Private Finance Initiative - Treasury Contents

Written evidence submitted by Dr Yseult Marique, University of Essex


In recent years, "public private partnerships" (PPPs) and "private finance initiatives" (PFIs) have been used as long-term projects based on cooperation between public and private entities to deliver public infrastructures and services. Value for money (VfM) and risk allocation are commonly associated with PPPs/PFIs and their articulation of public and private interests. As highly tailored solutions to complex problems, PPPs/PFIs work as a global framework of agreement to integrate within one project a range of fragmented issues. Flexible articulation of the public-private relationships would result in a governance structure fitting the particularised circumstances of the PPP/PFI, supported by a relevant procurement and risk allocation. Public procurement requires the bringing together from the outset of the various parties involved in the delivery of the project over its whole duration. Risk management demands a fair degree of legal certainty. Therefore, a good understanding of the project specificities and of the various parties' interests is key to the success of their joint endeavour. It calls for distinguishing between different PPP/PFI structures to map the specific difficulties each structure involves. Such an approach would equip public bodies with a toolkit of strategies to define the circumstances in which a specific PPP/PFI structure may be used. Further steps are then needed: developing such a typology of PPPs/PFIs with legal or practical relevance, gathering the data needed to model the dynamics specific to each category, and ensuring that the gathered data are worked in the modelled typology.


1.1  The information and opinions expressed here result from a doctoral dissertation in law carried out at the University of Cambridge between 2006 and 2010 under Prof. Bell's supervision. The thesis ascertains the role of the law in public private partnerships (PPPs) on the basis of a comparison between England and Belgium. It draws on semi-structured interviews with PPP experts and on case studies. The London Underground PPPs, waste PFIs, BsF and accommodation PFIs illustrate English practice. The Oosterweelverbinding (a major failure involving a tunnel in Antwerp), Flemish and Walloon school PPPs and Aquiris (a water treatment plant in Brussels) illustrate Belgian PPPs. Belgian PPP players are major construction contractors such as BAM, Veolia or Suez. Finally, the thesis builds on information gathered during a research project carried out on behalf of a Belgian university (Université libre de Bruxelles) in 2009. This project was commissioned by the Belgian professional organisation for the construction industry and involved panel discussions with construction industry members.

1.2  As a lecturer in law at the University of Essex, I am developing my research in the area of public contracting. I am also a member of an advisory board to a PPP Chair at the Vrije Universiteit Brussel. Located within the Business School, the Chair is sponsored by Deloitte, Grontmij and Laga, which are involved in PPP consulting.


2.1  Complex projects

2.1.1  PPPs/PFIs are long-term projects based on cooperation between public and private entities to deliver public infrastructures and services. Value for money (VfM) and risk allocation are commonly associated with PPPs/PFIs. PPPs/PFIs integrate in one major project a range of contractual, financial or economic relationships. PFIs have two main features. The first feature is "the bundling of construction, maintenance and sometimes other services into long-term 'whole life' contracts under which private sector contractors are responsible for the construction and functioning of public buildings over many years, in return for annual payment by public authorities".[46] The second feature is the use of private debt finance. Depending upon the PPP/PFI considered, the public-private cooperation integrating these contracts in one project takes various forms.

2.1.2  Mainly used for infrastructure, PFIs involve design-build-finance-maintain-(operate) (DBFM(O)) contracts. Different purposes, such as urban regeneration projects, require, as well, the integration of similar contracts to PFIs. They beg interlinked legal questions in terms of procurement, risks or governance structures.

2.2  Management and control

2.2.1  Bundling a range of contracts into one project requires balancing management and control of the various relationships integrated into the project. PFIs "brought about perhaps the greater change to the construction procurement".[47] Indeed, since WWII, the construction industry has struggled with poor records regarding deadlines, budgets and endless disputes. This still applies today. PFIs/PPPs here bring two contributions to VfM: coordinating the supply-chain and challenging accountability for public spending. These contributions have their own drawbacks however.

2.2.2  First, PFIs help overcome issues linked to the organisation of the supply-chain for two reasons. The first reason is that the public client is free from coordinating the supply-chain: it may focus on its core tasks and the private contractor, the SPV (special purpose vehicle), bears the risks associated with organising the supply-chain in the construction phase of the project and the risks of construction delays. The SPV has to start servicing the debt at a specified deadline, while the public authority starts paying the periodic payments only when the project is delivered. The second reason is that PFIs integrate the construction and the operational phases of the project. Early integration in the project of all variables influencing the operational costs should save money in the long term. It also results in solutions in which risk management is improved.

