“Forms of Public Private Partnerships” – Practice Note by Mathias Cheung

This Practice Note, produced by Mathias Cheung in partnership with LexisNexis, provides comprehensive and up to date legal information covering:

• Forms of Public Private Partnerships
• Note on public procurement post-Brexit
• Overview Public Private Partnerships
• Conventional procurement
• PFI/PF2
• PFI/PF2 documentation
• Partnerships such as a LEP or LIFTCO
• Concession
• Public delivery organisation
• Joint ventures
• Alliancing
• Hybrid PPP
• Why are PPPs important?

This practice note was first published on LexisPSL Banking and Finance on 8th March 2021. To view the article on Lexis®PSL please click here (login needed).

Reprinted with permission of LexisNexis, all rights reserved.

 

Forms of Public Private Partnerships

 

Note on public procurement post-Brexit

The Implementation Period under the EU-UK Withdrawal Agreement came to an end on 31 December 2020 at 11:00 pm GMT (IP Completion Day), and all the changes introduced under the Public Procurement (Amendment etc) (EU Exit) Regulations 2020, SI 2020/1319 to the existing EU-derived public procurement legislation have now come into force (with the exception of the amendments set out in Regulations 7, 9, 11 and 16). This Practice Note has been updated to take into account these post-Brexit changes.

In addition, the UK government has published high-level guidance on public procurement post-Brexit, which has been updated after the IP Completion Day: Public procurement policy and Public-sector procurement.

 

Overview Public Private Partnerships

Public Private Partnerships (PPPs) should focus on promoting efficiency in public services. This can be done through risk sharing and utilising private sector expertise. Sources of capital which can be offered by the private sector can also relieve the pressure on public financing which is increasingly required.

There are numerous forms of PPP creating a family of procurement methods. The more traditional forms are:

• conventional procurement
• PFI/PF2
• partnerships such as LIFTCo’s and LEPs
• concessions, and
• Public Delivery Organisations

The newer/alternative forms of PPP are:

• joint ventures
• alliancing
• hybrid PPPs, and
• other models defined in the Government Construction Strategy Report (see guidance)

In the 2018 Budget (delivered on 29 October 2018), it was announced that the government will no longer use PF2 on new projects (see News Analysis: Budget 2018—what does it mean for infrastructure and housebuilding?). However, existing PFI and PF2 projects will continue to run, and given the typical lifespan of such projects this is likely to be for many years. The government has reconfirmed in its National Infrastructure Strategy of November 2020 that it will not reintroduce the PFI/PF2 model in new infrastructure projects.

References:

Budget 2018

National Audit Office—Managing PFI assets and services as contracts end (June 2020)

 

Conventional procurement

Form

This is one of the main processes in which infrastructure procurement is carried out in the public sector. It is not a form of PPP but involves the public sector providing specifications for a particular asset and a contractor then builds the asset. Contracts are usually based on the Joint Contracts Tribunal (JCT) or New Engineering Contract (NEC) suites of contract and costs are usually on a cost plus, fixed price or target cost basis. For more information on JCT and NEC contracts, see sub-topics: JCT contracts 2016, JCT contracts 2011, JCT contracts 2005, JCT contracts 1998 and NEC3.

 

Suitability

This procurement method is suitable where there is a definite and guaranteed need for a service.

 

PFI/PF2

Form

This was the most popular form of PPP and arguably the most successful, up until the insolvency and collapse of the facilities management and construction company Carillion in January 2018 (see News Analysis: Carillion’s insolvency—infrastructure and construction). In view of the perceived inflexibility and overcomplexity of the PFI/PF2 model, the Chancellor announced in the 2018 Budget that the government will no longer be using the PFI/PF2 model for new projects. For more information on the impact of the 2018 Budget, see News Analysis: Budget 2018—what does it mean for infrastructure and housebuilding?

As at June 2020, there were over 700 operational PFI/PF2 contracts in place in the UK with a capital value over £57bn, 571 of which were PFI/PF2 projects in England. For more information on PFI/PF2, see Practice Note: Introduction to PFI and PF2.

