Lawyers to the projects industry
projects
bulletin
Summer 2004
contents
Outsourcing - how to make
it work
1
Update to the PFI contract
guidance
4
The Freedom of Information
Act - the right to know
6
Using PPP to upgrade
8
infrastructure in the New Europe
Who to contact
8
Welcome to the
Summer edition.
This issue contains articles on
outsourcing, PFI
standardisation, freedom of
information and infrastructure
in the enlarged EU.
Outsourcing - how to make it work
"Outsourcing" is all about the transfer
to third parties of functions previously
performed in-house. Where
successful, it can be a means for
businesses to improve their
profitability as well as the quality of
performance of the function being
outsourced.
Outsourcing has now developed into
its own service industry. Intellect UK
estimates that the business process
outsourcing ("BPO") market in Europe
will be worth $64bn by 2005 (source:
intellectuk.org). Ovum estimates that
in the UK alone, the BPO market is
expanding at the rate of 30% per
year and will be worth £11.9bn by
www.ngj.co.uk
2005 (source: GrowingBusiness.co.uk).
The number of deals being
outsourced to foreign jurisdictions
with cheaper labour costs is also
increasing dramatically. Gartner (the
market research company) has
predicted growth of 40% for offshore
outsourcing in Europe (source:
FT.com). India is currently the leading
provider of offshore outsourced
services, with China as the rising star.
Interestingly, the state of Florida in the
US is also a popular choice with its
concentration of educated retirees
willing to work for relatively low cost.
Although the commercial incentives
supporting outsourcing are very
attractive, these incentives will only be
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exactly what is expected of you by
the customer and to formulate a
competitively priced service
proposal. Due diligence is also
particularly important where
employees of the customer will be
transferring to the service provider
under the Transfer of
Undertakings (Protection of
Employment) Regulations 1981
("TUPE"), to determine the terms
and conditions of employment
that will attach to these transfers.
realised if the outsourcing is carefully
planned, managed and executed. As
anyone who has been involved in an
outsourcing will know (whether as a
customer or service provider), they are
generally very time-consuming and
complex arrangements to structure
and carry out. Set out below are some
useful practical tips that will assist you
to deliver a successful outsourcing
deal and avoid some of the pitfalls,
whether you are a customer or service
provider.
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Due diligence
Due diligence is the key to
establishing a solid foundation for
any successful outsourcing. As a
customer, the decision to
outsource a particular business
function should follow a detailed
assessment of that function and
its associated cost, importance and
value to the business. Due
diligence also allows customers to
identify the benefits they seek to
gain by outsourcing and to
develop a clear and detailed
output-based specification that
can be used as the basis for
assessing the proposals of
potential service providers. Due
diligence should also be carried
out into prospective suppliers, to
ensure that they can deliver to
their promises and fit in with the
customer's culture.
As a service provider, it is essential
to know what you are getting into
when agreeing to take on a
particular business function for a
customer. By carrying out detailed
due diligence of a customer's
business and the function to be
outsourced, you will be in a much
better position to understand
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Get your ducks in a row
It is important to make sure that
you have access to key personnel
during the planning stages and for
the life of the outsourcing project.
Ensure that you have internal buyin to the proposed outsourcing
and that key personnel are
committed to devote their time
and energy to the project.
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Onshore, offshore or
nearshore?
The explosion of the internet,
development of faster and
cheaper telecommunication
services and the increasingly global
economy mean that for some
business functions it is cheaper to
outsource to a country other than
the one in which your business
operates. The jargon is relatively
simple once explained: 'onshore' is
use of a service provider in your
own country; 'nearshore' is use of
a service provider in a nearby
country (eg one that shares a
border); and 'offshore' is use of a
service provider in a geographically
distant country.
India, the Ukraine, the Philippines
and increasingly China are popular
choices for outsourced services.
The availability of cheap, skilled
labour in these countries is
continuing to attract an increasing
number of companies outsourcing
their R&D and/or core CRM
(customer relationship
management) functions.
Careful thought needs to be given
to the business and legal
implications of offshore/nearshore
outsourcing and to balance these
against the economic benefits.
For example, ensuring the security
of customer records may be an
area of major concern, particularly
for financial institutions
considering service providers in
countries such as India that do not
have the same high levels of
protection for personal data as
exist throughout the EU.
