Negotiating PFI, PPP, JV and Outsourced Service Delivery Arrangements David Blake dblake@arlingclose.com

Arlingclose has advised the London Borough of Tower Hamlets, on a series of innovative changes to the Poplar Baths Leisure and Residential Project, a multi-faceted regeneration scheme. This included advice on a debt refinancing package, subsequently expanded to include a partial handback of leisure services to the Council. The Council managed to negotiate this refinancing in a difficult market, achieving a reduction in payments with no disruption to services.

Increasingly, Arlingclose is being asked to provide advice on similar local authority contracts including Private Finance Initiatives, other forms of Public Private Partnerships and Joint Ventures and outsourced services. Often, the need for advice and engagement is driven by existing contractual arrangements but also changes in underlying economic conditions, developments concerning existing partners, political factors or a variation in service delivery requirements. The huge impact of COVID 19 and the measures adopted to control the virus has accelerated many of these issues, requiring a review, often urgent, of current outsourcing arrangements and relationships with those delivering services. This could apply to leisure services, outsourced back office provision, housing maintenance and management, technical services, and waste collection.

These contracts share many similar features, including relatively large values, complexity in terms of contractual and financial arrangements and key strategic importance in the delivery of essential services.  To add to the finance officer’s burden, these issues often come with a ticking clock including key break dates in contract documentation and financing.

Eversheds Sutherland provided legal advice to the Council on the Poplar Baths Project.  It regarded the innovative solution as a first in SOPC-based infrastructure (Standardisation of PFI Contracts).  While SOPC-based concession agreements include mechanisms to enable temporary solutions in the current COVID-19 environment, in many projects these mechanisms serve only to kick challenges down the line.  ES noted that there are several hundred PFI projects in the UK and countless others based on PFI, and Arlingclose’s experience from Poplar Baths will be of interest to those authorities looking to develop similarly favourable solutions - rather than letting potential challenging situations deteriorate over time.

While this can seem like a daunting task, below we set out a checklist of practical steps that can help ensure authorities achieve beneficial outcomes:

• Start early.
• Dedicate sufficient resource to the task, these negotiations often require action to be taken at relatively short notice. Set up a team that can commit to engaging with the issues, understanding the project financials, and challenging the assumptions when required.
• Bring in expertise. While this may be a “one off” transaction for the authority it is likely to be similar to other transactions in the sector. Knowledge of these projects, relevant pricing and potential solutions will add significant value. There may be areas including legal documentation, market benchmarking and project finance assessment where the authority needs external support.
• Make sure the parties involved stay engaged and decisions are taken within a reasonable time frame.
• Bring some energy! Ensure someone is responsible for driving the timetable, muscling into diaries and video calls to ensure the project stays on track.
• Be clear on objectives but be ready to be flexible when required. Experience suggests the solution envisaged at the outcome may be substantially different to the eventual agreement. There will usually be several different routes to achieve your end goal.
• Challenge the information you are given. Often modelling and financial analysis will be prepared by a third party, consider their role in negotiations and who they represent. Although project finance models can look complicated and daunting, they are, after all, just a series of interconnected calculations, be prepared to do some digging where required.
• Step into the shoes of those you are negotiating with. Understand their objectives, vulnerabilities, IRR hurdle rates and other stakeholder influences. It will help you understand when you can extract value.
• Understand market conditions, whatever the project. Know the current trends, pressure points and future expectations. What is driving activity? How does this fit in with your objectives? Where funding is to be reviewed, consider the current environment but appreciate the strength of local authority covenants and how regulatory influence across the banking sector can help you drive a better bargain on existing debt and hedging.
• Reflect on the project’s performance to date – is it good enough? In some projects, amounts routinely paid by authorities to service providers have been too high because deductions have not been properly calculated and applied.  Factors can include construction defects such inadequate fire stopping or potentially dangerous electrical installations and ongoing operational or performance failures.
• Investigate the accounting implication at an early stage, so you can be sure any restructuring or change of ownership delivers expected outcomes.

The COVID 19 pandemic and implications of “Lockdown” have thrown up many challenges for local authorities with outsourced and arm’s length service suppliers. It may also deliver the opportunity to review these arrangements and negotiate new deals that bring a degree of stability to service delivery and revenue savings too.