Most of the current PFI/PF2 contracts will be coming to an end from 2025, and the National Audit Office has recommended that early preparations should be made by public authorities to ensure successful exits from these remaining PFI/PF2 contracts. For more information, see: LNB News 05/06/2020 65.

A PFI is usually based on the following structure:

The PF2 model (as announced by HM Treasury in December 2012 under the coalition government) went further than the original PFI model and encouraged equity participation by the central government as a minority co-investor in new schemes, principally through joint venture vehicles. The objective of the PF2 model was to enable a greater alignment of interests between the public and private sectors, better collaboration, greater involvement by the public sector in decision-making, greater visibility and transparency of project information to the public sector, and the sharing by the public sector of the ongoing investment returns.

 

PFI/PF2 documentation

The project agreement is the powerhouse of the PFI/PF2 structure. Project agreements in PFI projects were based on SoPC4 (Standardisation of PFI contracts—version 4) (see Practice Note: Introduction to PFI and PF2). When PFI was replaced by ‘PF2’, HM Treasury and Infrastructure UK (IUK) published a number of documents under the label of ‘PF2’ including new contract standardisation guidance ‘Standardisation of PF2 Contracts’ which was in effect SoPC5.

The policy document for PF2 was A New Approach to Public Private Partnerships.

The advantages PF2 had over PFI include:

 

• a revised risk transfer
• a standard output specification
• a standard payment mechanism, and
• a model shareholders agreement

There was more flexibility in relation to the services provided and therefore a faster procurement was expected. However, up until the 2018 Budget, there had been relatively few projects procured under PF2, so the model remained relatively untested compared with SoPC PFIs.

If there were any derogations from the standardised documents, such derogations needed to be approved by IUK.

In a PFI project, the contractor (a special purpose vehicle) will procure a building contractor to construct the asset. Once construction has been completed, the services to maintain the assets will commence. The contractor will contract with a facilities management company to provide the maintenance services for the asset. The payments (a fixed unitary charge) from the local authority to the contractor will commence when the asset is constructed and when the services have commenced. This is the case with most accommodation projects such as schools and hospitals. For more information, see Practice Note: Introduction to PFI and PF2.

The services are provided based on an output specification which is given by the local authority. The local authority will pay only if and to the extent the required services are delivered. If the contractor defaults, deductions can be made from the unitary charge as prescribed in the payment mechanism in the project agreement. Further, there is the risk of the funder stepping in if the contractor default could instigate termination of the project agreement. For more information, see Practice Notes: Change protocols in PFI/PF2 and Termination of PFI/PF2 contracts.

 

Suitability

The PFI/PF2 model was suitable where there could be a contractual fixed price and where there was a long term predictable need together with a long term solution. The project also had to be big enough to justify the procurement costs. However, as discussed above, the government has stopped using the PFI/PF2 model for new projects since the 2018 Budget.

 

Partnerships such as a LEP or LIFTCO

Form

With this type of PPP there is a long-term relationship between the public sector and the private sector partner. This arrangement enables the private sector partner to provide works and services required by the public sector to address infrastructure needs. This should also provide efficiencies through continuous improvement of the processes and designs used and allows the private sector partner to provide input at the planning stage for the asset.

 

Suitability

If there is a combination of successive phases, similar types of work and numerous local procurers for the same types of project then this type of partnership should be used. This type of partnership is suitable where the infrastructure required may be known but the timing and detail of the phases might not be.

The partnership can be set up by way of a joint venture or by contract. Partnerships established by contract include Local Education Partnerships (LEPs) and Local Improvement Finance Trusts (LIFTCos). LEPs were set up as part of the Building Schools for the Future Programme and LIFTCo’s were part of the NHS Local Improvement Finance Trust initiative. The set up costs for these have proved to be significant. The partnerships do however make savings compared to if projects were procured separately.

The diagrams below show the typical structures for a LIFTCO and a LEP.

