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What does Priority Schools agreement say about a new PFI?

A draft project agreement for £2 billion of privately financed schools may have shed some light on a new PFI model - but what does this mean for contractors, sub contractors and financiers?

The Education Funding Agency has now published the “Priority Schools Building Programme PFI Project Agreement” on its website for consultation.

Partners at Pinsent Masons have been scouring the lengthy documents, and have shared their findings with CN (below).

The details of the schools project agreement confirms much of what has been previously mooted about a new PFI model, including a share of the equity gain; a dropping of soft FM - which could impact sub contractors; and the public sector taking more risk.

But it also leaves a number of questions unanswered; such as how an equity gain share would work; and refinancing risk, which will be a major consideration for long-term investors.

It comes weeks before Chancellor George Osborne is expected to reveal a new PFI model, after the existing model was blasted as poor value for money for the taxpayer. The year-long review led to some financiers saying the PFI market had been “knee-capped’”.

Some experts have suggested the PFI model will only be tweaked, while others have suggested it could entail ‘menu of options’ or models.  However, the Treasury have insisted that the model will see a significant overhaul.

As reported by CN in September, there are also indications of a move towards the Non-Profit Distributing (NPD) model, used by the Scottish Futures Trust, a public corporation set up by the Scottish Government in September 2008 to tackle public infrastructure investment.

Kate Orviss, partner and PFI/PPP expert at Pinsent Masons, said: “A number of the issues track the SFT’s NPD approach although it is interesting to note that the draft does not adopt that approach wholesale.

“Given that the Scottish model has at least been thoroughly tested by some of the players active in the Scottish market, one wonders whether trying to develop something new is the most efficient way forward for a market desperate for new opportunities.

“It will be interesting to see what detail is revealed on 5 December – hopefully a fully developed model not another list of options.”

What does the consultation draft of the PSBP Project Agreement tell us about the direction of traffic for privately financed projects in the current climate?
Kate Orviss, partner, Pinsent Masons

Equity Gain Sharing – the draft actually provides no detail on this. It merely notes that this is being considered by Treasury. This has, of course, been heavily trailed but this document doesn’t shed any light on this major issue.

Soft FM removed - Soft FM will be provided by the individual schools rather than as part of the services. This is unlikely to be a schools-specific approach and most likely signals a new direction for the soft FM providers.

The reduction of the scope of the service provision will mean smaller FM Contracts which will in turn impact on sub-contractor appetite for risk – smaller fees mean smaller caps and if the scope of “hard FM” reduces further (as is the case in the model north of the border) there may be a wider impact on the fundamental concept of passing risk away from the project vehicle. This will be an issue for equity providers and funders alike.

Lifecycle Surplus to be shared - the new approach seeks greater transparency and a gain sharing (but no pain sharing) arrangement on Lifecycle Surplus amounts. The public sector has long felt they are missing out on upside generated in relation to lifecycle but this is the first time any form of gain sharing arrangement has appeared in the main contract. A similar issue is addressed in the NPD model but not in as direct a fashion. This is unlikely to be school sector specific issue.

Public Sector takes more change in law risk -the risk of capital works arising from unforeseen changes in law during operations now sits with the public sector.  This change has been the subject of some prior speculation.  It seems a sensible risk re-allocation and a chance to make savings for the public sector (although query what sort of scale of saving this will generate).

Refinancing risk allocation remains unchanged– a new approach to refinancing risk and whether the public sector taking this risk would unlock the senior debt market has been the subject of considerable debate in respect of the new model for PFI. The consultation draft adopts the latest HMT guidance on this point but doesn’t go further. Does this indicate HMT’s final position on this issue?

Two Stage Handover Mechanism - this is a sector specific issue given the use of ICT in schools. There remains an ICT interface issue but this is now elevated to the main Project Agreement rather than in the sub-contracts. Given that the Building Contractor will need to remain responsible for the school until the second stage sign off it will be imperative that the ICT Access Protocol (which needs to be developed) clearly establishes what the Authority and its ICT Provider need to do so that there is a clear remedy if they do not fulfil those obligations.

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