagus Bridge in Portugal, not to mention the M1/A1shadow tolls project.

4 Sir Malcolm Bates, The Bates Review, June 1997; see www.ogc.gov.uk/pfi.

8/10/2019 PFI PPI

4/24

3

Major legislation followed the Bates Report and greatly assisted the PFI

process, namely the National Health Service (Private Finance) Act 1997 and

the Local Government (Contracts) Act 1997.

Regarding the lack of standardisation of PFI documentation and procedures,

the position was accurately described by Haydn Cook, Chief Executive ofCalderdale NHS Trust, who said in his case study of the procurement by PFI

of the Halifax Hospital:

The Trust negotiated, almost continuously, with Catalyst from

September 1996 through to July 1998

Most meetings seemed to involve lawyers and the legal contracts

seemed to be the basic agenda for almost every meeting. The legal

contract is a means of reflecting the commercial understanding or so it

was thought! There were times when it felt like it was an end in itself

no matter if the hospital did not work, as long as the legal words were

sound

The legal negotiations went on ad nauseam, with about thirty drafts of

the contract being produced (the Trust regularly lost track of which

revision it was working on) ...

One meeting, close to financial close, had around twenty people

present. The lawyers were typically getting 300 an hour. The total

cost of the time involved must have been in the order of 3,600 an hour,

or 1 per second ...

By the last two months, it should be added that everyone was getting

tired with regular weekend working and long hours that often turned

into working through the night. Good health and stamina were key

elements to keeping the negotiators going.5

This is exactly my experience: one enduring memory I have of a PFI

negotiation in about 1998, is of the bankers representative producing a tube of

vitamin C tablets at approximately 3am one Saturday morning near financial

close on a deal to keep the meeting going to the end.

In mid-1999 the Treasury Taskforce published the first edition of its Guidance,

which provides a template for concession contracts (project agreements)

across all sectors, in most cases setting out the principles for the drafting and

then providing examples of appropriate clauses. (This has now been

superseded by the Guidance published by the Office of Government

Commerce (OGC part of the Treasury).)6 This is already bearing fruit in

that the National Health Service (NHS) has produced a standard form of

project agreement, based on the Guidance.7 It remains to be seen whether the

5 Courtney A Smith,Making Sense of the Private Finance Initiative Developing Public-Private Partnerships, Radcliffe Medical Press, 1999.

6 Treasury Taskforce Guidance first edition 1999 and OGC Guidance issue 3,Standardisation of PFI Contracts, general revision 2002, OGC/Butterworths, availablefrom www.butterworths.co.uk and see www.ogc.gov.uk/pfi and the PFI network at

http://pfi.ogc.gov.uk; OGC help desk 0845 0004999.7 NHS Executive Standard Contract (version 2) October 2000, available on

www.doh.gov.uk/pfi (help desk 01132 545487).

8/10/2019 PFI PPI

5/24

4

transaction costs will be substantially reduced but there is every reason to

expect that they will.

Where we are at present

I believe that PFI does work, principally because the process brings benefits tobothsides of the table: employers are seeking solutions to their requirements,

allowing innovation to be explored in all sorts of areas creating an

environment where freedom of ideas can flourish.

There is complete integration under the project company (which is a corporate

special purpose vehicle) of everything needed to achieve the required service,

from designers and contractors, to service provision and maintenance. The

project company will, therefore, be focussed on being able to provide the

service efficiently and economically. The project company and employer

have common goals, and the project company can:

be more innovative in configuration, design, construction, maintenanceand even the operation of the project;

create greater efficiencies and synergies between design and operation;

invest in the quality of the asset, to improve long term maintenance and

operating costs, to give value for money not cheapest capital cost.

In the past (under traditional procurement), capital has often been invested

without a clear commitment to adequate future spending on maintenance,

leading to poorly maintained assets, high running costs, inefficient service

provision and premature replacement. In contrast, PFI invests in the future

because it ensures that assets are maintained properly.

An upfront decision as to what is required is made, leaving the projectcompany to adopt and deliver a solution. Major capital projects in the past

have been bedevilled by massive change and variation. PFI is about focusing

on the right questions, with an emphasis not generally associated with

traditional construction methods. There is a huge incentive to work towards

the earliest provision of the service, because only then does payment start to

flow, and the financial risks of failure on the design and build contractor are

considerable. This aspect of PFI alone acts to concentrate the minds of design

and build contractors in a way almost unknown in previous Joint Contracts

Tribunal (JCT) standard forms of building contract. A big difference between

PFI and JCT is, invariably, the delivering of a completed product to time for a

pre-agreed price.

It may be that the detailed negotiations leading to financial close are one of the

reasons for the projects success. All parties have the opportunity to fully

understand what the other parties wish to achieve. The risks are exhaustively

researched and methods of controlling them determined in advance. The

design is well progressed and most, if not all, planning issues have been

resolved. Principal subcontractors have been selected and have bought in to

the key issues. To my mind, the key feature to understand about the PFI

process is that it is all about the delivery of aserviceor productof which the

construction of the facility/hospital/building or whatever is an (important) part.Because of the very different risk:reward profile of PFI projects compared to

8/10/2019 PFI PPI

6/24

5

more traditional methods of procurement and the use of output specifications,

the participants in PFI must make major mind adjustments and stop thinking

JCT. Instead, they must adapt to new concepts.

The future

The government seems keen to ensure that the lessons learnt through PFI are

applied to all public sector procurement. Peter Gershorn, the then managing

director of GEC Marconi, carried out a review of public procurement and

identified a need for radical change.8 He recommended that the government

create a central body to ensure consistency of strategy and the promotion of

best practice across the public sector. A second report was produced by Sir

Malcolm Bates.9 The result of these reports is that two new governmental

bodies have been set up.

Partnership UK will effectively take over where the Treasury Taskforce left

off. The likelihood is that many different types of public/private co-operationwill develop, some of which we are already seeing, for example in a recent bid

for the new Meteorological Office building, where the construction costs will

be directly funded by the government. The OGC will act as a gateway for

decision making on government procurement (excluding military, health and

local authority procurement). It is likely to have a significant influence on

which projects go forward and whether PFI, traditional methods or some

combination of the two is used. Numerically more projects will be procured

using PFI methods. Immense potential exists for the export of UK PFI skills

as other countries begin to copy the UK model.