These partnerships tend to be procured under the competitive dialogue procedure (see Public Contract Regulations 2015, SI 2015/102, as amended by Chapter 1 of Part 3 of the Public Procurement (Amendment etc) (EU Exit) Regulations, SI 2020/1319) and the intention is that a single procurement should cover both the establishment of the strategic partnership and any current or future phases or projects to be delivered by that partnership. When a procuring authority advertises a new strategic partnership project such as through LIFT or BSF, the notice published in the ‘Find a Tender’ service (FTS) (which applies to procurements commenced after IP Completion Day) needs to be considered carefully to ensure that any anticipated future phases or projects will fall within the scope of the procurement and any exclusivity granted, as these future phases/projects are usually unknown at the date of the FTS notice. Indeed, as and when any new phases or projects require delivery the procuring authority should always check that the FTS notice covers the phase or project in question before implementing delivery.

For future phases or projects a LEP and a LIFTCo will use what is known as the ‘New Projects Procedure’ in the ‘Strategic Partnering Agreement’ (SPA) (the overarching contractual document it enters into with the relevant public sector bodies). In general terms, the New Project Procedure requires the LEP or LIFTCo to submit proposals for new phases or projects in line with a staged approval process with proposals benchmarked back to the original or ‘phase one’ project. This, combined with the original FTS notice is how a new phase or project can be delivered without the need to separately advertise on FTS.

Although there are few—if any—new projects currently being procured using these structures, there are still a lot operating, and elements of each are often co-opted into other new projects. It is therefore still useful for practitioners to understand LEP and LIFTCo structures.

 

Concession

Form

This form of PPP is where the government grants a private entity the exclusive right to build, operate and maintain a ring-fenced asset. These projects are financially free standing and are usually for a substantial period of time. Demand risk is transferred to the private entity, in whole or in part. Concession PPPs fall under the procurement process as stated in the Concessions Contracts Regulations 2016, SI 2016/273 as amended by Chapter 2 of Part 3 of the Public Procurement (Amendment etc) (EU Exit) Regulations 2020, SI 2020/1319 (the 2016 Regulations). The Regulations implemented into UK law Directive 2014/23/EU on the award of concession contracts, and have been preserved under the European Union (Withdrawal) Act 2018 and continue to apply as retained EU-derived domestic legislation after IP Completion Day.

Under the 2016 Regulations, a ‘concession’ contract means one of the following:

• a ‘works concession contract’ means a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or utilities entrust the execution of works to one or more economic operators, the consideration for which consists either solely in the right to exploit the works that are the subject of the contract or in that right together with payment, and
• a ‘services concession contract’ means a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or utilities entrust the provision and the management of services (other than the execution of works) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment

Both must meet the requirements set out in paragraph 4.1 of the 2016 Regulations, which are that:

• the award of the contract shall involve the transfer to the concessionaire of an operating risk in exploiting the works or services encompassing demand or supply risk or both, and
• the part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible

 

Suitability

In order for the concession model to be suitable the project must have a clearly defined scope and relative certainty over its requirements during the lifecycle of the project. The project must be able to be economically independent and it must also be able to interface with surrounding infrastructure.

If there is a ready market for the service and usage of the asset is easily measurable, a concession is suitable. Ideally, the private sector entity will have the ability to influence demand for the use of the asset. An example is the M6 toll road in Birmingham which is a free-standing concession.

 

Public delivery organisation

Form

This arrangement involves the authority procuring a public delivery organisation, referred to as the integrator. The integrator will manage the delivery of a project. Delivery will start from the pre-procurement stage through to procurement, construction and then into operation but the integrator may not deliver the services. This can be similar to PFI as the arrangement may have some PFI elements.

 

Suitability

This form of PPP will be suitable for projects which need to have a degree of flexibility as the long-term need and timing for the deliverables under the project is not known. If the project is a large project and if the construction phase is long then this type of joint working may be appropriate.

As with the LEPs or LIFTCos there should be the opportunity for continuous improvement over the term of the project. Efficiencies can then be gained.

 

Joint ventures

Form

A joint venture (JV) in the context of PFI/PF2 can be quite different from what a corporate or commercial lawyer would think of as a JV.

