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Summer 2005
Projects Bulletin
Building schools for the future will it work?
Amongst the many criticisms levelled
at PFI/PPP in the past there have been
two issues which are very relevant to
schools: first, that PFI is a procurement
method which only works for the
development of new facilities (and for
most local authorities, the concern is
maintaining the current school estate
rather than constructing brand new
ones) and second, that PFI projects are
one-offs and neither the public sector
side nor the successful consortium
reaps the benefits of working together
in the future.
Building Schools for the Future
("BSF") is a programme which the
Government has developed with a view
to addressing these problems. Unlike
conventional PFI projects, which
traditionally cover one school or a group
of schools in one local education
authority ("LEA"), the intention of BSF
is that a programme should be
developed covering the complete
secondary school estate across a wide
geographical area. The geographical
area can be one LEA, in the case of a
big city such as Bristol, or a
combination of smaller LEAs so as to
produce a big enough mass. Following
a competitive tender, the procuring
authority appoints a strategic partner
which is known as a Local Education
Partnership or LEP. In legal terms, the
LEP is set up as a limited company
with three shareholders - typically the
awarding authority as to 10%,
Partnerships for Schools (see below) as
to 10% and the balance of the shares
will be held by a private sector partner.
The private sector partner is usually a
consortium involving a major contractor
with interests in school building, a
financial institution and possibly also
operators or FM companies.
Partnerships for Schools (“PfS”) is the
national body which has been set up by
DfES to roll out the BSF programme
and, as part of that programme, to take
investment stakes in LEPs around the
country. The Strategic Partnering
Agreement ("SPA") between the
awarding authority and the LEP
normally has a term of 10 years and as
explained above it covers all works
required in connection with the
secondary schools in the relevant
geographical area over that period.
There may be some exclusions: for
example, existing schools which are the
subject of a previous PFI project may
be "carved out" from the deal, but in
theory it extends to all significant
capital works (and this may go down as
low as £10,000) to any school in the
secondary school estate. Not all such
capital projects will be suitable for a
full blown PFI style procurement.
Accordingly the Strategic Partnering
Agreement provides that work may
Welcome to the Summer Edition of
the Projects Bulletin.
This edition includes articles on
various topics. Should you have any
questions about them please find our
contact details on page 8.
Contents
Building Schools for the Future will it work?
1
Update on procurement
3
Financing techniques
6
State Aid
8
Who to contact
8
Projects Bulletin
alternatively be placed by the LEP
with a contractor using an agreed form
design and build contract, or there is an
agreed form ICT contract for procuring
services from ICT providers. There
may be other standard form
procurement documents agreed
between the parties as part of the initial
appointment process. The private
sector partner to form the majority
shareholder in the LEP is selected in
the first place following a competitive
procurement and that competition is
based on a bid for a number of schools
utilising a PFI structure.
Although the private sector has to date
embraced the BSF concept with some
enthusiasm, there are a number of
issues of principle which still give cause
for concern.
First of all, there is the somewhat
uneasy relationship which may apply in
relation to the organisation, control and
management of the LEP which is
simultaneously a customer of/supplier
to the awarding authority and an
investment vehicle in which the
awarding authority has a stake. The
majority private sector shareholder will
carry the majority of the risk but does
not have complete control over the
LEP and the agreed form of
documentation offers many
opportunities for (not to put too fine a
point on it) interference by PfS and/or
the awarding authority. Moreover
there are restrictions on the profits
which the LEP may retain.
Second, the BSF arrangements confer a
degree of exclusivity at LEP level - the
LEP will be given the first option to
carry out projects within the secondary
school estate during the life of the SPA.
However there are some exclusions
from this LEP exclusivity and in
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addition it may be difficult to create
appropriate opportunities for subcontractors of the LEP. Supply chain
companies that support the initial bid
will be interested in securing the lion's
share of the ongoing construction work
throughout the life of the SPA but the
market testing and benchmarking
arrangements built in to the SPA and
Shareholders Agreement are such that
it may be difficult for the LEP to
"guarantee" an appropriate share of the
work to sub-contractors. The LEP's
obligation to offer value for money to
the awarding authority conflicts with its
desire to push work down to its agreed
supply chain.
