Swift injection of capital

As a growing number of contractors join the rush of private sector businesses trying to get into private finance initiative schemes (PFI), lawyers from construction firms have found themselves thrust into the eye of the storm. This is a more commercial role for the construction lawyer as a natural consequence of the changing business focus of many contractors.

Put simply, the purpose of the PFI is to encourage the private sector to bring its money and management expertise to the public sector in the efficient delivery of infrastructure and services of all kinds. Under the PFI, private companies will

design, build and finance facilities for the public sector and supply it with services under contract.

One of the most surprising aspects of the PFI, given that service quality and private capital are central to its aims, is that it is not being driven forward by either the services sector or the financial community.

In part, this is due to the lack of a strongly based facilities management industry, particularly in those areas that have been the preserve of state-owned organisations such as health, public transport and estate management.

For the City, the reluctance to invest stems more from fear of the unknown than any lack of resources.

Thus the majority of PFI projects have been seized upon by construction firms in the pursuit of new, post-recessionary opportunities for work.

The construction industry has had to come to terms with the prospect, in winning PFI projects, that they call for investment in and long-term commitment, over an operational lifetime lasting well beyond the scope of traditional contracting activity.

As a result of the leading roles played by so many construction clients in various PFI scenarios, they have (happily for us) turned to specialist construction lawyers for advice on the script.

Undertaking a PFI project means much more than drafting new construction contracts. Some of the areas where expertise is now needed during project evaluation, tendering and implementation are:

– The PFI environment and rule-book in the context of project structuring;

– Permissible structures for public/private sector partnering or joint-ventures;

– The role of long-term service and facilities procurement contracts;

– UK and European Union procurement and competition rules;

– The impact of employment and social laws (eg TUPE);

– The impact of public, civil and administrative laws;

– The best use of development and property transfer agreements;

– The best use of planning, highways and infrastructure agreements;

– The ability of a scheme to tap EU and UK structural funds, single regeneration budget or other sources of grants and financial aid.

Within this firm, the multi-disciplinary nature of the projects we are involved with has resulted in the formation of a PFI team, whose experience now ranges across DBFO roads, sewerage projects, NHS Trust hospitals, government offices and IT systems.

More than 20 lawyers within the firm are now involved in PFI work – and there are no signs of this slackening, whatever may happen in the economy or on the battle-field of national politics.

PFI projects range from advising a government agency on a PFI scheme to redevelop government-owned properties to provide modern office accommodation for thousands of their staff at numerous sites, to advising an NHS hospital trust on a scheme to provide up to £45 million worth of new hospital facilities.

Elsewhere, in this burgeoning area of the firm's practice, we are retained to advise a consortium of major engineering and utility companies on evaluations of, tendering for and implementing a number of build-own-operate schemes to provide modernised water and sewerage infrastructure in several regions of Scotland.

The PFI team has also been involved in holding a series of regional seminars around the country in conjunction with Ernst & Young and the Building Employers Confederation, designed to assist smaller construction firms in participating in PFI schemes at a local level.

Some key issues are becoming recognisably common to all types of PFI schemes.

– The accent on partnering

Public/private partnerships can achieve good value for money in a number of ways.

They bring in fresh ideas and commercial disciplines alongside the best traditions of public service and can introduce new ways of working and boost effectiveness through competition. The introduction of private sector management skills and shifting the burden of risk to the private sector should lead to better value for money through shorter construction times, better control of project costs and reduced operating and maintenance costs.

However, there are a number of legal and contractual difficulties in assembling a successful structure to enable partnering arrangements to work. These includes limits on the powers of public bodies, capital spending controls and the need for the private sector to retain control of 'its' project.

– Risk shifting or sharing?

The question of risk transfer has been a sticky issue. The private sector is under no illusions that the Government is serious about seeking the maximum level of risk transfer away from the public sector.

Would-be contractors have been quick to complain that the Government is asking them to take on too much risk on PFI projects, in that they are being asked to assume risks (eg political risks) they cannot control and which it would make more sense for the public sector to bear.

At the Private Finance Panel Annual Conference in January 1995, Steve Robson from the Treasury PFI unit indicated that the Government is prepared to negotiate on risk and would approach all projects on a 'deals not rules' basis.

In other words, the allocation of risk is a subject for negotiation. While this approach is to be welcomed, it places the lawyer in a critically important position to negotiate a balanced, sustainable allocation of a panoply of risk factors.

– Intellectual property issues

There is increasing concern being shown by the private sector about the potential exploitation of know-how associated with any innovations disclosed during the tender process.

Lawyers will need to consider the issues arising in relation to intellectual property rights. However, it is unlikely that patent and trade mark problems will arise.

As far as designs are concerned, there almost always will be copyright in the drawings and contractors may rely on legal protection afforded by the law relating to confidential information (for example, in relation to a novel design concept for a road).

If restrictions on the use of any disclosed material are required, confidentiality undertakings should be obtained prior to the release of any project information.

Potential contractors complain that there is too much emphasis on competition rather than negotiation, especially where a private investor is proposing an innovative scheme and then has to compete with other firms to win the contract and carry it out.

The cost of making unsuccessful proposals does little to encourage private sector enthusiasm. The public sector is now more aware of the Treasury guidelines on competitive tendering – and if they are not, the Private Finance Panel can normally be relied upon to remind them. The key elements of these guidelines are that the public sector:

– Must make it clear what they want from a project, how proposals will be evaluated and give the private sector the opportunity to provide innovative solutions;

– Should state precisely what risks they are prepared to accept or negotiate on;

– Must consider compensation if a project is stopped for any reason outside the bidder's control;

– Should keep to definite timetables wherever possible;

– Should normally limit bidders to three or four, and contribute to the tender costs of bidders, where appropriate.

It is understandable if some contractors – and perhaps some of their lawyers too – think there must be an easier way to earn a living. But that is to underestimate the great potential of PFI to open up new markets.

The vast majority, if not all PFI projects, are going to be medium to long-term exercises where the goal is the creation of new business enterprise rather than short-term considerations of who wins a particular construction or management contract.

The PFI presents a unique opportunity to private sector companies and construction/ project lawyers with a sufficient spirit of enterprise and sense of purpose to generate substantial additional work.

This firm's involvement with PFI projects so far suggests good returns for the construction industry. It is short sighted to regard PFI as an optional extra.

Although the private sector must genuinely assume risk without guarantees that the taxpayer will foot the bill if things go wrong, the returns could be greater than in traditional public sector projects.

Steven Janes is a lead partner in Masons' structured finance unit.