What are PPPs
In simple terms, Public-Private Partnerships, also known as a P3s, are long-term cooperative agreements between the public and private sector that are used to design, finance and operate large infrastructure projects. This compares to conventional procurement process where private contractors might be involved in the building of an asset but where the public sector provides the finance. The most well-known of these are PFIs (Private Finance Initiatives), which were popularized by the UK in the 90s. In this structure, the private party provides the upfront payment for a project through raising finance from debt and equity providers.
The government then reimburses them in annual payments over a long-term period, typically between twenty to thirty-years. “Having a government-backed income is attractive for investors,” Ritchie explains. She adds that “today many people use PPP and PFI interchangeably, but there a huge range of different models across the market. For example, a PPP can just be a partnership without a banking or private financing element.” In Scotland, NPDs (Non-Profit Distributing) were developed to replace the traditional PFI model. Similarly, Wales also has its own initiative: The Mutual Investment Model or MIM.
A necessary evil?
According to YouGov: ‘PPPs have delivered £56 billion of private sector capital investment in over 700 UK infrastructure projects. These include new schools, hospitals, roads, housing, prisons, and military equipment and accommodation.’ PPPs have typically been viewed as an attractive option for governments reluctant to rely on public borrowing to fund infrastructure projects. Many also highlight the advantage they have in transferring risks away from government bodies, as well as being able to harness the skills and innovation offered by the private sector. While PPP projects have certainly helped deliver a range of infrastructure projects across the UK, they have also been a magnet for controversy, with many citing a poor return on investment and the risk of the public losing operational control. Though quantifying the exact economic benefits of using PFI can be difficult, one report by the House of Commons Committee of Public Accounts found that ‘the cost of private sector borrowing can be as much as 2% to 3.75% more expensive than the cost of government borrowing.’
One project that attracted significant criticism revolved around plans to upgrade large parts of the London Underground Network in the late 90s. Eschewing calls for further privatization to deliver the upgrades, the incumbent Labour government initiated a PPP to modernise the network which included the refurbishment of over 30 stations and additional track works on the Victoria and Northern Lines. Although the project delivered some successes - 23 stations were modernised – ultimately TFL was forced to step in a takeover the project due to escalating costs between 2003 and 2007, citing poor financial control by one of the project’s private contractors, Metronet. Estimates of the loss to taxpayer have been put at between £170 and £410 million. “It’s fair to say that PPP has had some bad press; PFIs in particular have fallen out of popularity in the last decade,” Ritchie concedes.
More recently, the collapse of Carillion once again bought PFIs to the forefront of political debate. When it went into liquidation in January 2018, the firm had over 400 public sector contracts, many of which needed to be rescued at a cost of over £150 million to the taxpayer. Still, despite the bad press, a report by the National Auditing Office in 2018 pointed out that ‘there are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion. Annual charges for these deals amounted to £10.3 billion in 2016-17. Even if no new deals are entered, future charges which continue until the 2040s amount to £199 billion.’ Moreover, Ritchie questions how “the prime-minister’s rhetoric to level up the country and build build build,” will be reconciled with the reality “that public coffers have been significantly diminished as a result of spending on the pandemic. If it means there is less capital for capital projects to be funded, will there be a move for revenue funded projects?”
In the wider international arena many organisations, including UN agencies such as the United Nations Economic Commission for Europe, are exploring the potential role PPPs could have helping lower-income countries develop their economies in a way that is compatibility with the UN’s Sustainable Development Goals. Recognising the inadequacy of the traditional PPP model, ideas of ‘People-first Public-Private Partnerships’ are receiving attention. As well aiming to promote social justice and platforming people’s well-being, these would designed around the highest standards of environmental sustainability.
What lawyers do
Law firms typically represent private companies through a ‘special purpose vehicle’ (SPV) established to build, own and operate the end result of the project. The project company is a joint venture between various ‘sponsor’ companies. An SPV could also be partially owned by a government body or banks. One report by The European Services Strategy Unit likened an SPV to ‘a spider sitting at the centre of a web of contracts. It is the body through which loans for the PFI project are raised and through which the service providers under the PFI contract are secured.’
“In a typical PFI deal, you will be advising funders on the associated risks of the project,” Ritchie tells us. “However, as a lawyer, your role can vary greatly depending on who you are representing. For example, you could be advising the public sector on the whole procurement process and helping them to appoint a private sector entity. If acting for the private sector, you will be supporting clients who are in the bidding service bid competitively, as well as helping to review and draft documents to support their solutions for the tender that is out to the market.”
While trainees and junior associates will typically remain generalists, “the more you progress the more you will develop expertise in a particular sector,” Ritchie explains. “In terms of PFI or PPP, that could be specialist knowledge in transport infrastructure, expertise in the health sector building hospitals, or other areas such as defence or waste. You end up having expert knowledge on all the risks associated in that area.”
Like corporate, it’s a very transactional area of law. “However, unlike an M&A deal which might operate overt short bursts of time, PFI/PPP deals typically operate over much longer time tables,” Ritchie explains. She adds that “good team building skills are essential as you will be negotiating with a range of different parties over extended periods.” There’s also a huge amount of documentation involved so a “deep understanding of the key contracts and the relationship between documents is also key.” For more information on Projects Law, please see our practice area overview page.