Third, and this is principally a concern
on the public sector side, many
authorities are reluctant to grant
exclusivity (even subject to exceptions)
to one private sector partner over the
whole of their school estate for a ten
year period. This is significantly
different in effect from entering into a
PFI project for one or two schools, with
the balance remaining under LEA
control This concern alone has led to a
number of LEAs dragging their feet
when looking at BSF. Some authorities
have also decided to pursue a nonprofit making approach as an
alternative to the limited company
LEP. However as a programme BSF
appears here to stay and it is viewed by
the Government as equivalent in scope
and reach to LIFT in the health sector.
Christopher Causer (ccauser@klng.com)
is a member of the Expert Group
advising the Minister for Schools on the
development of the BSF programme.
www.klng.com
Update on procurement
Public Procurement - update on developments in 2004/2005
New Public Procurement
Directives - 2004
The new Directives on public
procurement have been adopted by
the EU Parliament on 30 April 2004.
The first Directive relates to the
procurement of public works, services
and supply contracts by public
authorities (the Public Sector
Directive) whereas the second
Directive focuses on the procurement
of contracts by utilities in the sectors
of water, electricity, gas transport and
postal services (the Utilities
Directive).
The Directives replace the four
existing Directives that were adopted
between 1989 and 1993. The
commercial landscape surrounding
public procurement has evolved
considerably since the 1990's. The
nature and complexity of projects
procured by public authorities and the
level of technical sophistication
available to bidders in delivering
projects have increased as well.
The new Directives ensure the
liberalisation of the EU market and
effectiveness of best value for money
policies in public procurement by
simplifying the existing procurement
legislation, combining the rules for
works, services and supplies public
contracts in one text (instead of one
per type of contract works, services or
supply) and, finally, clarifying the
existing rules by adopting recent
developments in case law. The new
Directives can be found on the
European Parliament website:
www.europarl.eu.int.
The UK has 21 months to transpose
the two Directives into national law.
The UK Office of Government
Commence ("OGC") has organised a
consultation on the transposition of
the EU Directives in English law and
draft regulations were circulated for
comments. The approach taken by
OGC is to remain as close to the EU
text as possible, because "any
substantive departure would raise
questions that the UK was trying to
interpret the provisions to suit our
own circumstances".
Our recommendations and practical
tips for tendering following the new
Directives 2004 are:
For public authorities and utilities:
In the contract notice or the tender
documentation, expressly reserve
the right not to accept any bid
Retain drafting control on contracts
and ask bidders for mark-ups to
facilitate comparative analysis of
the bids
Keep another bidder in reserve
following announcement of the
preferred bidder
For private sector entities bidding for
public contracts:
Involve lenders early but monitor
due diligence costs of lenders'
advisers
Seek clarification of the tender and
bid documents as much as possible
Agree allocation of risk between
members of consortium
For lenders:
Due diligence on tender
procedure
Obtain warranties and sponsors'
indemnity on legality of award of
the contract
Unresolved issues for
contracting authorities and
private sector tenderers 2004
These issues have not been wholly or
partially addressed in the new
Directives:
Sub-contracting by private sector
tenderers who have been awarded a
PPP contract
Abnormally low tenders
Reimbursement of bid costs
Protection of intellectual property
and confidentiality.
We will develop these issues and their
implications for PPP and PFI
contracts in our next edition of
Projects Bulletin.
Group or "in-house" awards 2005
The participation of the contracting
authority in the capital of a legally
distinct company in which a private
undertaking participates as well
means that the company is subject to
the procurement rules. The ECJ
held that an entity's private law status
does not preclude it from being a
contracting authority, in a judgment
dated 11 January 2005 (City of Halle,
11 January 2005, Case C-26/03).
It was clear under the "Teckal" rule
that, in-house awards exempt public
authorities from the application of
procurement rules when contracts are
awarded to their own administrative,
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Projects Bulletin
technical or other internal services
(Teckal srl v City of Viano, 18
November 1998, Case C-107/98).
