Lexxion Verlagsgesellschaft mbH

United KingdomAuthor(s): Gareth Foulkes

Source: European Public Private Partnership Law Review , Vol. 4, No. 1 (2009), pp. 60-63
Published by: Lexxion Verlagsgesellschaft mbH

Stable URL: https://www.jstor.org/stable/10.2307/26696203

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60 Country Reports
implemented by the private partners in the post-
evaluation stage of the procedure for environmental
impact assessment. In specific terms, such meas-
ures must be in place in the final design of the con-
struction, and they further must be accompanied by
a report in which compliance in the referred condi-
tions set forth in the environmental impact state-
ment is duly showed and grounded (“RECAPE”)9 .
Thus, under the legal amendment set forth in
2006, a substantial part of the “environmental risk”
is now already considered at the time a PPP is
launched, with significant benefits for both partners.
In any case, it is noted that this healthy “little big”
revolution in the methodology of the launch of the
PPP, as one might sense, does not resolve definitive-
ly all the complex problems associated with envi-
ronmental risk. Besides all the problems that still
may arise in the procedure of environmental
impact assessment related to the approval of the
“RECAPE”, it shall be highlighted that contrarily to
the understanding of the European Union Court of
Justice10 , the Portuguese legal framework allows
the tacit acceptance of an environmental impact
statement11 and, worse, the tacit acceptance of the
approval of the RECAPE12 .
However, this certainly reopens the spectrum of
environmental risk. Indeed, the tacit approval of an
environmental impact statement doesn’t specify the
conditions to minimize the environmental effects /
damages of a PPP project. On the other hand, the
tacit approval of RECAPE prevents the verification
of compliance of a project with all environmental
requirements.
As a conclusion, one may say that an importance
step has been given so as to mitigate environmental
risk in PPP, but environment risk still exists and
continues to be a matter of extreme relevance.
Pedro Melo (Partner)
Manuel da Silva Gomes (Senior Associate)
PLMJ
United Kingdom
Revisions to the Refinancing Arrangements
for PFI
On 16 October 2008 HM Treasury issued an Adden-
dum to the Standardisation of PFI Contracts ver-
sion 4 (SOPC4). This amended the existing SoPC4
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EPPPL 1| 2009
provisions on refinancing by creating a sliding scale
of gainshare between the public and private sectors
and giving the Authority a right to request a refi-
nancing.
I. The background
Under the original SoPC4 drafting, any gains made
through the refinancing of a project were required
to be shared 50/50 between the public and private
sectors. This was seen by HM Treasury as an equi-
table position given the factors that would give rise
to a gain. In particular, their view was that any
improvement in financing terms would not be due
mainly to efficiency improvements by the private
sector and therefore any benefits should be shared.
The current amendment, introducing a sliding
scale of gainshare, has been explained by the
Treasury as a response to the challenges in the cur-
rent funding market. The idea is that the credit
crunch has increased margins on financing and
therefore the gain to be made on a refinancing if
margins move back to pre-credit crunch levels is
greater than it would have been previously. It was
noted in the covering letter to the Addendum that
HM Treasury would review the position in the mar-
kets in 18 months time and consider whether to
continue the use of the Addendum at that stage.
They did not, however, give any indication of the
matters that would be taken into consideration at
that stage.
9 The necessary compliance with the RECAPE and environmental
impact assessment is a natural consequence of the legally bind-
ing nature of the environmental impact assessment. Therefore, if
measures to minimize under environmental impact assessment
are not implemented in the implementation draft- which is
found in the adoption of RECAPE - this will entail the invalidity
of the act of final authorization of the construction of public
work, for breach with, environmental impact assessment cf.
Article 20. paragraph 2 and 3 of Decree-Law No. 69/2000 of
3 May, as result of Decree-Law No. 197/2005 of 8 November.
10 See the judgments of the ECJ, Commission v. Italy, 28 February
(Case C-360/87) and Commission v. Kingdom of Belgium, 14
June 2001 (Case C-230/00).
11 For a critical appraisal of tacit deferrals in the environmental
impact assessment, cf. Maria Alexandra Aragão, José Eduardo
Figueiredo Dias, Ana Maria Barradas, “O Novo Regime da AIA:
avaliação de previsíveis impactos legislativos” in CEDOUA, 1 /
3, 2000, p. 95-97.
12 See Article 28.º, Paragraph 7 of Decree Law 69/2000 of 3 May.
It was also the procedure of environmental impact assessment
legislation, under Article 11., Paragraph 8, the possibility of
obtaining the tacit approval of the Environmental Impact Assess-
ment (EIA), which aims to set the scope of the specific action.
EPPPL 1| 2009
II. Application
The guidance is mandatory for all projects in com-
petitive procurement as at 1 November 2008 i.e.
where final tenders have not been received or com-
petitive dialogue has not yet closed. If HM Trea-
sury’s covering letter to the Addendum is correct, it
also applies to any projects on which the funding
terms change after that date. This additional aspect
is not reflected in the Addendum and as such its sta-
tus is unclear. This could, however, have a signifi-
cant impact, for example, on projects where a post-
Preferred Bidder funding competition was being
held – the concern being for the private sector that
they would not have had an opportunity to price
this revised arrangement into their bid.
