PFI is an acronym for Private Finance Initiative. It presents a model that enables the government to carry out large-scale construction and infrastructure projects without having to make massive upfront payments by contracting a company to design, build, and manage facilities for a long-term, fixed period of time, thereby spreading the cost over many years (usually over decades).
Typical PFI projects include schools, hospitals, and prisons, although they can also be used for office space and other government structures. In this article, PFI in construction, we take a look at the process involved and the options available to you.
Please click here to find out more about our construction services
Free Initial Telephone Discussion
For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of PFI in construction, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
How does a PFI agreement work?
Typically, under a PFI, the authority enters into a 25-year contract with a private sector entity, a special purpose company, for the financing of public infrastructure (ProjectCo). Once construction is complete and ProjectCo begins providing services, the authority provides performance-based payments, including reductions for subpar performance, to ProjectCo. At the termination of the concession, the authority normally regains ownership of the asset; however, depending on the nature of the project, alternative solutions may be implemented.
As previously stated, when the bulk of PFI contracts end, the authority reclaims the assets. One potential benefit of PFI is that the assets should be well-maintained during the length of the contract and, thus, be in good condition when returned to the government.
Often, when the government publishes a PFI tender, a number of Joint Ventures will compete for the contract (JVs). Typically, these JVs will consist of a construction company, a facilities management company, and a financial institution.
The winning bidder will subsequently be contracted to design and construct the government-specified facility. The JV will finance the design and construction of the facility (thus the inclusion of a finance house), eliminating the need for the government to make substantial upfront payments for new structures.
Are PFI projects risky?
Private Finance Initiative projects usually necessitate that the SPV accept a significant degree of risk. Nevertheless, their pricing will reflect any risks they are required to assume. It may therefore be uneconomical to transfer certain risks, such as planning risk, insurance risk, or risks outside the SPV’s control, such as the risk of legislative changes, to the SPV.
Due to the fact that the project will be auctioned before the completion of the designs, planning risk is a substantial and contentious issue. Before soliciting bids, the client should at a minimum consult with the local planning authorities to ascertain the expected planning parameters for the project and possibly obtain a preliminary opinion on whether an environmental impact assessment would be necessary.
Additionally, the customer may choose to obtain outline planning approval prior to soliciting bids, or even condition the contract on receiving thorough planning approval. Subsequently, the SPV may be liable for securing a detailed planning permission or other licences. Failure to prepare thoroughly may result in contract termination and compensation actions.
Why is PFI attractive to the local authority?
PFI allows the government to invest in infrastructure over a 30- to 40-year period, rather than making a substantial upfront expenditure.
It also ensures that a facilities management provider will be accessible throughout the duration of the contract to manage the buildings and keep operations running well, without the need for time-consuming and costly tender processes.
Numerous public structures, particularly schools and hospitals, would not have been constructed without the possibility of using PFI.
Why would a PFI be attractive to private industry?
The JV recovers its initial investment over a lengthy period of time through a monthly service charge that includes continuing property maintenance (which is where facilities management comes in).
A PFI contract can span up to three to four decades, and the service charge will include interest payments; hence, a PFI can be worth hundreds of millions of pounds to a JV.
How are contracts typically structured?
A public sector entity executes a contract with private sector consortia, sometimes known as a special-purpose vehicle (SPV). This consortium is often formed for the sole purpose of delivering the PFI. Numerous private investors, including a building company, a service provider, and frequently a bank, own the property. Throughout the duration of the contract, consortium funds will be used to develop the facility and perform maintenance and capital replacement. Once the contract is active, the SPV may be used to facilitate communication between the client and facility operator regarding contract amendments. SPVs typically charge fees for this service.
Depending on the nature of project, PFI contracts are typically for 25–30 years; contracts for less than 20 years or longer than 40 years are much less common.
During the length of the contract, the consortium will offer formerly government-provided services. The consortium is reimbursed on a “no service, no fee” basis for its work during the life of the contract.
The public authority will produce an “output specification,” a document detailing the collaboration’s goals. If the consortium fails to meet any of the agreed-upon conditions, it should have a portion of its payment withheld until the standards are met. After an agreed-upon period, if standards have not improved, the public sector entity may terminate the contract, compensate the consortium if necessary, and assume control of the project.
The majority of projects are unable to acquire private financing without assurances that loan financing would be reimbursed in the event of termination, making termination proceedings highly challenging. In the majority of termination scenarios, the public sector is responsible for repaying the loan and assuming ownership of the project. In actuality, dismissal is considered a last resort.
Whether or not a particular PFI contract protects the public interest depends significantly on the contract’s design and the contracting authority’s commitment (or lack thereof) and ability to enforce it. Throughout the years, numerous initiatives have been undertaken to standardise the style of PFI contracts in order to better safeguard public interests.
How we can help
We have a proven track-record of dealing with PFI contracts. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Construction Solicitors
It is important for you to be well informed about the issues and possible implications of a PFI in construction. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Construction solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
Comments are closed.