I believe that the future of PFI looks bright, despite recent well publiciseddifficulties associated with the process. These difficulties, particularly those

relating to onerous bid costs, new accounting rules and trade union concerns

with aspects of PFI, are genuine concerns, but they can be dealt with. The

disadvantages of the PFI process are greatly outweighed by the advantages.

Role of the contractors lawyer in PFI transactions

There is no law of PFI as such but merely many areas of law which have a

bearing on the various agreements concerned. The essential requirements for

a lawyer practising in this area include:

1. A broad experience and understanding not only of construction

contracts but of a variety of commercial agreements, as well as

knowledge of a wide range of corporate and general commercial

documentation (such as service/facilities management agreements and

their payment and availability regimes, shareholders agreements, joint

venture agreements, finance documents, property documentation and

general security documentation);

8 Peter Gershorn,Review of Civil Procurement in Central Government, April 1999;

available at www.ogc.gov.uk.9 Sir Malcolm Bates, The Second Review, the results of which were published by the

Treasury in July 1999; see www.ogc.gov.uk.

8/10/2019 PFI PPI

7/24

6

2. An inclination to wade through sometimes thousands of pages (and

many, many drafts) of project documentation without losing the will to

live;

3. An ability to pick out from this mass of information the key matters and

issues which have not yet become apparent;

4. Common sense; and a sense of humour!

The process of closing a PFI deal can typically take, these days, nine to twelve

months (and sometimes longer) of continuous work, with a final period of

three or four months hard work, of which the final six weeks or so will be

incredibly intense. In my experience, there can be little real doubt that the

excellent work on standardising PFI documentation to date has resulted in

significant time and cost savings and standardisation greatly facilitates the

process of closing deals. Although deals still take a long time to negotiate to a

close because of project specific considerations (particularly on the larger

deals), the task is now much less onerous than it used to be. On the subject of

standardisation of PFI contracts, the new OGC Guidance has just recently

been made available and is essential reading for those involved or interested in

the PFI process.10 This updates and improves upon the earlier Treasury

Taskforce Guidance.

The diagram appended at the end illustrates the spiders web of parties

involved in a PFI project. This typical structure gives rise to a mass of legal

documentation. (On one recent hospital deal I was involved in, there were

some 144 agreements appearing on the completion protocol: one section of

one of the major schedules ran to about 6,000 pages on its own!)

The project agreement

The first task for the contractors lawyer is to get involved in the project

agreement negotiations, as it is the project agreement which sets the agenda

for all the other agreements. Although the contractor is not a party to the

project agreement, it is crucial that it is drafted in terms satisfactory to the

contractor, because all the design and build construction risk is either retained

by the employer, or stepped-down into the various subcontracts (the

contractor/hard facilities manager/soft facilities manager and equipment

suppliers are, officially, referred to as the subcontractors, the project

company being the contractor).

A project agreement contains numerous provisions and requirements relating

to the provision of a service. These can look very different when one is

looking at the construction aspects stepped down into the design and build

contract. If a particular construction risk is not to be retained by the employer,

it will be stepped down and taken by the contractor (unless it is an equipment

or hard or soft facilities management issue). If matters of concern to the

contractor are not dealt with at all in the project agreement, it is likely that

they will not be dealt with in the design and build contract. Once negotiations

on the project agreement are under way, the teams will get involved in looking

10 See note 6.

8/10/2019 PFI PPI

8/24

7

at various other, related, commercial documentation such as funder/authority

direct agreements, security documentation etc.

It remains a truism that the best and most effective way of managing risk in all

its guises (legal, technical and commercial) is for the contractor to ensure that

he gets it right to begin with in terms of defining as fully as possible theexact scope of works to be undertaken and to meticulously plan and price to

do this. This is not rocket science, I agree, but I never cease to be amazed how

often this basic principle gets overlooked. The source of a disproportionately

large number of construction disputes can be traced to lack of clarity regarding

the scope of the work, and a lack of understanding as to exactly who in the

construction process should be doing what, how, where and when. Because of

the huge amount of upfront work done in understanding the needs and

requirements of the employer and the constraints applicable to the project, and

developing solutions, the PFI process affords the parties a greater opportunity

of arriving at the best solutions to meet the employers needs.

What the contractors lawyers look out for

The NHS Executive standard form project agreement11 illustrates what

lawyers acting for the contractor particularly look out for. As mentioned, they

will end up negotiating (to varying degrees of intensity) aspects of the project

agreement which affect the contractor with a number of teams of lawyers,

principally those acting for the project company, bank and employer. In

addition to this, and depending upon the complexity of any given deal, the

contractors lawyers may also be involved in discussions with lawyers acting

for other major subcontractors, including the operators lawyers (two lots if

the operations are split into hard and soft services) and other parties too.

The NHS standard project agreement (like similar documents used in other

sectors of industry), contains a wide variety of obligations to cover everything

that is required for the ultimate provision of a service (including the building

product), of which the design and construction of the hospital is but one (very

important!) constituent part. The project agreement deals with all sorts of

matters from general, normal boiler-plate commercial contract type clauses,

to matters relating to land issues, construction issues, corporate matters such

as change in control constraints, intellectual property/confidentiality, taxation,

employment law12and so on and so forth.

The employer wants a product that will provide the necessary services (usually

specified in an output specification) for the concession period (typically 25-30

years) to a set standard. Provided that the employer actually gets the product

and service it requires (and subject to meeting the employers minimum

required technical standards), it will not, usually, be overly concerned whether

the project company specifies and pays a high capital cost for a high

specification building from day one (which is going to be virtually

maintenance free) or whether it specifies a lower specification, lower cost

11 See note 7.12 Especially relating to the Transfer of Undertakings (Protection of Employment)

Regulations 1981 (TUPE) or the Governments new retention of employment model.