Summer 2004
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Heads of Agreement
Many outsourcing contracts are
derived (in part) from proposals
submitted by potential suppliers as
part of a competitive tender
process. The eventual selection of
a supplier follows detailed
discussions with prospective
tenderers. Once this process has
been completed, it may be helpful
for the customer and chosen
supplier to sign a non-binding
Heads of Agreement setting out
the core commercial terms of the
deal and the key performance
obligations that the supplier must
adhere to.
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Minimise document
delay
Most lawyers (and their clients!)
will be familiar with the frustration
that comes from a deal being
delayed because sufficient
attention has not been given to
the schedules of a contract. In
outsourcing contracts, the
schedules often contain detailed
lists of assets (eg hardware and
software), TUPE transferring
employees and their entitlements,
and third party contracts to be
transferred from the customer to
the supplier. To ensure that
contract signature is not delayed
while these schedules are agreed,
it is sensible to prepare them early
on in the negotiation process.
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management process which is
then incorporated into the
outsourcing contract, to allow the
parties to document variations to
the outsourced services and the
nature of their relationship.
Depending on the scope of the
project and the parties'
relationship, it may be necessary
to have different levels of change
management - for example, a
process requiring higher levels of
authorisation where the financial
implications of a change exceed a
specified threshold.
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Dispute escalation
Outsourcing relationships are
generally long-term - most
outsourcing contracts run for at
least 3-5 years and, in some large
public sector deals, may continue
for 20 years or more. Like any
union, differences of opinion or
grievances are likely to arise
during the term of the outsourcing
relationship. It is therefore sensible
to establish a framework for
dealing with disputes that can be
adapted to suit the nature of the
dispute. For example, the majority
of disputes could be dealt with
initially by structured discussions at
a 'steering committee' level with
representatives from both parties.
If the dispute is not resolved, it
could then be escalated to senior
management, failing which it
could be referred to a formal
alternative dispute resolution
process (eg mediation or expert
determination). Parties will
generally agree that taking a
dispute to court should be a step
Change management
Outsourcing projects are rarely, if
ever, static and it is not
uncommon for disputes to arise as
a result of scope creep or poor
management of change. It is
important that the parties agree a
carefully thought-out change
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of last resort. However, it is
important not to restrict either
party's right to seek interim
injunctive relief where necessary.
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The after-life
When an outsourcing contract
comes to an end, either due to
expiry of the contract term or
termination, the involvement of
the parties does not usually just
end there. The customer will
generally be keen to ensure that
there is a smooth transition of the
outsourced services either back to
the customer or to a new service
provider. Outsourcing contracts
therefore usually provide for the
outgoing service provider to assist
in ensuring that this transition
takes place smoothly, perhaps by
continuing to provide the services
for a transition period and/or
transferring to the new service
provider relevant assets, contracts
and employees used in the
delivery of the services. It is to
both parties' advantage to ensure
that an exit management plan is
formulated well in advance during
the term of the contract, rather
than waiting until the end when
the relationship will not be as
strong as it was in the beginning
and there is little incentive for the
supplier to assist the customer in
transferring the service.
Update to the PFI
contract guidance
HM Treasury has published an update
to "Standardisation of PFI Contracts"
(SoPC). The latest edition of SoPC is
Version 3 - since 14 May 2004 it is the
version procuring authorities have
needed to use.
HM Treasury has reaffirmed its
determination that there should be
"more vigorous enforcement of the
standardised PFI contract across both
the public and private sectors". It
states that the process of
standardising PFI contracts helps
spread best practice, improves PFI
procurements across the public sector
and significantly reduces the length
and cost of the procurement process.
HM Treasury encourages the
development of sector specific
contracts (such as in education, health
or in waste management for example)
where doing so spreads best practice,
reduces bid costs and shortens
timescales for the closing of deals,
provided that such contracts are
consistent with Version 3 of SoPC. In
some areas there are no sector specific
contracts though, such as areas where
there are fewer PFI contracts being
put into place. In assessing the
compliance of contracts with Version
3 of SoPC, HM Treasury is advised by
Partnerships UK.
The key changes from Version 2
(dated September 2002) are
summarised opposite:
For further information contact
Michael Webster tel: 020 7360 8101
email: michael.webster@ngj.co.uk
or Sarah Stone tel: 020 7360 8153
email: sarah.stone@ngj.co.uk
4
Summer 2004
Replacement of subcontractors
The procuring authority may consider providing some relief against project termination and
accrued performance points where project services are being provided by just one or two
sub-contractors and the project company needs to replace one of its sub-contractors for
poor performance.