III. The changes
As noted above, the Addendum makes two changes
to the existing SOPC4 provisions:
(i) the existing 50/50 gainshare arrangement has
become a sliding scale according to the cumula-
tive gain made over all refinancings;
and
(ii) the Authority now has a right to request a refi-
nancing.
1. Gainshare changes
The Authority will now be entitled to 50% of any
cumulative refinancing gains up to £1 million, 60%
of any further such gains up to £3 million and 70%
of any other refinancing gain. The fact that the
thresholds are calculated according to aggregate
gain means that second and subsequent refinanc-
ings will almost certainly have a higher gainshare
for the Authority, even if gains are small. For exam-
ple, if refinancing 1 had a gain of £1 million, the
Authority share would be 50%, but if refinancing 2
then also had a gain of £1 million, the Authority
share would be 60%.
Concerns have been voiced by the private sector
about these arrangements. In the first place, there is
no correlation between the actual increases in mar-
gins caused by the credit crunch and the increased
gains for the public sector. Secondly, refinancing is
already an expensive and difficult process and these
amendments are likely to add a further disincen-
tive. The risk is that, by asking for a bigger share of
the savings, HM Treasury is actually discouraging
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Country Reports 61
the process by which the savings are made in the
first place, with the result that Authorities actually
lose out.
2. Authority right to request
It would appear that the concern that the private
sector will be reluctant to refinance has prompted
the second change in the Addendum – the inclusion
of a right for the Authority to request a refinancing.
Essentially, if the Authority reasonably considers
that the funding terms in the market are more
favourable than those in the current financing
agreements, the Authority can require the SPV to
request potential funders provide terms for a poten-
tial refinancing. This right can be exercised at any
time but not more than once in any two year period.
The SPV is not required to propose a refinancing
that would not be approved by a prudent board of
directors of a company operating the same business
in the UK to that of the SPV in similar circum-
stances. Also, the Authority cannot insist upon a
refinancing if the SPV reasonably believes that it is
not possible to obtain more favourable terms and
provides evidence to the Authority’s reasonable sat-
isfaction both for that belief and that the SPV has
complied with its obligations to investigate the
potential refinancing.
However, the Addendum does provide that wilful
breach of the provisions relating to a request for
refinancing will give the Authority the right to ter-
minate. The concern here is that, unlike the termi-
nation right which already exists in relation to refi-
nancing which is triggered, effectively, by a failure
to share refinancing gains, the triggers for the new
termination right are much more subjective and,
importantly, could be triggered where no refinanc-
ing has actually occurred. This is going to be of con-
cern to funders and SPVs alike.
IV. Conclusion
The current economic climate has clearly affected
the financing market and there is the potential for
increased gains be made on a refinancing if the
markets stabilise and return to terms that are closer
to pre-credit crunch levels. Without doubt, the
Government would face a media backlash and polit-
ical controversy if it were to appear at any stage that
the private sector was deriving an economic benefit
from the financial crisis.
62 Country Reports
However, from the private sector perspective, there
is no evidence that the revised sharing percentages
correlate with the changes in financing terms.
Equally, there are currently a number of challenges
facing the PFI/PPP market, not least the difficulty of
securing funding for projects and the increased
costs associated with bidding under competitive
dialogue. In the current climate, the amended refi-
nancing arrangements may simply operate as a fur-
ther disincentive for the private sector to become
involved in the PFI/PP market.
Alexandra Hardwicke, Shadbolt LLP
Public Private Partnerships in Wales:
Is it a good idea?
It is astonishing that Wales has not embraced Public
Private Partnerships (PPP) to the same degree as
England, Scotland and Northern Ireland. In Eng-
land PPP has been used as a means of developing
infrastructure throughout the country and are major
proponents of this form of procurement. The fol-
lowing points are likely to have attracted England
to use PPP:
– the alleged lower levels of bureaucracy within the
private sector;
– greater efficiency in the private sector;
– the public sector’s ability to transfer some risk to
the private sector; and
– the alleged potential to obtain taxpayer value for
money
However, a likely question lodged in the psyche
of many a tax-payer, not just Welsh taxpayers, is
whether PPP actually provides value for money and
lowers the public sector’s exposure to risk? Certain
people are likely to hold the belief that the private
sector are only out to make a profit and, by doing
so, they may not achieve the requisite standards in
the provision of the service which they have been
contracted to provided.
Consequently, the Finance Committee for the
Welsh Assembly Government raised an inquiry into
PPP (“the Inquiry”), with a report published in
September 2008. The inquiry involved developers,
financiers, unions and managers of services in the
public sector.
The Inquiry highlighted, and provided opinions/
findings about a number of concerns with regard to
PPP, some of which are discussed below.