8/10/2019 PFI PPI

9/24

8

building (requiring less of an initial capital sum but which will have a high

cost maintenance over the term of the agreement). The philosophy of PFI is

that that is a decision for the project company. The project company and

contractor are afforded significant leeway and autonomy and suffer much less

interference in terms of the detail of how the service is delivered. With the

transfer of greater risk to the private sector must go a correspondingly greaterdegree of control to enable that risk to be managed.

The main role of the project companys lawyers will be to get the deal done,

and generally ensure that all risks and liabilities are identified, and then either

costed and kept within the project company (unusual) or (more usually) passed

to another party such as the contractor or the facilities manager. Project

companies are project specific and generally have little or no resources of their

own. Their income will rely upon the monthly payments they will receive

from the employer once the services have commenced. From these monthly

payments, the project company services its debt, pays the operating contractor,

builds up contingency reserves for specified matters such as replacement ofplant or equipment, and generally attempts to create a dividend for the

shareholders. Because the bank will lend money on a limited or non-recourse

basis (ie the banks usual or only recourse if things go wrong will be to the

facility asset and revenues generated by it), it will be keen to ensure that no, or

very little, risk remains with the project company.

Accordingly, the contractors lawyers, when identifying the risks which are

unacceptable to their client, must get involved in the project agreement

negotiations to ensure that any unacceptable risks are either retained by the

employer, or transferred to a more appropriate party. It is vital to understand

that, if one is unsuccessful in negotiating out a particular risk within theproject agreement during negotiation with the employers lawyers, it will be

too late to do anything about that risk when heavy negotiations start on the

design and build contract.

It is very important that a good, team-like, working relationship exists, or is

created, between the lawyers acting for the project company and the

contractor. The contractors views on the project agreement must be properly

understood by the project companys lawyers and conveyed fully and fairly to

the employers lawyers. At appropriate points in the negotiations, the

contractors lawyers will sit side by side with the project companys lawyers

in negotiations with the employers lawyers. Even on jobs where thecontractor is wearing many hats (through related companies) and is also a

shareholder in the project company, the contractors team must not forget that

it is not the role of the project companys lawyers to act in the contractors

best interests. In other words, the contractors lawyer must look after his own

clients interests as nobody else will.

NHS standard form project agreement summary

The standard form13is laid out in twelve different parts as follows:

Part A Preliminary

13 See note 7.

8/10/2019 PFI PPI

10/24

9

Part B General Provisions

Part C Land Issues

Part D Design and Construction

Part E Quality Assurance

Part F Information Technology

Part G ServicesPart H Payment and Financial Matters

Part I Changes in Law and Variations

Part J Delay Events Relief andForce Majeure

Part K Termination

Part L Miscellaneous.

In addition to the 69 clauses comprising the operative part of the standard

form, there are many schedules, the exact number of which differs from deal

to deal. Key schedules include:

Schedule 1 Definitions and Interpretation14

Schedule 2 Completion Documents

Schedule 7 Land Matters

Schedule 8 Construction Matters

Schedule 9 The Programme

Schedule 10 Review Procedure15

Schedule 11 Collateral Agreements

Schedule 12 Outline Commissioning Programme

Schedule 13 Equipment

Schedule 15 Independent Tester Contract

Schedule 21 Insurance Requirements

Schedule 22 Variations ProceduresSchedule 23 Compensation on Termination

Schedule 26 Dispute Resolution Procedure.

Although the contractors team will concentrate on these schedules, they will

also review and get involved (to varying degrees of intensity) with many of

the other schedules (usually project specific). This is because of the high

degree of interfacing which occurs between the various parties and the

potential for impact on the contractors position. Lawyers acting for parties on

a PFI transaction get involved to a much greater extent in the detail of

schedules than was the case in contracts procured under more traditional

procurement routes This is almost entirely due to the different risk:rewardprofile applying to PFI projects. Moreover, the devil is in the detail.

It is important to understand what I mean by the different risk:reward profile

applicable to PFI transactions. When signing a PFI construction contract, in

practice the contractor is, to all intents and purposes, signing off its final

account at the same time, in that there is relatively little scope for claims to

allow upward adjustment of the contractors contract sum. The contractor

musttherefore understand what he is undertaking to do in terms of scope, and

price it properly: that is, get it right to begin with.

14 This is a vital schedule to look at on one recent deal, this schedule alone exceeded 50pages in length.

15 Dealing with mainly reviewable design data etc.

8/10/2019 PFI PPI

11/24

10

On most PFI jobs, the project company and contractor will only be entitled to

claim additional money in the event of compensation events, which are

usually limited to such matters as employer breach, employer change/variation

and discriminatory or specific changes in law. On some occasions it may be

possible to justify additional compensation events such as, for example,

archaeology (a subject treated differently depending upon the project and thecircumstances). Unless the project company receives compensation as defined

in the project agreement, there will be no equivalent relief flowing down to the

contractor. A host of drafting devices have been invented by lawyers to

protect the position of the project company and the interests of the funder.

The PFI risk profile has resulted in contractors undertaking very significant

amounts of up front design and related work to ensure that it knows what it is

supposed to be designing and building, with the aim of achieving clarity of

scope of works. With this clarity comes greater pricing certainty and less

scope generally for disputes, as much conflict derives from lack of clarity as to

scope of obligations and generally who should be doing what, where andwhen. One of the downsides of this is the vastly increased bid costs. These

arise, not only because of the involvement of lawyers, but also (and more

importantly) because of the cost of deploying sizeable resources to carry out

upfront work, all of which is usually done at risk in that these costs (running

into many millions of pounds on the bigger projects) will not be recoverable if

financial close is not achieved. This really does tend to concentrate the mind

of the contractor.

The costs of playing the PFI game are so high (especially if a deal does not

reach financial close) that contractors must be very selective in terms of the

projects they bid for. The public sector should remember that contractors donot possess bottomless pockets in terms of bid costs and that both public and

private sectors should continue to look for ways to make the PFI process work

affordably and sensibly for both sides. It should not be forgotten that issues of

corporate governance and commercial prudence will impose constraints on the

amount of risk the private sector can reasonably take. From the perspective of

those contractors who can afford to put at risk very significant upfront bid

costs, the profit margins available on PFI projects are potentially greater than

most traditional commercial property development projects, provided that the

very real risks have been properly evaluated and the project properly managed.

