Project finance practices could face tough times as PFI shrinks. By Gavriel Hollander
The long-running, expensive and at times bitter saga that was the London Underground PPP finally came to a conclusion earlier this summer when the second of two consortia charged with the maintenance and development of the network was sold back to Transport for London (TfL).
The original deals, which reached financial close in 2003 but whose inception can be traced back to the end of the previous millennium, provided something of a feeding frenzy for the City’s leading project finance practices, with a bevy of firms getting involved along the way.
But with the end of the Tube Lines deal in June following the 2007 collapse of Metronet, the wind seems to be blowing back towards the public sector when it comes to major infrastructure work, and the days of big-ticket project finance transactions in the UK could be over.
In announcing TfL’s reclaiming of the contracts, a gleeful Mayor of London Boris Johnson declared that “the big losers are the lawyers”, after revealing that the firms involved raked in £400m in fees over the course of the contracts. While this can easily be read as a convenient political soundbite, especially given the negative press that continually circles PFI and PPP projects, it is true that a return to traditional procurement will not yield the juicy mandates of yore.
And it is not just the end of one deal, however headline-making it was, that will have firms worried about where their project finance teams are going to pick up work.
CMS Cameron McKenna finance partner Andrew Ivison, who leads the firm’s current relationship with TfL, and who was also involved in Metronet’s bid for the 2003 contracts, says the end of the London Underground Limited (LUL) deals does not in itself represent a watershed.
“It was a one-off in terms of structure,” Ivison explains, pointing out that this year marked one of four periodic reviews punctuating the 30-year contract. “It was always a potential exit point if they couldn’t agree on the repricing for the revised scope.
“This time window coincided with other big things going on; a change of government is an inevitable point for rethinking or rebranding PFI, particularly when the administration needs to reduce publanaic sector spending.”
October’s comprehensive spending review and a new government with twin goals of cutting capital expenditure and distancing itself from the previous regime could also spell danger for PFI and PPP experiments.
But it is not all doom and gloom for firms with fingers in the PFI honey jar, according to Berwin Leighton Paisner (BLP) projects partner Mark Richards.
“We’re still looking at some kind of contract opposite Government,” he says. “You can call it PFI or PPP or anything you like, but it adds up to the same thing. If the World Bank or any other multilateral lender believes PPP’s a good thing they’ll promote it. And a top London law firm with experience will be able to add value.”
Ivison agrees. “PPP and PFI represent just one form of project finance,” he says. “If you look at the larger project finance practices, it will be a question of how they marshal their resources.”
The cast list for the two LUL PPPs – Metronet, which won the two contracts covering two-thirds of the network, and Tube Lines, the consortium responsible for the subsurface lines – includes most of the big players in project finance.
Freshfields Bruckhaus Deringer initially advised LUL before the procuring authority turned to Herbert Smith. Camerons acted for the Metronet consortium on its bid and was subsequently mandated by LUL and TfL on the deal that took Tube Lines back
in-house. Hogan Lovells legacy firm Lovells was legal counsel to Tube Lines throughout the contract (with the combined entity only becoming involved towards the end).
Allen & Overy ( A&O) and Clifford Chance also bagged roles when the administrators were called in on the Metronet deal, with A&Oacting for Ernst & Young and its magic circle peer advising the lenders.
However, it is not these types of firms that will feel the pinch of a shrinking PPP market, but the volume shops that grew large practices out of an increasingly cookie-cutter deal space.
Richards argues that the landscape for PFI/PPP began to change even before the credit crunch took hold.
“I think that by around 2007-08 PFI/PPP had become quite commoditised, with things like Building Schools for the Future [BSF], social housing and hospital projects,” he says. “It was a volume play. You’d look at three or four deals and hope clients were successful on maybe one in three.”
With fewer lower-end deals around, diversification is likely to be the name of the game, and that requires a bigger practice.
“There won’t be so much work coming out of the PPP world, so people are going to have to do other things,” says Freshfields PFI/PPP head Nick Bliss. “Particularly with the recent demise of the BSF programme, there won’t be as many mandates around, so people are going to have to look overseas if that’s feasible.”
Bliss and others highlight the still-buoyant power and renewables sector, as well as secondary market and infrastructure funds work, as areas that could sustain flexible practices.
The sale of Government assets, such as the Nuclear Decommissioning Authority’s (NDA) continuing divestment programme, is another potentially rich stream of work. Burges Salmon and Pinsent Masons acted for the NDA and the purchaser respectively on the £70m sale of land near Sellafield last October.
However, national firms such as these may be competing for fewer deals if the Government radically reinvents PFI.
“If it becomes PPP without the finance there’s a chance there could be work for those firms,” says another leading project finance partner. “But if the Government goes back to the old way of doing things, companies can do it in-house, and there’s no banking role in either model.”
The commoditised PFI market had become bread and butter for many firms. Even if it is rebadged by the new administration, the consensus is that there will be fewer projects.
“At the national level it will be a squeezed market,” the project finance partner warns.