Richard Dyton (Simmons & Simmons) and Nick Hopkins (KPMG) 16 January 2007

1. PPP/PFI terminology unravelled[or An idiot's guide to the curious world of Public Private Partnerships] Richard Dyton (Simmons & Simmons) and Nick Hopkins (KPMG) 16 January 2007

2. Introduction to the Private Finance Initiative • Part 1: Some Background • What is the difference between PPP and PFI? • What is PFI? • Terminology Quiz - 1 • Part 2: The Legal Framework • Basic contractual structure • Terminology Quiz - 2 • Principal documents • Treasury guidance • Part 3: Conclusion

3. Part 1: Some Background • What is the difference between PPP and PFI? • What is PFI? • Terminology Quiz - 1

4. What is the difference between PPP and PFI? • Is it: • A) Not a lot? • B) “F” and “I”? • C) That one is a general term for public private partnerships, the other a particular type of public private partnership?

5. The PPP Range PPP Conventional Procurement Outsourcing & FM Strategic Partnering PFI Leasing GOCO Joint Ventures Full Privatisation

6. Headlines Quiz • These are all headlines: • (A) “I.T. Hits The Fan” • (B) “Amey Amiss” • (C) “The Strange case of the Vanishing Hospitals” • (D) “The Great PFI Sell-off” • …from the Times, The Daily Mirror, Private Eye

7. Terminology Quiz - 1 • What does “PIN” mean and how does it fit into the PFI process? • A) Personal Identification Number - needed to access funding for the PFI • B) Pesticide Information Network - term only used in specialised agricultural PFIs • C) Prior Information Notice - initial formal announcement of the project • D) Project Identification Number - used to track each project throughout its set-up and operation

8. Terminology Quiz - 1 • What is the “OJEU”? • A) Official Journal of the European Union - publication in which new projects are announced • B) Orange Juice officially approved by the European Union for consumption in the course of a PFI • C) Original Jurisdiction of the European Union - regime under which approval for PFI projects must be sought

9. Terminology Quiz - 1 • What is the “ITN” in this context? • A) Integrated Testing Network - prototype scheme used to roll out and test the features of a PFI scheme • B) Invitation to Negotiate - discussions and negotiations with co- sponsors, contractors, banks and advisors for the preparation of a deliverable technical, commercial and financing solution • C) The evening news - used to catch up on the latest developments in the scheme • D) Identification Tasking and Networking - allocation of responsibilities between the parties at the outset and provision for interaction between the parties

10. Part 2: The Legal Framework • Basic contractual structure • Principal documents • Treasury Guidance

11. Basic Contractual Structure • Contractor usually a Special Purpose Vehicle • Significant up-front investment required • Equity is usually 10-15% of requirement • Lenders provide the remaining funding • Lenders rely solely on the project cashflows for debt servicing • Risk to cashflow is minimised by appropriate allocation of risk

12. (Basic Contractual Structure) Shareholders/Sponsors(Shareholders Agreement) Insurers Lenders(Inter-Creditor Agreement) Loan Agreement Equity Insurance policies/agreements Direct Agreement Direct Agreement Contractor (SPV) Construction Contractors AUTHORITY Construction Agreement Concession Agreement (may include Land transfer agreement or lease) OperatingAgreement Suppliers/ Subcontractors Possibly collateral warranties Suppliers/ Subcontractors Operations and maintenance Contractor

13. Terminology Quiz - 2 • What is a “Unitary Payment”? • A) One-off payment paid by the public sector for the provision of services by the concession holder. • B) Periodic payment paid by the public sector for the provision of services by the concession holder • C) Periodic payment paid by the project parties to their much valued legal and accounting advisors

14. Terminology Quiz - 2 • What is “Financial Close”? • A) The point at which all the contracts are signed by all parties involved in the project • B) The funder’s correspondence address • C) The point at which the final payment is made by the public sector to allow operation of the project to commence • D) The point at which the final payment is made by the public sector upon termination of the project

15. Principal Documents • Concession Agreement • Subcontracts • Direct Agreement • Loan Agreement • Insurance • Shareholders Agreement

16. Principal Documents • Concession Agreement • Service requirement • Payment mechanism • Acceptance of the Service by the Authority • Performance regime • Change mechanisms • Termination • Refinancing restrictions on Contractor

17. Principal Documents • Risk allocation • authority risks • contractor risks • operating risks

18. (Principal Documents) • Subcontracts • May be shareholders of the SPV • Construction Contractor • Operation and maintenance contracts • Authority must carry out due diligence • Authority’s rights under collateral warranties arise on termination of Concession Agreement

19. (Principal Documents) • Direct Agreement • Main purpose: sets out rights and obligations following threatened or actual termination of the Concession Agreement • Rights of step-in and liability during step-in • Rights to replace non-performing Subcontractors • Application of insurance proceeds to reinstate assets on total loss

20. (Principal Documents) • Loan Agreement • Restrictions on the Contractor to alter the Project’s risk profile • Cashflow requirements and ratio setting: breaches can trigger loan default • Term will be shorter than the Concession Agreement

21. Treasury Guidance • Standardisation of PFI Contracts, version 3 (April 2004) (SOPC3), as updated • Guidance for negotiating (and some required drafting) the Concession Agreement and Direct Agreement • Promotes consistency of approach and aims to reduce negotiating time • Assumes: • Contractor is an SPV • there is a construction phase and an operational phase • there is limited recourse debt

22. (Treasury Guidance) • Standardisation of PFI Contracts (continued) • SOPC3 must be followed, but: • assumptions above may not apply • large, complex and/or novel projects may need individual treatment • example drafting is not exhaustive • MoD standard contract consultation ongoing ( April 2005) • Principle of freedom of contract under UK legal system has allowed PPP contract structures to be developed in deals without requiring contract to conform to rigid legal structure • Document is continually reviewed and amended to reflect differences with market practice or current legislation

23. Part 3: Conclusion • The future of PFI

24. Future of PFI • Current projects are still in the early stages of operation • So far the National Audit Office has concluded that PFI deals have saved public money, but early schools deals proved to be more expensive than conventional procurement • Many governments overseas considering and beginning to use PFI • Considered to be an important UK “export”

25. PPP/PFI terminology unravelled[or An idiot's guide to the curious world of Public Private Partnerships]Richard Dyton and Nick Hopkins 16 January 2007