Public domain?

After Railtrack, is PPP doomed? And is it the end of the line for project finance lawyers? Jon Robins reports

The received wisdom is that the decision by the transport secretary Stephen Byers to take Railtrack back into public ownership is bad news for one of New Labour&#39s most prized policies the Public-Private Partnership (PPP). Sceptics of the PPP scheme of which there are many predict that ministers now face greater problems persuading backers to sign up to the Tube project after the way the Government treated the Railtrack investors. Some have already dubbed last year&#39s part privatisation of the National Air Traffic Services (Nats) a potential Railtrack of the skies.
However, project finance lawyers claim to have more faith in the future of PPP arrangements, not least because most of the big players in the City have been involved in one way or another in setting up all three of the high-profile deals.
“Railtrack doesn't have any effect on the work we're actually doing,” argues Jon Ellis, a partner in Norton Rose's projects group. “I don't think there's any less work as a result of it and nor would I expect there to be.” On Railtrack, his firm acts for the rail regulator, on London Underground it represents a bank group supporting the Jubilee, Northern and Piccadilly lines, and on Nats it advised the airline group that bought 49 per cent of the company which was established to run the new air traffic control system.
The bitter controversy over the railways has “posed a question in the minds of a number of participants in the market”, reckons Bruce White, a partner in Linklaters' project finance group who focuses on UK PFI work. “I think that it's a question of the degree of confidence that the private sector market has with the Government, but we certainly haven't seen any slowing of activity,” he says. Linklaters acts for the Strategic Rail Authority in relation to Railtrack and advised a losing bidder in the Nats deal.
According to Anne Baldock, a partner in the banking department at Allen & Overy (A&O), it is “interesting” that commentators have made the link between Railtrack and other public-private arrangements. “Railtrack wasn't a PPP at all but a straight up-and-down privatisation, and the Government has taken action which, on the face of, it's perfectly entitled to do,” argues Baldock. A&O is presently embroiled in the Railtrack saga acting for the institutional shareholders. The firm also represented bidders on the Tube and Nats deals.

“Nats has just started, and in anyone's estimation, what's happened in the last few weeks is the worst thing that could ever happen to that industry”
Anne Baldock, Allen & Overy