2.2.3  Secondly, PFIs/PPPs develop a single point of contact, the SPV, for the public body. On paper, PFI/PPP contracts would formalise the breakdown of costs, performance monitoring and control of money flows by the public party. The accountability for public spending in PFIs/PPPs is subjected to various controls (from political bodies, the OGC, the NAO, taxpayers, external audit, financial institutions, competitors, etc). This blurs how VfM is assessed: the concrete contribution of these techniques to understanding PFI costs is unclear. However, as PPPs/PFIs are tailored to specific projects, they may provide a strategic overview of accountability lines. It may enable to map them realistically so as to streamline control. This would prevent accountability issues from jeopardising projects (cf. the Bicester Accommodation Centre).

2.2.4  In organising and controlling these complex relationships, problems also arise. Firstly, constructors and maintenance firms are not one single entity, so more parties need to be brought into the discussions, which takes time and money. Secondly, PFIs are rigid: any changes to match ever-changing public interests lead to over-expensive processes. Thirdly, ensuring proper accountability for public spending requires monitoring mechanisms, which are costly or difficult to fine-tune to the specificity of the projects. One way to lessen these drawbacks is to develop stronger cooperation—"partnering"—between the parties to PPPs/PFIs. Against this background, procurement, risks and governance structures are examined.


3.1  Introduction: planning

3.1.1  As procurement is a planning process, public authorities exercise discretion and make a series of choices. They may use this discretion in a creative way to reach VfM. Yet, they may also harm market players' and taxpayers' interests. Procurement regulations take a prophylactic approach and limit possible abuses of discretion. However, this approach reduces the ways in which discretion can be used to the benefit of all interests involved. When it comes to complex procurement, the question is how public authorities may be encouraged to use their much-needed discretion positively without being unduly constrained by technical complexity.

3.1.2  During the procurement, public authorities have to make decisions related to the future performance of the PPPs/PFIs. Many issues in contractual performance find their roots in bad planning. Yet, there are few indications about how the performance should be legally framed. European regulations are silent. Most English contractual arrangements rely on construction contracts models (eg NEC3), whose respective advantages are not definitively settled. However, the anticipated contractual governance influences the planning process, and the planning process affects the resulting contractual governance.

3.1.3  This mutual influence between planning and contractual outcomes is part of the many uncertainties public authorities face during procurement. Public authorities have to deal with information asymmetry with the bidders, limited numbers of market players, and ensuring competition, transparency, non-discrimination and the regularity of the overall process. Finally, they also need to work with the chosen contractor towards flexible solutions for supervening risks for the whole duration of the contract.

3.1.4  Public authorities have to make their choices between different procurement processes available, with each their own advantages and drawbacks to ensuring cooperation in PPPs/PFIs.

3.2  Competitive dialogue

3.2.1  Competitive dialogue offers a procurement route for "particularly complex contracts", for technical, legal or financial reasons.[48] A dialogue is open once publicity has been released and expressions of interest received. The dialogue follows the process the public authority defined in its publicity and once the dialogue has been formally closed no further discussion may be held.

3.2.2  It requires the public authority to plan an informed strategy as it has to set out beforehand the various stages of the competitive dialogue. It gives bidders a fairly clear overview of the preparations needed for the whole process. The dialogue is open to any issues related to the project, which leaves space for innovation from bidders. Finally, this process enables the maintenance of equality between bidders.

3.2.3  This has proved to be difficult to implement. As it is a novel route, it may require more time for fine-tuning. However, some structural issues have been pinpointed. First, negotiations cannot be held with only one preferred bidder, which increases costs. Competition may drive prices down or improve the contractual terms. Yet, in the long-term, bidders whose bids have been kept instrumentally may withdraw. They also want to recoup the high costs of their bidding. If public authorities accept this claim, the overall costs of the project increase. If they don't, they may face legal challenges for violation of the procurement process. Procurement regulations are complicated enough to provide such grounds. The contracts may then be postponed. Secondly, bidders fear violation of confidentiality. Thirdly, once the dialogue is closed, no discussions may be held. This may cause trouble if the financial institutions involved require changes in the contracts for financing the project or granting more favourable terms.

3.3  Two stages - design and build under a restricted procedure

3.3.1  The restricted procedure enables the public authority to choose which private contractors it invites to submit tenders, once publicity has been released and expression of interest received. The basis for choice may not be discriminatory grounds and needs to have been published in the contract notice.

3.3.2  According to construction literature, this procedure is especially efficient in overcoming supply-chain problems as it favours partnering and collaborative working.