Experience demonstrates that the line between turning in a reasonable profit

and a substantial loss is a fine one and ultimately depends on a skilled and

experienced management team.

The realities of the PFI process effectively create economic barriers to entry,

thus discouraging Wide-Boy Construction Limited from simply taking a

chance, as often happens in commercial property development projects.

There, the less responsible contractor (who is often not properly resourced and

who does not invest in training, health and safety, welfare etc, to the same

degree, or at all, compared with more responsible contractors) too often

achieves a resultant pricing advantage, which some employers and their

various advisers are only too happy to exploit. In essence, the risk:reward

profile of the PFI process rewards those who get it right in terms of good

8/10/2019 PFI PPI

12/24

11

margins and enhanced reputations. If though the contractor gets it wrong, then

the results can be disastrous and unforgiving.

NHS standard form project agreement - details

Above all, when reviewing the NHS standard form,16

the contractors teamwill concentrate on those clauses and schedules which deal with the regime for

defining construction requirements (for example Schedule 8 usually contains

the employers construction requirements and the project

company/contractors proposals) and other related clauses, such as Clause 5

(the Project Operations) and Clauses 17-24 (dealing with design and

construction matters). The employer will be the Trust or Health Authority. In

Clause 5.2 (General Standards), the contractor should consider whether there

are any project specific reasons to amend the compliance with

laws/consents/good industry practice regime (and this is related to Clause 39

Changes in Law) where, for example, the construction period is unusually

long.

The standard form generally assumes, in terms of construction, a single

facility on a greenfield site, with a 12-18 month construction period. The

degree of foresight (crystal ball gazing) to be expected of a competent

contractor in terms of anticipating future changes in law should be considered,

as this gives rise to very real risk, costing and value for money considerations.

It is usual to request the employer to be precise as to exactly which NHS

requirements it expects compliance with (as referred to in Clause 5.2(f)).

Pinning down exact requirements also contributes to the overall certainty of

the scope of obligation which is in the interests of all participants.

Trust data and land issues

It is essential for the contractors lawyers to ensure that his client will conduct

a proper due diligence exercise regarding the trust data (having regard to the

content of Clause 10) as the employer takes little, or no, responsibility for such

information. I normally seek to ensure that under Clause 14 (Nature of Land

Interest) sufficient ancillary rights (ie access/ingress/egress to site etc) are

afforded to the project company (and thus the contractor) and that generally,

land issues are fully investigated and potential threats and constraints are

identified, assessed, priced and managed. Related to this is Clause 15 (the

Site) which places the risk of the condition of the site squarely on theshoulders of the project company. Qualifications or carve-outs may need to

be considered regarding such issues as areas of the site not capable of

inspection, past contamination and areas retained by the employer (particularly

on a multi-phase project).

In relation to issues arising out of Consents and Planning Approval (Clause

16), it will be necessary to check these various provisions, particularly those

relating to the terms of consents and approvals, to make sure the obligations to

comply are properly understood and allocated.

16 See note 7.

8/10/2019 PFI PPI

13/24

12

Design, construction and commissioning process

With regard to the project company/contractors obligations under Clause 17

`(the Design, Construction and Commissioning Process), much thought will

go into drafting Schedule 8 (Construction Requirements) and the related

schedules dealing with reviewable design data, programming etc. It is usual toprovide that where documents are submitted through the review procedure

(Schedule 10), unless there are any comments to the contrary, they satisfy the

employers requirements in respect of clinical functionality.

The employer requirements (output specification) should be clear,

unambiguous, objective and measurable. With regard to design review

procedures, it should be clear what is to be reviewed and when and on what

basis the employer can object: usually only for failing to achieve compliance

with the output specification or where the design is not in accordance with

previously submitted designs.

Programme

With respect to Clause 19 (Programme and Date for Completion), I normally

check whether there are any employer damages (see the OGC Guidance on the

standardisation of PFI contracts for sensible advice17). To the extent that

programming float has been built into the programme by the contractor, then I

attempt to ensure that it is made clear that the float belongs to the contractor

and not anybody else.

Equipment

The issue of equipment (Clause 21), should be considered carefully by all

concerned and I attempt to check who is responsible for what bits of

equipment. In respect of pre-completion equipment, the contractor should

generally not be responsible for its provision, as this is normally the function

of the equipment subcontractor. The contractor will attempt to ensure that the

provision of the equipment does not interfere with his ability to achieve

practical completion. The contractor must also keep a close eye on what, if

any, impact the equipment has on the contractors design in particular

whether any of the bigger items of equipment have design implications on

already designed parts of the works. Important design/equipment interfacing

issues arise which need to be carefully thought through and addressed. Thisrelationship is dynamic and evolves throughout the bid process up to financial

close and beyond.

Completion

Another subject high on the contractors priority list, is the completion regime.

Completion tests, criteria and sign off procedures must be (a) achievable, (b)

unambiguous and (c) objective so that it is very clear that an item has passed

or failed sign off. Completion procedures should allow for sequential testing

(or shadow testing) with an early warning if any items are unlikely to achieve

17 See note 6.

8/10/2019 PFI PPI

14/24

13

the completion test criteria. The contractor should insist on completion being

determined on objective criteria and that it is achieved as quickly and

efficiently as possible. The cost of any delay to completion incurred by the

contractor will be horrendous (possibly running at up to 1 million per week,

which includes but is not limited to liquidated damages).

Often the objective completion criteria are set out, such that the independent

tester simply ticks off his list to the effect that the facility exists and has been

constructed in accordance with the reviewed design, and that (for example) the

sample of rooms inspected comply with room data sheets.18 Often, the

completion criteria are not, on the face of it, unduly strict. Hoewever, should

defects subsequently be found to exist (not picked up when completion is

certified), the contractor remains very much on the hook and liable for defects,

insufficiencies etc, in the works, because usually the contractor agrees to be

responsible for rectifying defects for a period of 12 years. This is a fair and

balanced approach to determining completion. The contractor is not

disproportionately penalised in terms of delay related loss and the employerretains its entitlement to have undiscovered defects addressed by the

contractor.