NGJ comment: This change allows greater flexibility in this area because it will make it
easier to appoint a replacement sub-contractor.
Retendering following
contractor default
The Authority may not go out to retender following a project company default if there is
no liquid market for similar PFI projects or if the senior lenders have stepped into the
project agreement and are using their reasonable efforts to find a buyer for the contract.
Permitted Borrowing
The requirement for senior lenders to step into a failing project in order for any additional
senior financing to be counted as Permitted Borrowing (and taken into account in various
termination payments) has been removed. This has been replaced by a mechanism which
provides that a capped amount of "rescue refinance" may be provided by senior lenders
(and may affect compensation paid in various termination scenarios - but not on contractor
default). However any distribution of profits made to shareholders at any time when such
additional monies are outstanding shall serve to reduce the amount of any termination
payments payable on such terminations.
NGJ comment: This also introduces some flexibility - where additional borrowing is
permitted it is counted in determining compensation to the contractor on non-fault based
termination - this may help in procuring additional finance.
Permitted Borrowing
tests of uninsurability
The test which a contractor must satisfy - to demonstrate that other companies facing
uninsurability would cease to operate - has been amended.
NGJ comment: Contractors now need to show that their reaction to a risk becoming
uninsurable is prudent (taking account of a number of factors) before a process for dealing
with it with the Authority (which may involve the Authority self-insuring) is initiated. This
change is helpful since it removes a test which would be very hard to satisfy in practice.
Overall comment
The changes since Version 2 are of
interest and in some cases are
important. However, the substantial
body of SoPC is very largely
unchanged and the issuance of
Version 3 appears to be partly
motivated by the wish to reaffirm the
principles behind SoPC - that central
government, and specifically HM
Treasury, should lead a co-ordinated
approach to PFI documentation.
However the new guidance has
caused some confusion in practice
about the status of existing published
sector guidance which does not
currently reflect SoPC Version 3.
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The Freedom of Information Act the right to know
Introduction
information it will routinely make
available, how the information can
be obtained and whether there is
any charge for it. The purpose of
the publication scheme is to make
sure that a significant amount of
information is readily available to
members of the public without a
request being tested under the
Freedom of Information Act each
time; and
The Freedom of Information Act 2000
is coming into force, step by step, with
significant pieces of it becoming
effective on 1 January 2005. Public
bodies in the UK are getting ready.
This article summarises the Freedom of
Information Act and considers its
effect on PFI contracts.
The purpose of the Freedom of
Information Act is to promote a
culture of openness and accountability
amongst public authorities by
providing people with rights of access
to the information they hold. These
rights are meant to facilitate a better
general understanding of how public
authorities carry out their duties, why
they make their decisions and how
they spend public money.
The Freedom of
Information Act
The Freedom of Information Act
applies to all recorded information
held by English, Welsh and Northern
Irish "public authorities" (although
access to environmental information
will be dealt with according to the
provisions of the Environmental
Information Regulations and access to
personal data will continue to be dealt
with under the provisions of the Data
Protection Act 1998). It does not
apply in Scotland, which has its own
legislation on this area.
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The Freedom of Information Act
creates two key obligations:
each public authority must
adopt and maintain a publication
scheme, setting out details of
J
from 1 January 2005, every person
will have a "right to know", by
being entitled, after making a
request for information to a public
authority, to be informed by it in
writing whether it holds the
information and, subject to an
appropriate fee being calculated
and paid, for such information to
be communicated to such person
within 20 working days.
Who is in charge?
The Freedom of Information Act places
responsibilities on public authorities in
dealing with information. The
Secretary of State is required to issue a
code of practice to public authorities
on how to deal with information
requests and a further code of practice
is required on the keeping of records.
The Information Commissioner (who
was previously called the Data
Protection Commissioner) enforces and
oversees the Freedom of Information
Act (as well as the Data Protection Act
1998). The Freedom of Information
Act provides for an appeal and
enforcement mechanism whereby any
person may apply to the Information
Summer 2004
Commissioner for a decision as to
whether the public authority dealt
with a specified request correctly.
Exemptions to the right to
know
There are two categories of
exemptions; absolute and qualified. If
a provision confers an absolute
exemption there is no duty for a public
authority to consider the public
interest test. The right to know does
not apply under absolute exemptions
in various situations, including:
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to personal data (which is
governed by the Data Protection
Act 1998);
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to information which has been
provided to the public authority in
confidence and disclosure of which
could lead to litigation; and
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where the information can be
reasonably accessed by the
applicant by other means.
