Thank God it's PFI-day

June 13, 1997

The review of public/private partnerships due today should kick-start university building projects which have been waiting for new guidance, say David Cuckson and Peter Walters

Friday the 13th may be considered unlucky by some. For Malcolm Bates, chairman of Pearl Group (and chairman of Premier Farnell), today marks the day on which he is supposed to complete his review of the PFI (Public/Private Partnership) process, as commissioned by the Paymaster General, Geoffrey Robinson.

In his announcement of the review on May 8 Mr Robinson also signalled the immediate end of universal testing, the rule that all capital projects in the public sector should be tested for private finance potential. This is clearly a sensible first step, and it will save time which might otherwise have been wasted on evaluating projects for which PFI was never going to be the preferred option.

How significant a difference this makes, however, will depend on whether there is also a change of attitude by the Government on the issue of capital expenditure. The fact that the new Government is looking to streamline the PFI process, to encourage its efficiency, suggests that there will continue to be strong pressure to control capital expenditure so as to make PFI look more attractive an option than might otherwise be the case.

While we do not wish to undervalue the benefits for the client from the PFI route - such as quality of project, transfer of risk and general value for money - we recognise that many choose PFI solely because it is a choice between PFI or no project at all. This may well continue to be the case.

The aim to make the PFI process more streamlined, and to remove obstacles, is to be applauded, and we await the report's suggestions with interest. Some attempts have already been made towards greater standardisation of contracts. The Private Finance Panel published a booklet in October last year containing precedents for 22 basic contractual terms, which was followed in January this year by the issue of guidance on "further contractual issues". These help as points of reference, but will not avoid the need for detailed drafting and negotiations. In "further contractual issues" the panel admits that "because the issues covered are more complex . . . we have not produced standard contract clauses". More realistically, what we can hope and work for, is the development of "best practices", which will be expected to apply unless strong arguments can be put forward to the contrary.

Malcolm Bates's review was to take as its starting point the 12-point plan for partnership, published originally in Labour's business manifesto. The second of these points refers to subjecting every potential partnership project to "Pathfinder" projects. Care taken at the outset to ensure that the proposed project is likely to be reasonably attractive to potential private sector bidders, (and "bankable"), will avoid wasting time later rethinking project specifications or enduring fruitless negotiations.

One of the key elements of the PFI approach is the opportunity for the private sector partner to come up with an innovative response to the invitation to tender. The client is supposed to describe its specification in terms of outputs, what it needs by way of service requirements, rather than to seek to define how that service should be provided. This is not an easy thing to do, because inevitably the client wants to ensure that the services provided under the PFI agreement complement and support elements of its business over which it retains direct control. The client, therefore, has a deep interest in the final detail.

On the other hand, a funder, who is considering the project "package" overall, will be looking for a product which is marketable elsewhere if the client fails to meet its obligations. The tension created by the competing aspirations can lead to lengthy negotiations over the wording of the project documents, which make it difficult to keep to a set timetable. Any attempt to streamline procedures must address this issue. It will help if a clear project focus can be established at the outset, which is accepted by all the negotiating parties, and to which reference can be made as the detail is refined.

The PFI review will need to address the legislative framework, to ensure that public sector clients have the necessary powers to enter into the PFI arrangements. This point was included in the 12-point plan of the business manifesto and is of particular concern to the banks. The legal uncertainty was first raised as a major problem in relation to contracts being entered into by National Health Service trusts, and this is already being addressed in the NHS (private finance) bill. However, the British Bankers Association is reported to have recommended to Malcolm Bates's review that more sweeping legislation would be better, so as to cover all public sectors. The Department of the Environment has now put forward further proposals for discussion, which would protect private sector partners entering into PFI contracts with local authorities. If the banks can be reassured on this aspect, they may be more ready to accept those elements in a PFI transaction which involve the greater transfer of risks to the private sector partner. It is ironic that for many projects the immediate result of the "kick start" announced on May 8 has been that progress has been put on hold pending the issue of new rules or guidance by the Government.

David Cuckson, partner, and Peter Walters, senior associate, are members of the PFI Group of City law firm, Stephenson Harwood.

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