Practice Area Focus: PFI

PFI (Private Finance Initiative) is one model used for the funding of private public partnerships (PPP).  A public sector contracting authority commissions a private sector party to provide an infrastructure asset and associated works and/ or services for a specific project, such as waste management, building schools or hospitals, improving roads or street-lighting etc.  Funding is provided by the private sector, although the current financial climate has meant that public sector funding contributions are not as unusual as once was the case.

What’s the working culture like in a PFI department?

The work is transactional (deal-based), so there can be intense periods of activity, with long hours.  While this can be daunting, the strong team bond that develops from working together over long periods outweighs the drawbacks. The very size of a complex PFI project requires a large multi-disciplinary team over many months (or years), which means you build up solid working relationships with your colleagues.

What’s the typical makeup of a PFI lawyer’s client base?

Acting for the public sector, your client could be a local council, hospital trust or central government department. A private sector client could be a building contractor, services provider, equity investor or provider of debt finance.  If you act for a debt finance provider, your client would typically be a large commercial bank.

Which other practice areas do you work closely with?

There is a lot of contact with other lawyers in the real estate, construction, corporate, pensions and employment departments of the firm.

What skills do you need to make a good PFI lawyer?

As for any lawyer in a commercial law firm, it is key to understand your client’s business, in particular what drives their business and what their objectives are, both in the specific PFI project and on a broader canvas.  As mentioned above, PFI projects involve many different practice areas and, in many ways, it is a PFI lawyer’s responsibility to draw the different practice areas together to ensure the deal is carried out in a coordinated way and within the anticipated timeframe.  An important role for a PFI lawyer is to act as a motivator to the people outside the ‘hub’ of the transaction, including other professional advisers, in order to meet your client’s expectations, and to pull together different elements of the transaction to push the deal over the finish line.

What impact has the recession had on this practice area?

From a funding perspective, the key issue in the current market is a lack of liquidity (i.e. available funds).  Deals are taking longer to close; more banks are required to participate in order to finance a transaction, meaning it is a greater challenge to co-ordinate that banking group; and banks have toughened up their approach, meaning they are less willing to take a view on issues they may have previously accepted.

From a public sector perspective, PFI deals are still generally viewed as necessary as the provision of infrastructure (education, health, transport, waste management) is a function of government.  The Treasury has established the Infrastructure Finance Unit (IFU) which will help bring PFI projects to financial close by plugging funding gaps.  The IFU has been specifically set up to provide funding for projects where there is insufficient debt finance available from the private sector as a result of the “credit crunch”.

What recent key PFI deals has your firm been involved in?

Addleshaw Goddard recently acted for the bank group on Britain’s biggest waste management deal  – one of the largest current PFI deals in the country, the Greater Manchester Waste PFI project.  A landmark for the PFI sector, it was the first deal in which the IFU participated, as one of the five key lenders in the project.  The deal was mentioned in the recent Budget by the Chancellor, as a first example of HM Treasury’s strategy to engage in more PFI projects in the role of primary lender.

What do you think will be the future shape of the PFI departments?

All of the main political parties have made a commitment to the provision of public services in the health and education sectors.  Additionally, as a result of the European Landfill of Waste Directive, the Government encourages local authorities to introduce waste management methods which provide an environmentally-friendly solution.  In line with the Government’s agenda on climate change, there is also likely to be an emphasis on alternative energy projects, such as wind-farms, known as renewable energy projects.  Projects which establish the provision of these public services (waste management deals in particular, with their complex structure and increasing waste-to-energy element) are well suited to the PFI structure.

The reduction in conventional Government funding for PFI transactions means that available funds are arguably more likely to be destined for more complex projects, which are better suited for PFI.  PFI departments are therefore going to have to rise to the challenge of these more complex projects – Greater Manchester Waste was a very good example of such a project.

It is a fascinating time to be in the market with such landmark recognition by the Government of how useful a PFI structure can be in pushing key infrastructure projects forward to completion.

What phrase is a PFI lawyer most likely to use and what does it mean?

Risk should be allocated to the party best able to manage the risk. PFI is fundamentally concerned with risk allocation and in particular, the transfer of risk in certain circumstances  (e.g. in relation to cost overrun, delay in construction or performance of services) from the public sector to the private sector.  However a risk should only be transferred if it allows the public sector to achieve the best possible value for money for the tax payer (the cost of transferring some risks to the private sector would be too expensive).