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EPPPL 1| 2009
I. Completing on time and to budget
A general concern was raised about how efficient
the private sector is, in comparison to the public
sector, in terms of delivering projects on time and to
budget. The findings of the Inquiry point to the fact
that “broadly” most PPP deliver to time and budget,
but on the odd occasion, delays had been encoun-
tered. The Inquiry highlights contributions from
senior management at Baglan Hospital, which
states that its project was “handed over on time and
within agreed operating costs”. Whilst the senior
staff at Penweddig school provided details of their
project and the fact that remedial works prevented
the pupils occupying the building within the stated
opening time. However, they also highlighted the
fact that the remedial works were completed at no
additional cost to the school. This suggests that the
monetary risk in such delay remained with the pri-
vate sector, with the public sector suffering risk
mainly to its reputation for not delivering on time.
The Inquiry also suggested that if the public sector
had the necessary skills and knowledge with regard
to managing projects, they could match the private
sector in ensuring that projects were completed on
time and to budget.
II. Does PPP provide value for money
The findings of the Inquiry highlighted that it is a
complex task comparing value for money provided
by the public sector and value for money provided
by the private sector under PPP, generally. Reference
is made within the Inquiry to the fact that the
Government could arrange finance more cheaply
than the private sector and that the private sector
had to include a margin for profit within any proj-
ect. This would suggest that in actual fact, a PPP
may not provide any greater value for money when
compared to a conventional public sector project.
Accordingly, the Inquiry expressed the opinion that
when comparing value for money provided by PPP
and that provided by conventional public sector
procurement, decisions are likely to be made on a
project by project basis.
III. Risk transfer in PPP
The Inquiry established that one of the key reasons
for entering into a PPP was to transfer as much
risk as possible, in a project, onto the private sector.
EPPPL 1| 2009
A number of findings suggested that certain risks
still remained with the public sector; the one of
most concern being the contractor going “bust”! If
the contractor goes bust, who is to step in and com-
plete the project and who would ultimately take
control of the project? Both Gwalia, Shaw Health-
care and Babcock & Brown expressed the view that
in this type of situation, the public sector would be
awash with organisations willing to take over the
project, and that the monetary risk remains with
the banks financing the project and the delay, and
reputation, risk would lay with the public sector.
Again, the Inquiry expressed the opinion that the
allocation of risk was a complex procedure and that
it was best to analyse the use of PPP on a project by
project basis.
IV. Is Wales ready to embrace PPP
The Inquiry raised a number of concerns that
Wales, as perceived by the private sector, is “not
interested” in PPP. It was suggested that this intona-
tion may lead to investment being diverted into
other countries, which have more tolerance of PPP.
However, the Inquiry found very little evidence to
suggest that “Wales is closed for business” with
regard to PPP.
V. Recommendations
The Inquiry sets out a number of recommendations,
some of which are detailed below:
1) the Welsh Assembly Government comes forward
with proposals to develop and strengthen skills
within the public sector;
2) the Welsh Assembly Government establishes a
central body to promote and support PPP;
3) the central body should take a lead role in devel-
oping project specifications, negotiating con-
tracts with the private sector partner and moni-
toring and managing performance in relation to
the contract; and
4) the Welsh Assembly Government should publish
forward plans for its capital/infrastructure pro-
gramme, including setting out of funds that
were to be available.
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Country Reports 63
VI. Conclusion
With regard to the recommendations, it is fair to
say that it should be a good idea to develop and
strengthen the skills of the public sector workforce.
This could allow Wales to utilise this resource in
future projects, possibly with somewhat less input
from the private sector with regard to the manage-
ment of a project.
The establishment of a central body to promote,
support and lead PPP projects is also another
important recommendation. This will allow a
degree of independence from individual public sec-
tor organisations that may be wary about adopting
PPP as a method of procurement. It may also be the
case that if individual local authorities were to pro-
mote, support and lead PPP then it is likely to result
in a divergence in the success rate of such PPP
across Wales; possibly leading Wales to revert back
to more conventional methods of procurement. For
example, one authority may not have the resource
required to lead PPP projects, which may result in
inadequately managed PPP projects that do not pro-
vide value for money. Accordingly, the creation of a
central body could be paramount to the success of
PPP in Wales, as long as it provides the requisite
resource, knowledge and capability to develop and
deliver robust PPP. The creation of the central body
should also help to alleviate the concern that “Wales
is closed for business”; as one of its main tasks is to
promote PPP in Wales.
The Inquiry highlights the fact that Wales faces
major challenges in its capital investment program-
me over the coming years; as public sector money
available for such investment is limited. However, it
also highlights the concern raised by some that
Wales would be “mortgaging its future” by adopting
PPP – although no viable alternative has been pro-
posed that can bring in the same level of capital
investment. Accordingly, Wales should embrace PPP
as the means of achieving the required level of such
capital investment. Wales should be able to reap the
benefit of hindsight, by being able to analyse a range
of PPP models and consequently derive/adopt its
own flexible and robust model of PPP.
Gareth Foulkes, Shadbolt LLP