She continues: “For people to say that the Government is always going to try and renationalise everything is a big leap – but it's an emotional leap, and you can see why people have done it.”
There has to be “some sort of relationship” between the Government's decision to pull the plug and its approach to public-private work, says Peter Watts of Lovells. Last year, Watts headed the Lovells team acting for Nats on the creation of the first successfully-implemented PPP.
“But I don't think it's a direct relationship,” Watts elaborates. “Railtrack was never designed to represent a partnership between the public and private sectors in the same way as Nats or the Tube, which were explicitly trying to create a balance [between the two].”
Not surprisingly, he resists the 'Railtrack of the skies' tag that has been applied to Nats over the last few weeks. “It's a sound-bite that the press have been trying to run for the last three years, and whatever anyone's political views, I think it's a wholly incorrect analysis,” he argues. Watts says that the whole point of Nats was to enhance safety and not to maximise traffic. “Whereas for Railtrack it was the other way round,” he adds.
The Government thinking behind Nats was that its debts could be serviced easily by the revenue from air traffic control charges. But that was before 11 September. As a consequence of the terrorist strike, the Government last month promised to examine any request from the partially privatised service “on its merits” after the company operating the system, in which the Government has a 49 per cent share, admitted that it was looking for savings.
According to White at Linklaters, the Railtrack saga involved a “unique set of circumstances”, not least because of the scale of the West Coast Mainline project, which runs from London to Glasgow and has been estimated to cost as much as £60bn. “The issue [for Nats] is probably a short-term lack of confidence in air travelling,” he says.
One lawyer who is closely involved in the Railtrack saga reckons that the ongoing legal travails of its shareholders will have undoubtedly hit the confidence of investors. “It almost doesn't matter whether they're right or wrong,” he says. “The question is, what appetite will they have for supporting PPP/PFI, and what appetite do their credit committees have?”
The lawyer draws a distinction between a 'regulated utility', such as a water company, and a 'project', such as a school or hospital. He says: “Most of the legislation setting up provisions for regulated utilities creates an administration regime, which applies if they're in an insolvency situation that takes the standard regime and pushes it a bit further to reflect the requirements of a monopoly utility.”
But a school project, for example, would be operating under a concession contract which would have its own compensation provisions built into it. In that situation, he points out that lenders will enter into “a direct agreement with the public sector, enabling them to step in in the event of a problem with the project, including insolvency”.
But the lawyer also stresses that it is difficult to envisage such a forced renationalisation elsewhere. “The appetite for the consumption of cash that the UK railways has got is just phenomenal,” he says, referring again to the West Coast Mainline. “What other infrastructure projects are there which have the need for so much capital to be spent?”
Baldock points out that Nats, being a 'monopoly utility', will have its own administration scheme; but she also questions the circumstances in which a government would ever invoke it. “The distinction is that Railtrack was 100 per cent private and Nats is a 50/50-owned company,” she says. “Railtrack had a long time to have a go at getting it right, and in the Government's eyes they didn't think that they did; whereas Nats has just started, and in anyone's estimation, what's happened in the last few weeks is the worst thing that could ever happen to that industry.”
But given the uniqueness of Railtrack, why has there been such ambivalence towards PPP in the press since the Government pulled the plug?
White detects an element within the media and political establishment that is eager to undermine private sector involvement in public projects. “What's happened since the last election is that a number of Old Labour have been able to voice their concerns that they've had all along,” he says.
But, he reckons – and no doubt hopes – that the tide is beginning and the private sector is fighting back. White sits on the Confederation of British Industry's modernising Government committee and the PPP Finance Providers' Forum, both of which are assiduously arguing the case for PPPs.
“There is very little pro-PFI/PPP lobbying going on, but what we've seen is that the public sector clients are actually really pleased with what they've seen so far,” he asserts.
Much of the resistance to PPPs has come from unions, such as the public services union Unison. Dave Prentis, Unison general secretary, was recently quoted as saying: “The truth is that these partnerships take money out of the public purse and put it into the pockets of private sector companies.”
According to Andrew Ivison, a partner in banking and international finance at CMS Cameron McKenna, the Government is taking a pragmatic view of public and private involvement. “I don't believe that they've ever said, 'private is good and public is bad',” he says. “In each case it ought to be what achieves the best results, and I believe that's what the Government's position is.” Camerons acts for the Government in Railtrack and for a consortium that has two of the infrastructure companies involved in the London Underground deal. It also represented lenders on Nats.
“At the end of the day, we're all users of these services,” argues Ivison. “We should be seeking what's best for the country. That's the answer – not orthodoxy.”
White points to new research by PricewaterhouseCoopers (PwC) – 'Public Private Partnerships: A Clearer View' – as evidence of the private sector increasingly putting forward the argument for the benefits of PPPs. PwC claims that its work, which was published last month, represents the first detailed analysis of the impact of PPPs.
Nigel Middleton, head of PPP/PFI advisory services at PwC, says: “The PPP industry has been frustrated by a lack of objective analysis and some past public comment has been misleading.” He hopes that his report will contribute to “a more balanced debate”. The report concludes with a number of examples of “wholly misleading” press reports concerning Cumberland Royal Hospital, the first major PPP hospital.
Certainly, it offers a healthy picture of PPPs to date. “It suggests that PPPs are being delivered on time and to budget, while traditional public sector procurement still suffers from delay, cost overruns and compromises on initially planned requirements,” says Middleton.
PwC reviewed 27 projects covering transport, defence, water, education and health sectors. Of that number, only one suffered from delay and virtually all public service participants interviewed regarded their projects a success.
Firms are reporting that they are as busy as ever with domestic PPP work. “We're still steaming ahead, which is encouraging,” says Baldock. “With the events of 11 September, there are other areas of the City that aren't, but we seem to be fairly busy. It shows a degree of confidence in that market, notwithstanding the knocks that people keep saying we're having.”
According to Ivison, there is a constant flow of domestic project work going through Camerons' project department. Since New Labour came into office in 1997, there has been “various streams of activity, which are now established”, he says. He cites the building of hospitals, prisons, the sale of property portfolios by local authorities and the Inland Revenue, as well as major projects for the Ministry of Defence (MoD).
At Linklaters, like most City firms, 75 per cent of projects work relates to work outside the UK. “So PFI isn't the be-all-and-end-all of our practice area,” says White. “But having said that, it's an important area of work for us.” The current hotspots of domestic PPP work for Linklaters are hospitals and MoD work, in particular a new generation of military satellites. White reckons that the firm has done in the region of 15 major hospitals.
“We see this as a very important stream of business for a number of years yet,” says White, “and I personally don't believe that, in the absence of any seismic change to Government policy, either of the political parties are willing to scrap PPP.”

The PwC PPP survey
Last month, PricewaterhouseCoopers (PwC) published a survey of 27 public-private partnership (PPP) projects covering transport, defence, water, education and health. A PwC spokesperson said: “An important part of the review was to interview the people who are making these projects work, and are therefore experiencing any benefits and shortcomings.”

According to Nigel Middleton, the head of PPP/PFI advisory services at PwC, the PPP industry “has been frustrated by a lack of objective analysis, and some past public comment has been misleading”.

Of the 27 projects surveyed, just one experienced delay and this was “totally at the private sector's cost”, says Middleton.

Virtually all of the public sector participants interviewed regarded their PPPs as successful, albeit qualified in some cases.

In 12 schemes where staff had transferred to the private sector as part of the PPP, public sector managers were asked how the process had gone. According to the report, in all cases the transfer was “by and large” problem free; in half the samples, managers concluded that staff were happy; in five cases reaction was mixed; and in one case it was unclear. “None of the managers believed that staff were, on the whole, unhappy with the arrangements or unfairly treated,” the report noted.

For a full copy of the report, visit