Following the City of Halle decision
of January 2005, the procurement
rules apply when a contracting
authority awards a contract to a legally
distinct entity in which it has an
interest, whether the involvement of
the private sector in the same entity is
minor or substantial.
"Alcatel" and effective
remedies - 2004/05
The Remedies Directive of 1989 has
not been updated (yet) but the EU
Commission has launched a
consultation on the possible
amendments to the Remedies
Directive. The intention of the EU
Commission is to enhance the
effectiveness of procurement
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remedies by making them available
against contracts entered into in
breach of public procurement
legislation. Contracts entered into in
breach of public procurement rules
are set aside until the infringement is
rectified. Under the Remedies
Directive decisions that are in breach
of procurement rules must be set
aside or annulled. To be successful a
claimant has to prove that he had a
good chance of success and would
have won the contract if it were not
for the breach of procurement rules.
The now famous "Alcatel" ECJ case
law (1998) provides that, while nonfinancial remedies such as contract
annulment or setting aside of illegal
decisions were available until the
contract was concluded, the fact that
the only available remedy afterwards
being the allocation of damages did
not comply with the EU Directive on
remedies (Alcatel Austria and others,
28 October 1998, C-81/98). Claimants
must be allowed to challenge a
decision to award a contract before it
is concluded. This is proven difficult
in circumstances where award and
conclusion of a contract take place
simultaneously. Under English law,
once the contract has been concluded,
the only remedies for infringement of
procurement rules is damages.
English law does not provide for
interim relief or relief at the trial
either.
The UK has failed to take account of
the Alcatel case law so far. OGC is
currently consulting on a mandatory
standstill period of ten days allowing
judicial review either between the
decision to award a contract and the
conclusion of the contact (first
option), or following the conclusion of
www.klng.com
a contract (second option). The OGC
published a consultation paper on
possible amendments to English law
in December 2001 the proposed
amendments failed to impress the EU
Commission who issued a reasoned
opinion against the UK (31 March
2004). OGC went back to the
drawing board and is now asking for
views on new amendments to English
law.
In the recent English case Holleran a
private sector entity was excluded
from a tender procedure for which it
had failed to apply for selection in the
relevant time set out by the tender
document (Holleran v Severn Trent
Water, QBD, 4 November 2004). The
judge held that Holleran were to bring
proceedings "promptly", meaning
within a few days of the alleged
infringement, and not within the
three month-period of judicial review.
The judge refused to allow for an
extension of the time allowed to bring
proceedings.
According to the EU Commission, the
possibility to challenge a contract
award would allow a more effective
and fairer access to public
procurement. The risk, however, is
that unsuccessful tenderers with very
little chance to win the award would
use the available remedies to put an
halt to the formation of public
contracts by making vexatious claims.
Will public authorities be prepared to
compensate successful bidders from
vexatious challenges?
In the case Commission v Germany
dated 3 March 2005 (Commission v
Germany, C-414/03), the ECJ decided
that the public authority when it is
made aware that a contract had been
concluded in breach of the
procurement rules must take steps to
terminate the contract. Here a
German local authority had awarded
and concluded a waste disposal
contract with a private company
without advertising the contract
tender procedure. The public
authority claimed that terminating the
contract would result in the private
entity claiming damages. The EU
Commission sanctioned the lack of
action in response to the
infringement. Article 2(6) of the
Remedies Directive requires to fully
bring procurement infringements to
an end by terminating contract
already entered into.
Green Paper on PPPs - 2005
Watch this space! The EU
Commission had organised a
consultation on the need for further
legislation on the award of PPP
contracts. The results are published
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Projects Bulletin
on www.europa.eu.net. We are
awaiting for the EU Commission's
response, expected this Autumn.
Freedom of information and
public procurement - 2005
On 1 January 2005, the Freedom of
Information Act ("FOI") came into
force in England and Wales. It is now
compulsory for public authorities who
receive requests from members of the
public for copies of documents and
contracts to authorise the
communication of these documents.