Fossils and antiquities

In relation to fossils and antiquities (Clause 24), if this is considered a real

likelihood, then consideration should be given to seeking compensation for

time lost (currently only compensated if there is a variation to the facilities).

Payment provisions

The payment provisions (Clause 35 and Schedule 18) should always be

reviewed for adequacy and consideration should be given to any project

specific amendments that may be required.

Insurance matters

Sufficient time must be allowed for insurance advisers to liaise and advise

regarding insurance matters (Clause 36 and Schedule 21). One point always

of interest to a contractor is whether the project company is taking out advance

loss of profit insurance which, if available, can alleviate the liquidated

damages burden placed on the contractor in the event of delay (more aboutthis below).

The ambit of Clause 38 (Information and Audit Access) is very wide and it is

in both the project companys and the contractors interest to attempt to take

out commercial confidential documentation from the scope of this provision.

Delay events

The wording of Clause 41.11 (Delay Events) is of particular concern to the

contractor and appears to link the project companys entitlement to a

compensation event to the award of an extension time. The clause reads: For

18 Samples, because there may be up to 4,000-4,500 rooms on a large hospital job.

8/10/2019 PFI PPI

15/24

14

the purpose of Clause 41.10, a Compensation Event means any Delay Event

referred to in Clause 41.3(b) [Breach], (c) [Execution of Non-Project Related

Works] or (d) [Opening up of Works] for which, in each case, it has been

agreed or determined pursuant to this clause that the project company is

entitled to an extension of time. My concern is that this probably means that

the project company will be entitled to compensation if (and only if) it isawarded an extension of time. This is manifestly unjust. The project

company (and contractor) might incur disruption losses as a result of an

employer breach of contract which does not give rise to an extension of time,

or incur delay related losses on, say, a multi-phased project where such losses

are not ultimately time critical and do not therefore attract an extension of

time.

If this interpretation is correct this clause contravenes the OGC Guidance on

the subject, the gist of which (fairly in my view) provides that the project

company should be entitled to compensation in the event of such matters as an

employer breach of the project agreement (subject to proof ofentitlement/quantum in the normal manner). Paragraph 5.2.1.1 (page 45) of

the OGC Guidance states In fact, even a delay is not strictly necessary for the

occurrence of a Compensation Event as cost increases can arise without

any timetable changes. Although this provision appears in the NHS standard

form, it has not featured in any of the project agreements that I have reviewed

on other bids in different industry sectors.

On a more general note, the contractor is usually able to negotiate extended

(more realistic) notification and procedural time periods for notifying the

employer of delays and similar matters which must be notified. A check

should always be made to ensure that time periods are not unreasonably short.If they are, they will not make much sense or be workable when the contractor

attempts to step down these provisions in its subcontracts (which, in turn, may

have to be further stepped down). Issues like this are matters of practicality

(rather than legal point scoring) and usually there is little difficulty in

achieving realistic and practical terms with the more experienced PFI advisers.

Turning to Clause 44.1 (Project Company Event of Default), it is essential for

the contractor to check that the long stop date allows adequate time to

complete the works, assuming that the worst has happened, bearing in mind

that liquidated damages will have to cover the whole period and will include

loss of revenue stream.

Intellectual property rights

The requirement (albeit one of reasonable endeavours) in Clause 51.3, to

ensure that any intellectual property rights (as described) vest and remain

vested in the project company throughout the term of the agreement (25-30

years) is not very realistic. Design consultants, amongst others, will not

usually agree to vesting provisions in respect of their intellectual property

rights. The clause refers to any Intellectual Property Rights created,

brought into existence or acquired during the term of this Agreement as

having to vest. Can one imagine representatives of Bill Gates at Microsoftagreeing to such a provision?

8/10/2019 PFI PPI

16/24

15

Dispute resolution procedures

It will be important to review carefully Clause 56 and Schedule 26 (Dispute

Resolution Procedure) as sometimes (and probably inadvertently) this

schedule contains material which might give rise to unacceptable no loss type

legal arguments which could have unintentional adverse implications for thecontractor. More generally, some employers tend to opt for arbitration as the

ultimate dispute resolution process, not necessarily because they believe in it

but because of the opportunities for avoiding the more accessible joinder

provisions available to parties who litigate in the courts.

Other provisions: finally, one should not forget to consider the commercial

implications of some of the miscellaneous boilerplate clauses, contained near

the end of the standard form, as some of these (such as entire agreement,

Clause 61 and mitigation, Clause 67) do have real commercial implications.

The design and build contract

Limits on liability

Although little or no risk remains with the project company, in the context of

the design and build contract, that statement must be modified to recognise the

practice of allowing the contractor to limit, or cap, its overall maximum

liability for any and all losses to a certain percentage of the contract sum. This

cap may be subject to limited qualifications or carve outs, usually relating to

contractor liabilities which benefit from insurance coverage (in which case,

any insured liability would not normally count towards the overall cap). This

overall cap will typically have (as a constituent part) one or more sub-caps, themost notable being a limit on the contractors liability in respect of liquidated

and ascertained damages. For instance, one might see the contractors

maximum exposure to liquidated damages limited to 20% of the contract sum.

The issue of the liquidated damages cap has a relationship with the long stop

date. The funders lawyers will be keen to ensure that the liquidated damages

cap can be reconciled with the long stop provision such that, in the event of

delay, the project company is able to satisfy debt service via liquidated

damages from the contractor.

As mentioned earlier, it is a commercial fact that because of the high risk

nature of PFI contracts generally (with severely limited abilities to utiliseclaims upstream), the contractor is, effectively, signing off his final account

from the moment he signs the PFI construction contract. This reality must be

understood, managed (and priced) for, by the contractor.

Project documents

It may be necessary throughout a design and build contract to expressly

qualify the relevance of project documents, by utilising drafting devices such

as insofar as the same relate to the design, construction, of the design

and build works . Amongst the many obligations to be complied with,

most design and build contracts require the contractor to observe and complywith the project documents. This term is often defined very widely and

8/10/2019 PFI PPI

17/24

16

sometimes not all of the project documents, as defined, are made available.