3.3.3  Public authorities may not discuss the contract with the bidders, but amendments to the contracts, albeit non-negotiable, may be included in the bids if the public authority has mentioned this faculty. The lack of discussion is problematic for complex projects, which require tailoring negotiated solutions. Furthermore, this procedure has to comply with EU procurement. First, the first stage may be used as negotiation towards the final contract, while such negotiation is not allowed under the restricted procedure.[49] Secondly, the second stage needs to respect competition. Therefore the first stage does not ensure that successful bidders get the contract at the end of the second stage, which may discourage bidders. France has tailored its own two-stage process to supplement European procedures. However, the ECJ ruled that the European procedures were limitative,[50] ending creativity.

3.4  Negotiated procedure

3.4.1  The negotiated procedure is open for utilities and under specific conditions in the classic directive 2004/18.[51] These conditions restrict its use to exceptional circumstances.

3.4.2  Negotiations are possible quickly with only one bidder. The public authority is in a weaker bargaining position however, which weakens VfM. It also requires due justification from public authorities. Competitors may successfully challenge the use of the procedure, the awarded contract may lose its effects, or financial penalties may be awarded against public authorities. Both sanctions result in wasted money.

3.5  Concessions

3.5.1  In concessions, public authorities grant private contractors the right to build an infrastructure or provide a service for which the users pay. Because the remuneration comes from the public, the contractor bears the commercial risks, and not the public authorities. However, financially free-standing PFIs awarded through concessions in the 1990s have been bought back by public authorities (eg Skye Bridge) or involved in public subsidization, challenging the choice of "concession" as a procurement route.

3.5.2  Service concessions in theory do not involve public money and therefore are not subject to the formalities of European procurement but only to Treaty principles such as transparency and non-discrimination on grounds of nationality. However, the ways in which these principles have to be respected are unclear.

3.5.3  Labelling a contract as a concession is tricky. First, choosing the lighter tendering process of concession is problematic when it results in an arrangement falling within the public procurement regulation: the procedure is invalid. The competitive dialogue was introduced to avoid this. Secondly, public authorities often partly subvent these projects to lessen contractors' risks. Yet, this may change the legal qualification. Thirdly, it is tricky to assess the risk transfer linked to the remuneration beforehand. The ECJ recently judged that what matters is that "the supplier assumes all, or at least a significant share, of all the operating risk faced by the contracting authority, even if that risk is, from the outset, very limited on account of the detailed rules of public law governing that service."[52] This may not solve all issues of categorisation. Further evolution may follow a 2010 consultation by the European Commission.

3.6  Conclusion

3.6.1  The suitable procurement route depends upon the project features, which may or may not enable cooperation. Skill and familiarity with the process also bear on the success of the chosen route.[53] Unprecedented procurement litigation has recently appeared,[54] making it even more important to choose an appropriate route. It implies that any procurement has to respect strictly procedures. The ultimate decision regarding the regularity of any creative technique to attain VfM lies with the courts.


4.1  Risk identification, allocation and management demand legal certainty: the law shapes solutions to risks (eg frustration in contracts) and takes risks into account (eg public procurement), or risks may arise from challenges/disputes against the PPP/PFI, or between the parties, or from contractual fragmentation in the networks of contracts bundled in PPPs/PFIs. Here some brief points highlight the connection between the law and risks.

4.2  Construction literature underlines joint risk management and partnering as important for success in construction projects. Yet, partnering has a legal drawback: it lacks enforceability when parties need it, ie when they cannot reach an agreement. Partnering help manage supervening risks but it becomes a risk when it no longer works.

4.3  The law plays a role in allocating risks, through contract law, joint venture arrangements or organising SPV separation from its shareholders. In case of financial failure of the PPP/PFI, the law may provide direct or indirect answers. For instance, the legislation sometimes makes it clear that the ultimate risk-holders are the public authorities. Legislation may impose minimum requirements in service delivery. If the public authorities want to discontinue the service provided by the PPPs/PFIs, PPP/PFI users may be partially protected through legal techniques such as legitimate expectations. All this result in public authorities having to bear the ultimate legal risks and costs associated with the PPP/PFI failure.

4.4  The law may impose either confidentiality or transparency in PPPs/PFIs. Both relate to information/data regarding risks in PPPs/PFIs and their costs. This contentious point[55] also highlights the lack of methodology for monitoring risks and VfM in PPPs/PFIs. In France, an "évaluation préablable" is legally mandatory at the start of the procurement process[56] In England, the NAO has developed a matrix but its use and practical result are both uncertain. The Gateway Process may have built its own methods, but access to their reports is currently uncertain. Legal challenges have managed to gain some information but this is by no means systematic. Because of this lack of data,[57] the necessary in-depth understanding of PPP/PFI dynamics required for modelling public procurement and risk management is so far based on uncertain assumptions. This represents a crucial risk for developing PPPs/PFIs.