This includes tender documents such
as reports on candidates applying to
qualify for a public contract, analysis
of tenders, award decisions and
contract terms. In other words,
members of the public may now have
access to commercial information and
details of deals and terms of contract
entered into by public authorities,
such as price and bonding
arrangements, unless they agree with
the contracting authority at the
formation of the contract to treat these
information as confidential and
exempted from the FOI.
Future issues will keep readers
informed of the progress on these
initiatives.
If you have any queries on any aspect
of Public Procurement, please contact
Sophie Charveron
(scharveron@klng.com) .
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Financing techniques
Current financing techniques both in
domestic PFI transactions and
international project finance bear only
conceptual resemblance to those which
were a feature of the early projects
carried out under the Private Finance
Initiative in the UK in the mid 1990s.
On an international level, many project
finance structures, for example in the
case of power projects, were largely
formulaic. Project finance has become
more sophisticated and more complex
since then on both a domestic and
international level. This trend is likely
to continue for the foreseeable future
and at a more rapid pace.
There are several reasons for this. In
addition to the related key factors of cost
and risk allocation, while the deals on a
national and international level have
been much bigger than previously in
capital value terms, there have been
fewer deals. This in turn has led to
increased competition among a large
number of players for fewer deals. This
has contributed to ingenuity and
innovation in terms of structures which
in turn have contributed to maximising
margins, mitigating risks and squeezing
costs.
On the domestic PFI front, key
financing innovations include the credit
guarantee scheme ("CGS") and the
prudential borrowing code ("PBC"), both
initiatives of HM Treasury. The CGS is
designed to reduce the cost of traditional
PFI financing while maintaining the
same risk-transfer matrix and
advantages. Under this regime, bank
loans are replaced by government gilts,
which in turn are guaranteed by
monolines and banks. HM Treasury
monitors continually the credit
worthiness of the latter and should there
be a fall in the guarantors' rating, the idea
is that that guarantor would find a
replacement at its own cost. While the
CGS has encountered resistance from all
sectors of the market, the first deal to be
financed in this manner has now closed
and the CGS is likely to be used in other
projects in the near future.
These structures are in addition to the
myriad of permutations and
combinations in both conventional
syndicated lending and in the bond
project finance market, where innovation
has come into its own in the "insurancewrapper" product market and particularly
in the use of indices in determining
bond yields.
Under the PBC, local authorities can
borrow directly from the Public Works
Loan Board or from a private lender
without specific permission from central
government as long as the local
authorities can prove that they have the
capacity to make repayments. This does
mean that the Local Authority can act as
sponsor and owner in a project and only
tender for an operator and turnkey
construction contractor. The structure
does mean also that there is no technical
or legal due diligence from the lenders'
advisers and therefore increases the onus
on the local authority in this respect. It
is also likely to have the effect of
increasing costs at the refinancing stage.
It is more likely that the PBC will be
used only to partially fund projects (as it
is unlikely that local authorities will be
able to borrow sufficient funds to fully
finance a project using this mechanism.
This will lead to increased partnering at
a finance level and also to co-fundings in
these projects.
www.klng.com
On an international scale, the most
significant amount of innovation and
creativity has been in the transport sector
and in the renewable energy sector.
With the imperative for new sources of
energy has come the need to look at
other financial solutions to finance that
procurement. Given the scarcity of
these assets and their financial
characteristics, demands are being put on
financiers to come up with more cost
efficient solutions than conventional
financing methods can offer.
Portfolio financings, mezzanine
financings, leasing and tax based
financings and private equity all feature
in increasingly layered project
financings. Export credit finance
agencies also often have a role to play.
In emerging markets, many projects are
financed through local institutional and
commercial bank investments where the
local currency interest rate risk is an
issue. In this context, it is likely that
local interest rate risk will soon replace
foreign currency devaluation risk on
projects, (unlike in the case of projects
with large international debt tranches
where foreign currency devaluation is
often a key risk). Multilaterals are
looking to mitigate this risk with devices
such as special reserve accounts that
smooth out fluctuations over a long term
project, thereby encouraging long term
investments in markets which would
otherwise be unattractive funding
propositions for such a term.