Clearly such documents need to be identified, accessed and assessed.

Generally, the design and build terms must be reviewed in their entirety with a

view to deleting or limiting the often excessive use of general indemnity

provisions (some of which are above and beyond what the projectcompany/employer reasonably need).

Equivalent project relief

The contractor should be entitled to a fair and reasonable proportion of any

equivalent project relief to which the project company becomes entitled under

the project agreement. Furthermore, and subject to reasonable protection as to

legal and professional costs, the contractor should be entitled to require the

project company to enforce rights and obligations regarding matters which

have, or may have, an adverse effect on the construction contract and/or utilise

name borrowing procedures to refer any disputes which arise to the agreeddispute resolution process. In terms of obtaining equivalent project relief,

most PFI design and build contracts contain provisions whereby the project

company and contractor agree that the latters entitlements upstream (which

rely on the project company establishing entitlement under the project

agreement) shall be limited to those benefits which the project company

derives from the employer: employer derived benefits.

Such provisions are often detailed and complex and are usually coupled with a

related clause setting out the regime for pursuit by the contractor of project

company entitlements under the project agreement. In order to keep the

project company financially whole (as required by the funder), suchprovisions will mean that if the contractor wishes to pursue a dispute under the

contract he must fully fund the legal and professional costs of doing so (this is

where no loss type arguments might arise under the dispute resolution

provisions in the project agreement). Often the contractor can negotiate that it

will fund the costs of the project company which are properly and reasonably

incurred (as well as its own costs).

Interfacing issues

The complexity of the PFI process, especially on the bigger, more complicated

jobs (such as multi-phased large hospitals), gives rise to very complicatedinterfacing issues. Such issues can, as a matter of contractual structure, be

dealt with entirely within the terms of each individual subcontract between the

project company and the relevant subcontractor (whereby interfacing issues

are co-ordinated and dealt with up and down via the project company, which

is the preference of most construction contractors). Alternatively, such issues

can be dealt with in a separate interface agreement; or a combination of these

two approaches is possible. Such agreements deal with a myriad of issues,

including inter-subcontractor disputes, design review and general co-

ordination issues.

In practice, this is a complicated and difficult matter to deal with satisfactorilyfrom everyones perspective. When it occurs which in my experience, is not

8/10/2019 PFI PPI

18/24

17

very often it is one of the more heavily negotiated elements of the design

and build contract. It is usually preferable from the contractors perspective

for all interfacing issues to be dealt with through the project company (who

should have priced for the resource needed to co-ordinate). The project

company often brings discipline (and sometimes a calming influence) to the

treatment of inter-subcontractor disputes. The parties will tend to think twiceabout bringing claims against the project company, not wishing to sour

commercial relations unnecessarily, whereas they may be less inhibited by the

prospect of launching claims against another subcontractor.

The active involvement of the project company, acting as it sometimes does as

a quasi arbitrator if you like, reduces the potential for a free for all.

Sometimes that can happen quite easily if inter-subcontractor disputes and

issues are left to be resolved directly between the parties without the active

involvement of the project company. The project company can be kept whole

and protected financially because all the individual subcontracts will (or

should) contain the type of protectionary provisions touched on above.Related interfacing issues concern what effect (if any) an interface agreement

has on the limits of liability in construction and facilities management

contracts and security (what if a subcontractor, against whom a large claim

exists, becomes insolvent?)

Construction Act avoidance

In the context of keeping the project company whole, it is frequently a

requirement for the contractor to enter into an agreement the purpose of which

is to circumvent the protectionary provisions afforded by the Housing Grants,

Construction and Regeneration Act 1996. Part II of the Act applies to thedesign and build contract with the project company but not to the project

agreement between the project company and the employer.

Such agreements are sometimes labelled loan agreement (or something

equally misleading), the gist of which is that if, for whatever reason, the

project company becomes liable to pay monies to the contractor, the latter will

only receive such monies if and when the project company receive these

monies from the employer (pay if paid). However, just in case the contractor

challenges this arrangement, the loan agreement stipulates that at the very

moment the contractor becomes entitled to receive X from the project

company, the contractor immediately becomes obliged to make a loan of thatvery same X to the project company. This, in turn, is supplemented by

further interesting provisions aimed at discouraging any challenge to this

arrangement by the contractor. Other devices include loans made by sister or

parent companies and independent guarantees of loans. As far as I can tell,

nobody really knows whether the loan agreement type device would be upheld

if tested before the courts: time may tell.

Performance bonds and parent company guarantees

The OGC Guidance queries the appropriateness of bonds and parent company

guarantees in PFI contracts, suggesting that collateral warranties and/or directagreements, as well as the project documents themselves, should provide

8/10/2019 PFI PPI

19/24

18

sufficient comfort and protection for the employer.19 In practice however, a

parent company guarantee is usually required from the contractor in favour of

the project company (assignable to the bank by way of security). A bond is

not usually required and certainly not both a bond and a parent company

guarantee, in most circumstances. The terms of the bond and parent company

guarantee will be qualified to contain the usual cluster of provisions normallyrequired by the contractor.

Direct agreements

Any direct agreements between the contractor and the fund and employer will

also contain the usual protectionary provisions required by the contractor. In

the funder direct agreement, the most heavily negotiated issue often revolves

around the length of the suspension period by which the contractors right to

terminate the contract by reason of project company default is suspended

whilst the funder is afforded a reasonable period of time to decide whether to

exercise their step in rights, or appoint a receiver, or additional obligor, ornovate the contract. Whilst the concerns of the funder are understandable, so

too are the concerns of the contractor to be paid monies owed to it and not be

forced to wait unduly long periods before it can terminate the contract. The

longer the contractor must remain on site whilst not being paid, the greater its

exposure to losses which can, quite easily, run into tens of millions of pounds.

In practice a reasonable compromise is usually achievable.

It will be essential to ensure that the terms of the funders direct agreement

and the employer direct agreement are reconciled the funder usually gets

priority. On a more general level, any warranties the contractor gives to the

funder or employer via the direct agreement will invariably be expressed asonly applying in circumstances where the project agreement between

employer and project company is terminated and step in rights are exercised.