If a provision confers a qualified
exemption, the Freedom of
Information Act requires the public
authority to consider first whether or
not the exemption applies and,
secondly, if the exemption does apply,
the public authority must consider the
public interest test. The right to know
does not apply, so long as the public
interest in disclosure is outweighed by
the public interest against disclosure,
in various situations, including:
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where the information is protected
by legal professional privilege; and
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where the information constitutes
a trade secret.
How will it affect PFI
contracts?
Whilst the Freedom of Information Act
encourages the release of information,
there are many important exemptions.
Nevertheless, the change is significant
because the presumption will be that
information needs to be disclosed by
public authorities unless a specific
reason can be advanced that it be
withheld. That is the opposite of the
present situation, where there is no
general obligation to disclose
information.
law, and so will not provide an
exemption from disclosure under the
Freedom of Information Act.
Accordingly, PFI participants in current
and future contract negotiations may
want their confidentiality clauses
tightened up so that confidentiality
will be protected. Confidentiality
clauses may also be extended by
private sector parties stating what they
believe constitutes information that
would, if disclosed, be likely to
prejudice their commercial interests, so
as to assist any reliance on the trade
secrets exemption.
Sometimes the public sector may
consider that it has a legitimate
interest in getting on with its public
functions rather than being diverted by
a fear of being open to greater
scrutiny and criticism. Nevertheless,
Mr Richard Thomas, the Information
Commissioner, has warned that the
Freedom of Information Act will affect
all PFI and government outsourcing
contracts.
The private sector, which has become
considerably involved through PFI in
fields which were previously the
exclusive domain of the public sector,
may in future seek to rely on public
authorities using the exemptions based
on confidentiality and trade secrecy so
that their commercial positions are
protected. As noted above, the
exemption based on confidentiality
provides that there is no right to know
where information has been provided
to the public authority in confidence
and disclosure could result in litigation.
Information provided in confidence will
usually be protected by a
confidentiality clause. However the
confidentiality clause typically included
in a PFI project agreement allows
disclosure if disclosure is required by
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Using PPP to upgrade infrastructure in the New Europe
On 1 May 2004, ten new Member
States joined the European Union,
being Cyprus, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovakia and Slovenia.
Many of these new Member States
will need to make substantial
investments in infrastructure following
their accession to the EU.
Most of the new Member States are
examining various forms of public
private partnership ("PPP") as one way
of securing the necessary investment.
The principal attraction of PPP to the
governments is the provision by the
private sector of capital - either
through equity invested in the project
company, or through debt raised by
the project company from banks or on
the bond markets. This additional
source of funding serves to
supplement whatever is available by
way of direct government funding at a
central government or local
government level or from institutions
such as the EBRD or EIB.
The UK lead is being followed - PPP is
well established here as a way of
delivering services to the public. The
usual structure is some form of design
build finance and operate contract
Who to contact
For further information contact
Christopher Causer, Carolanne
Cunningham or Stuart Borrie
christopher.causer@ngj.co.uk
carolanne.cunningham@ngj.co.uk
stuart.borrie@ngj.co.uk
8
("DBFO"), under which either central
government or local government
enters into a long term contract with a
private sector provider. The private
sector provider raises finance and then
designs, builds and operates a facility
for a 25 or 30 year period. The private
sector provider is paid a monthly fee
by the government entity for delivering
the services. In some sectors an
alternative "concession" approach is
followed, where the private sector
partner is granted a legal entitlement
to levy charges on the general public
in return for building and operating
the facility. Many European legal
systems already have in place a code
of law which permits concessions of
the latter type.
Nicholson Graham & Jones has ties
with firms in all the new Member
States and is able to give advice
through these contacts on legal issues
facing businesses in the enlarged EU.
We have also prepared (together with
our law firm partners in the new
Member States) an EU accession
document, which describes the ten
new Member States, discusses the
impact of EU accession and includes
information on projects. It is available
on request.
For UK companies interested in
promoting PPP projects, it will usually
be necessary to find a local partner in
the same sector as a way into the
market. The local partner should be in
a better position to understand which
level of government has the gift of a
particular project and to establish the
real chances of the project receiving
political backing and access to
funding.
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
020 7648 9000
Internationally a member of GlobaLex
The contents of these notes have been
gathered from various sources. You
should take advice before acting on any
material covered in this projects bulletin.
© Nicholson Graham & Jones 2004