Developments in the secondary project
finance market have revolved around
private equity, securitisations and
derivative products and often through
structured transactions, such as
collateralised debt obligations.
financings will continue. On an
international level, the additional
costs imposed under the Basel
Capital Accord on banks funding
infrastructure projects and the
"Equator Principles" to which an
increasing number of banks are
committing and on a national level,
developments in partnering,
proposed accounting changes for
transactions under the PFI and
mandatory treasury requirements for
financing competitions in all PFI
transactions are all likely to result in a
completely different financial
landscape when it comes to project
financing structures in the future.
If you have any queries on any aspect
of FinancingTechniques please
contact Carolanne Cunningham
(ccunningham@klng.com)
Current developments suggest that
developments and innovation in project
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Projects
Travellers’Bulletin
Checks
State Aid - Commission announces new action plan for next 5 years
State Aid is a critical part of the
European Union's competition policy.
The EC Treaty prohibits any aid
granted by Member States or through
state resources in any form whatsoever
which distorts competition by favouring
certain firms or the production of certain
goods in so far as it affects trade
between Member States. A number of
exceptions are allowed and the
Commission can approve aid which is
notified to it and which fulfils specified
public interest criteria. Aid is frequently
granted by Member States in the
context of major projects and the
funding of such projects should always
be closely scrutinised for compliance
with the State Aid rules. If an unlawful
State Aid is identified, the Commission
will usually order the relevant Member
State to recover the money from the
persons or persons to whom it was paid.
The Commission has recently
announced a comprehensive reform of
the State Aid rules and procedures, to
take place over the next five years. The
Commission has recognised that with
the enlargement of the European Union
from 15 to 25 Member States, and the
proliferation over the years of different
rules and guidelines, the time has come
for a new framework within which the
State Aid rules can be applied and
enforced. The key aims of the
Commission's Action Plan are:
. to ensure that aid should be more
targeted so that it delivers economic
efficiencies, more growth and jobs,
social and regional cohesion within
the European Union, improves public
services, and encourages sustainable
development and cultural diversity;
to apply a more sophisticated
economic approach so that financial
aid which has less of an effect on
competition and which is not
generally available on the financial
markets can be approved more
swiftly;
to improve procedures for
enforcement, increase transparency of
decision making, and to accelerate
approval procedures (e.g. by
decreasing the number of aids which
require notification for exemption);
to increase co-operation between
Member States and the Commission
Who to Contact
especially as regards notification of
proposed aids and the recovery of
illegally granted aid.
The Commission has published its plans
for consultation and invites comments
before 15 September 2005. The plan
can be found at:
http://europa.eu.int/comm/competition/s
tate_aid/others/action_plan/
As regards the next steps, the
Commission aims this year to reform the
Regional Aid Guidelines. The
Commission will also be consolidating
the various Block Exemption
Regulations, which allow Member
States to grant aid without having to
notify them to the Commission, by the
end of 2006.
Future issues will keep readers
informed of the progress on these
initiatives.
If you have any queries on any aspect of
State Aid please contact Neil Baylis
(nbaylis@klng.com).
Kirkpatrick & Lockhart
For further information contact the following
Nicholson Graham LLP
Christopher Causer
Trevor Nicholls
Carolanne Cunningham
110 Cannon Street
ccauser@klng.com
tnicholls@klng.com
ccunningham@klng.com
London EC4N 6AR
T: +44 (0)20 7360 8147
T: +44 (0)20 7360 8177
T: +44 (0)20 7360 8160
www.klng.com
Stuart Borrie
Kevin Greene
David Race
sborrie@klng.com
kgreene@klng.com
drace@klng.com
T: +44 (0)20 7360 8155
T: +44 (0)20 7360
T: +44 (0)20 7360 8106
T: +44 (0)20 7648 9000
F: +44 (0)20 7648 9001
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