Even then, such warranties should not be greater in extent or duration than

those imposed upon the contractor by the terms of the design and build

contract.

Delays

Unless the contract says otherwise, the project company (and the contractor on

a pass through) will be responsible for delays to the project. Exceptions in

PFI are as follows: compensation events, relief events orforce majeure events.

Compensation events are those expressly stated to be at the employers risk

and in respect of which the project company should be compensated. The

following should be treated as compensation events in all projects: employer

breach of an obligation (which includes a breach occasioned by third parties

for whom the employer is responsible, such as teachers or doctors); employer

changes; and discriminatory or specific changes in law. Experience has shown

that in certain circumstances, it may be possible to extend this list to problems

related to planning delays and possibly, also, difficulties encountered with

archaeological works. Sometimes certain types of ground conditions are

19 See note 6, section 22.4.

8/10/2019 PFI PPI

20/24

19

included as a compensation event, for example, on hospital projects where the

contractor has been unable, or given no realistic chance, to check the state of

the ground (eg for contamination), for instance where an old hospital building

is to be demolished and rebuilt immediately. If a compensation event occurs,

and it has an impact on the planned service commencement date, that date may

need to be postponed. Any long stop date would be similarly pushed back. Ifthe project agreement contains a liquidated damages provision, the project

companys liability for liquidated damages will also be relieved for the period

of delay caused by the compensation event. The project company should also

be relieved of any other liabilities or employer losses in respect of the event.

Relief events are those which prevent performance by the project company of

its obligations at any time. The project company bears the financial risk in

terms of increased costs and reduced revenue but it is given relief from

termination for failure to provide the full service. In most cases, termination

should not follow a relief event. They are best managed by the project

company (although not necessarily in its control). They are usually defined asincluding such incidents as fire, explosion, lightning, storm, tempest, flood,

bursting or overflowing of water tanks etc. The financial effects of delay

caused by relief events are borne by the project company (and the contractor)

so no compensation will be paid by the employer on the occurrence of such a

delay. If a relief event occurs prior to service commencement, any long stop

date will usually be extended by a period equal to the relevant delay. If a

relief event occurs, the contractors liability to the project company in respect

of liquidated and ascertained damages will continue, even if the project

companys date is extended under the project agreement (because the

financing debt must continue to be serviced).

Force majeureevents are a limited set of events which arise during the life of

the contract through no fault of either party, which are best managed by the

contractor (although not in its control) and in respect of which rights of

termination can arise.

One very notable difference between the PFI process and traditional JCT

building contracts is that under, say, JCT 1998,20 upon establishing an

entitlement to an extension of time for, say, delay caused by a fire or flood

(Specified Perils) the contractor would be entitled to an extension of time

under clause 25. The extension would give rise to relief from the liability to

pay liquidated and ascertained damages to the employer. In contrast, the

contractor in a PFI construction contract will usually not be relieved from

liquidated damages because of the fire or storm but will continue to be liable

to pay liquidated damages to the project company. This liability will be

abated only in circumstances where an advance loss of profits insurance policy

kicks in and the proceeds are used to alleviate the contracting losses. This is

all about keeping the project company whole and satisfying the project

companys continuing obligation to service its debts to the funder. This

considerable risk should encourage contractors to focus carefully on a number

of matters including the viability and reality of their proposed construction

programmes.

20 Standard Form of Building Contract, 1998 edition, The Joint Contracts Tribunal Ltd.

8/10/2019 PFI PPI

21/24

20

Changes

The project agreement should contain a mechanism whereby changes in

services or variations may be proposed by either party and evaluated and

approved prior to implementation. Generally, employer changes should be

limited to changes to the service requirement. If the project company is fullyprotected in the project agreement against the consequences of an employer

change, including how the change is to be paid for, there should be no

objection from the project companys financiers.

As mentioned, discriminatory and specific changes in law usually constitute

compensation events, the remedies for which benefit the contractor as well as

the project company. The bigger risk for the contractor relates to general

changes in the law. The contractor must, to some extent, crystal ball gaze and

take a view as to likely changes coming into force during the currency of the

construction works. Such changes might be ascertained by reference to

published Green and White Papers and proposed changes emerging fromEurope. On a typical hospital project, the contractor might reasonably be

expected to take the risk of compliance with general changes in law which

might apply over a period of say, 18 months to 2 years. On some of the

bigger, more complicated hospital projects, where the construction contract

period is likely to be in excess of 2 years (sometimes 4 years and over) a

different (shared) approach to risk allocation may be appropriate. Although a

contractor might envisage general changes over long construction periods, it is

often not reasonably possible to foresee the exact nature of any changes and

therefore, it may be impossible for the project company or contractor to form a

realistic view as to how to price this risk. Any attempt to price such

uncertainty would be imprecise, probably excessive and would not representvalue for money.

The OGC Guidance is helpful and suggests an alternative approach: the

recognition that it may be more equitable in certain circumstances for the

employer to share costs which are difficult for the project company (and

therefore the contractor) to manage.21 One suggestion is that general changes

in law requiring capital expenditure taking effect during a typical construction

phase might be at the risk of the project company (and contractor) in terms of

time and money. On the other hand, on projects which have unusually long

construction periods, transferring risk of general changes in law for the entire

construction period (rather than adopting a sharing approach) may, in fact,represent poor value for money and is likely to be difficult to achieve in

practice.

Termination

A project agreement will terminate either on the expiry date (typically after

25-30 years) or as a result of early termination. Early termination can be

caused by employer default, project company default, force majeure, corrupt

gifts and in circumstances of voluntary termination by the employer.22 The

21 See note 6, section 13.8.22 See note 6, section 20.5.

8/10/2019 PFI PPI

22/24

21

project agreement should deal comprehensively with the consequences of all

types of termination and in particular, it must address what happens to the

asset and what termination payments (if any) are payable by the employer. It

is widely accepted that the level of compensation payable by the employer

should be determined by such factors as the reasons for the termination, which

party retains the asset, and whether those assets have any alternative use.