5.1  Clear-cut recipes for PPPs/PFIs clash with the need for PPPs/PFIs to be tailored to particularly complex issues and the uncertainty surrounding available data. To define in what circumstances PPPs/PFIs may be suitable for the delivery of services, a possible thinking path would be to design a couple of PPP categories on the basis of the specific risks mainly connected to a given project and their possible evolution over time. This would at least give a starting point for filling in the data gaps and a general direction/strategy for designing PPPs/PFIs and governance structures interfacing public and private interests. Different criteria may be used to develop such modelling. One approach would hinge upon the relationships between cooperation and trust within the overall governance structure.

5.2  First, PPPs/PFIs may be market-driven: they focus on services bought from private contractors with no legal connections to end-users of the public services (eg defence, accommodation PFIs). The structure may be based on commercial arrangements to ensure VfM. Attention would be focused on ensuring suitable practical monitoring techniques and reinforcing trust between the parties

5.3  Secondly, PPPs/PFIs provide intricate services/infrastructures where both the public and private sectors have to cooperate in the effective delivery of services/infrastructures to end-users. PPPs/PFIs offer a point from which to adjudicate between competing demands. The governance structure needs to define clearly which party is responsible for which risks in the delivery of the service itself and clarify possible conflicts of interests, to promote trust. The dispute settlement mechanisms developed in construction contracts do not apply between the public and private parties, but they do between the SPV and its supply-chain. These two levels need further articulation to strengthen cooperation.

5.4  Thirdly, PPPs/PFIs may rely on joint ventures. So far, the various institutional and legal provisions needed to ensure an environment of trust and cooperation between parties have been external to specific PPP/PFI projects as they have been developed at a scheme/programme level (eg BsF). The extent to which the general level may be translated directly into specific projects require further fine-tuning and experience, especially regarding the possible conflicts of interests jeopardizing trust in PPPs/PFIs.


6.1  Cooperation between public and private actors is needed to deliver public services and infrastructures. PPPs/PFIs provide spaces for articulating public and private commitments and for maturing/aligning them in complex cases. Project structures matching specific circumstances need to embrace a range of possibilities, with each their own tailored advantages and dynamics. The procurement environment is currently changing as the European Union is considering a range of issues impacting on PPPs/PFIs (public procurement, concession). Legal risks are uncertain due to partnering and transparency/confidentiality questions. Governance structures are evolving. Only fragmented information is available regarding all these points, mostly drawn from patent failures, limiting the relevance of lessons to be drawn. More systematic data are needed to refine our understanding of the strengths and weaknesses of PPPs/PFIs.

6.2  To model governance structures appropriate to PPPs/PFIs and their specific circumstances, further stages must be defined: fine-tuning a typology of PPPs/PFIs with legal/practical relevance, gathering the data needed to model the dynamics specific to each category, and ensuring that the gathered data are fed back into the typology. Developing such an approach to PPPs/PFIs would maintain their flexibility and allow for building on their ability to work as a platform for the public and private sectors in sharing their respective strengths, and, most of all, creativity.

April 2011

46   SCEA, Private Finance Projects and Off-balance Sheet Debt (63-1 HL 2009-10) para 3. Back

47   P Hibberd "New Procurement Routes of Little Benefit" (2010) 21 8 Cons Law 23. Back

48   Public Contracts Regulations 2006 reg 18. Back

49   J Barber and S Jackson, "Pre-construction Services Agreement - Early Lessons from Experience" (2010) ConsLJ 182. Back

50   ECJ, Commission v France (C-299/08), 10 December 2009. Back

51   Public Contract Regulations 2006 reg 13 and 14. Back

52   ECJ, Wasser- und Abwasserzweckverband Gotha und Landkreisgemeinden (WAZV Gotha) v Eurawasser Aufbereitungs- und Entsorgungsgesellschaft mbH (C-206/08) 10 September 2009. Back

53   P Hibberd "New Procurement Routes of Little Benefit" (2010) 21 8 Cons Law 23. Back

54   D Thomas, "Contactors Challenge Tender Awards with Notable Success" 2009 (4/2) Cons LI 30. Back

55   Veolia ES Nottinghamshire Ltd v Nottinghamshire CC 2010 EWCA Civ 1214; 2011 EuLR 172. Back

56   Ordonnance n°2004-559 du 17 juin 2004 sur les contrats de partenariat s. 2 recently modified. Back

57   SCEA, Private Finance Projects and Off-balance Sheet Debt (63-1 HL 2009-10) para 38 ff. Back

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Prepared 10 August 2011