A corporate relationship is not necessarily required for a JV, a contractual relationship can form the basis of a JV arrangement. There are therefore a number of legal structures from which a JV can choose in order to establish the JV relationship. The JV can be set up as a limited liability partnership which is the most integrated form of JV or as an unincorporated JV which is the least integrated. A partnership could also be set up and this could be an unincorporated partnership, a limited liability partnership or a limited partnership. A community interest company is another alternative legal structure. Deciding which is the best form of JV will ultimately depend on how integrated the parties want to be.

 

Suitability

If it is clear from the outset that the costs of the project will exceed the revenue, a JV may be used. The LEPs and LIFTCo’s detailed above are JVs. Conflicts of interest can arise in JVs, for example, where an authority employee sits as a director of the JV.

 

Alliancing

Form

If the delivery of a project involves two or more parties and those parties have similar or the same objectives and incentives then those parties may form an alliance to enable them to deliver the project successfully and to enable the risks and rewards to be shared. One of the disadvantages of alliancing is that generally the public sector takes the risk.

 

Suitability

Alliancing can be suitable where there is a technological risk or there is a lack of a competitive supplier market. Further, the government would consider alliancing if there are policy objectives in place but it is not certain as to how these are to be met or what infrastructure is needed to ascertain these objectives. Alliancing may also be used if the project is large and phases are not easily identifiable. The authority involved in an alliance needs to be proactive. Procurement and commercial skills are therefore essential to enable the alliance to be effective.

 

Hybrid PPP

Form

Models are likely to develop which have characteristics of the other forms of PPPs. A hybrid PPP may be required because the project involves shorter term contracts or less equity may be invested.

 

Suitability

An example of a hybrid PPP is ProCure 22 (P22). P22 is ‘a Construction Procurement Framework administrated by the Department of Health (DH) for the development and delivery of NHS and Social Care capital schemes in England. It is consistent with the requirements of Government Policy including the Productivity and Efficiency agenda; the Government Construction Strategy; the Public Contracts Regulations 2015; the National Audit Office guidance on use of centralised frameworks; and the Cabinet Office Common Minimum Standards for procurement of the Built Environment in the Public Sector’. See ProCure 22.

P22 is the third iteration of the DH Framework (after ProCure21 and ProCure 21+) providing design and construction services for the NHS and social care organisations. P22 provides a framework agreement whereby the NHS can select a ‘Principal Supply Chain Partner’ without having to go through a procurement process. It aims to streamline the procurement process and create an environment in which Clients, Principal Supply Chain Partners (PSCPs) and their supply chains develop stronger partnerships to drive increased efficiency and productivity. P22 offers building information modelling and is developing standardised products, designs and repeatable rooms with bulk buying solutions to drive efficiency.

 

Why are PPPs important?

PPPs are crucial—the public sector has a service requirement and the private sector can provide service delivery. Moreover, it provides a crucial source of economic stimulus and recovery in the wake of the Covid-19 pandemic. The PFI/PF2 model has been used extensively, however it has its parameters and sometimes it has been used where it has not been appropriate, and its flaws have been placed under the microscope in the wake of Carillion’s insolvency. leading to their abandonment from 2018 onwards.

HM Treasury has long encouraged the consideration and adoption of different forms of PPP and alternative forms should be considered, and now that the PFI/PF2 model will no longer be used, there is unlikely to be a ‘one size fits all’ solution, but more likely a myriad of different procurement models in different sectors (if not different projects). The vast variety of projects required to provide infrastructure in the UK requires and dictates that there should be choice as to how those projects should be structured and implemented and there should therefore be a number of forms of PPPs to choose from. The chosen PPP should be appropriate for the particular procurement and critically, this means it should provide value for money for the tax payer.

Infrastructure is constantly required and with issues such as public sector debt and the struggle to access long-term finance, joint working is paramount for the government. Using a number of different forms of PPP does however create issues for the government. The government must have the requisite skills set to be able to approve and facilitate implementation of each of the different forms and know where and when each form can be used.

In addition, apart from the more traditional forms of PPPs, the 2018 budget has referred to the continuing support of private investment in infrastructure through other means, such as the use of contracts for difference to support private energy projects by providing for a fixed price for energy generated, and the use of the UK Guarantee Scheme to support existing debt financing in infrastructure projects. These are likely to continue hand in hand with PPPs in the ever-growing infrastructure and energy sectors.