The objective of compensation on termination for employer default should be

to ensure that the project company and its financiers are fully compensated

(that is, no worse off) because of employer default than if the project

agreement had proceeded as expected. A footnote to the OGC Guidance states

that the compensation payable should reflect a realistic calculation of an

anticipated claim for damages, and therefore should be an exclusive remedy of

the project company leaving no residual claim for damages.23 Usually, the

drafting of compensation on employer default clauses will involve paying the

project company an amount equal to the aggregate of the senior debt,

redundancy payments (for employees of the project company that have beenor will be reasonably incurred as the direct result of termination of the project

agreement) and amounts payable to the subcontractors under the project

documents as a direct result of the termination.

Termination on contractor default should be restricted to acts involving the

severest of defaults, when all other reasonable alternative options have been

exhausted. There should be no possibility of unjust enrichment and the

remedy should be the employers last resort. The events of project company

default which may lead to termination should be objective, clear and provide

for reasonable tolerances. Such events of default should be limited to

breaches which have a material and adverse impact on the performance of theservices.

The aim with regard to compensation for project company default is to ensure

that it is dealt with within the project agreement. The level of compensation

agreed on contractor default termination should represent a balance between

protecting the employers interests and not imposing unreasonable deductions

on the project company for its default.

Land issues

It is usual for the project company to procure a certificate of title to the landupon which the project is to be built. The due diligence undertaken will result

in a report which will highlight the nature and extent of interests held by third

parties which could impact on the contractors ability to perform its

obligations. In particular, the contractor should look out for unduly onerous

restrictive covenants, easements or constraints on the site. Do not overlook

tower cranes and the need for tower crane licences to be negotiated with

neighbours. If the issue of tower crane licences has not been properly thought

through (and priced for) before commencement of construction, the contractor

risks being faced with potential ransom licence fee demands. The same

worry applies to scaffolding licences, where applicable. The due diligence

23 See note 6, section 20.1.3.1.

8/10/2019 PFI PPI

23/24

22

exercise should also pick up and disclose any existing section 60 or 61 Control

of Pollution Act constraints which may apply to the site.24

Design

The level of design responsibility in the design and build contract will usuallymirror the equivalent obligation in the project agreement. In the case of the

NHS standard form, this is set out in Clause 17.2 as follows: The project

company warrants that it has used and will continue to use the degree of skill

and care in the design of the Facilities that would reasonably be expected of a

competent professional designer experienced in carrying out design activities

of a similar nature, scope and complexity to those comprised in the Works.

There is some debate as to whether this wording would be sufficient to

displace the implied term of fitness for purpose.

Much effort will go into the preparation and negotiation of consultants terms

of appointment and subcontracts and these must, as far as possible, becompatible with the risk profile of the project agreement and construction

contract. In terms of administering these contracts, procedures and time

periods (upstream) should be sensible, otherwise they will not work when

stepped down into subcontract conditions. This is a fact sometimes

overlooked in the drafting of project documentation. On a positive note, the

PFI regime allows much more scope than exists in traditional procurement

methods for main contractors to develop meaningful long term relationships

with subcontractors and suppliers. This is done by way of framework

agreements with key subcontractors and suppliers. Such relationships reduce

the scope for wasteful conflict and give rise to win:win relationships, which

means value for money for everyone involved in the process.

Assignment

Save for circumstances where the project company can assign or charge the

benefit of the design and build contract to the funder (or funders agent) in

connection with the funding of the project, the contractor will be keen to

prevent any further or other assignment without its express written consent.

Collateral warranties

Sometimes (but not always) the contractor is asked to procure collateralwarranties from its subcontractors in favour of various beneficiaries. The

contractor may well not accept this. In my view, they are (in a PFI context)

both unnecessary and expensive and are contrary to the value for money

aspirations of PFI projects. In contrast, however, it is quite normal for direct

agreements to be provided by the contractors major design consultants in

favour of the funder and the employer.

24 Control of Pollution Act 1974.

8/10/2019 PFI PPI

24/24

Conclusion

Does PFI work? In my experience so far, yes it does. The public private

partnership represents an optimum means of procurement, which invariably

gets the best out of the private sector. Primarily, this is because the private

sector takes a stake in the process and is therefore incentivised to make itwork. This, in my experience, rarely happens in traditional cut-throat

contracting. Innovation by the private sector, accompanied as it usually is

with a reduction in conflict between the participating parties, gives rise to

value for money for everyone and real meaning to the concept of partnership.

The potential to extend the process beyond current limits seems to me an

exciting prospect with very real chances of success because of its success to

date. In the real world, economic constraints apply to any governments

ability to build enough new hospitals and schools to satisfy societys needs

and demands. PFI/PPP allows more hospitals, schools and other necessary

infrastructure to be constructed or upgraded (by utilising private finance) thanwould otherwise be the case.

Despite taking on greater risk when compared to most methods of traditional

procurement, the contractor has the potential to earn better profit margins if it

manages to get it right in terms of delivering the product the employer wants

(an aim the PFI process lends itself to). I believe PFI as a means of

procurement gives real meaning to the term partnership when used in the

public private partnership context. When the process goes well (and most

projects, in my experience, do go well for both sides), a true win:win situation

arises. The employer generally gets what it wants in terms of a product and

service with relatively strong certainty of price, time of delivery and quality,giving real meaning to the term value for money. In turn, the contractor gets a

fair and proportionate return commensurate with the risk:reward profile

applying to the PFI procurement regime.

One of the most striking benefits of the PFI process is that as more projects

come on stream, people up and down the country are witnessing something

real happening within their communities: the construction of more new

schools, hospitals and other necessary projects which will be of direct benefit

to us all in our everyday lives. These projects are, in numerous instances,

replacing demoralising, crumbling, often Dickensian hospitals, schools and

other structures. In all likelihood this would not be happening but for PFI.

Martin Lenihan BA (Hons), LLM (Lond), ACIArb, barrister, is legaladviser to the Skanska Construction Group Limited.

Martin Lenihan and the Society of Construction Law 2002.

The views expressed by the author in this paper are his alone, and do not

necessarily represent the views of the Society of Construction Law or the

editor, neither of whom can accept any liability in respect of any use to whichthis paper or the information in it may be put.