The private finance initiative has suffered a barrage of criticism. Yet for lawyers, it is fast providing an attractive market in which to do cutting edge work, says Stephen Ward
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Tim Steadman, head of the construction group at global law firm Clifford Chance, says the private finance initiative (PFI) has suffered for too long from an image problem. He maintains that the deals were tarnished politically because the government was forcing them on people without properly arguing the case in favour.
Mr Steadman says: ‘Detractors came up with some snappy but misleading arguments against PFI.’
This vacuum of positive argument was filled by a negative case of worse pay and conditions for workers, and examples such as hospitals where the windows kept falling out. Cynics accused the government of turning a blind eye to PFI’s failings because under public accounting practice it is a way to spend money without it appearing as public borrowing. In reality, Mr Steadman argues, now, if not always in the early days, PFI delivers the taxpayer better value for money.
Andrew Briggs, a PFI partner at City-based law firm Lovells, says the legal skills needed to sustain a PFI practice are a complex blend. ‘To advise on a PFI deal, it is important to understand the risk allocation and structure, the corporate structure of the private sector entity, to be familiar with the law of building and construction, to be able to advise on the banking contracts – and you need to be a banking lawyer to work on the financing and the security package.’
Some firms have lawyers working full-time on PFI; others have virtual teams working half their time on other work. Mr Steadman says: ‘The PFI clients tend to care more about the individuals they are getting rather than the organisational niceties. The law firm’s name is important, the price is important, the individual’s name is important. Whether the individuals have this or that departmental designation is neither here nor there to most PFI clients.’
The concept of PFI is straight-forward. Instead of building a school or hospital itself, a public body commissions it from a private contractor, which not only provides the bricks and mortar, fixtures and fittings, but maintains it as well, and charges the public body a pre-determined annual rent, commonly for 30 years. The contractor needs to finance the deal as well, so there are three clients – two private and one public, each with a law firm, around each deal table.
Like Mr Steadman, Steve Hughes, head of PFI and projects at Bristol headquartered Bevan Brittan, is not so much an apologist as an evangelist for PFI. ‘It’s pretty easy to criticise a lot of the early PFIs – it was a desperately immature market,’ he comments. But that has now changed. ‘The real value in a mature PFI market must revolve around better whole-life costings and better project management skills in the construction and management of buildings.’ The public sector just did not have these skills. ‘It was just “build as cheap as you can, then maintain it well as you can afford”,’ he says.
And Mr Hughes says PFI is not a static product, although on one level it is becoming routine with standardised documents. ‘It is always moving forward at the same time,’ he says.
The big example of innovation recently is NHS LIFTs (local improvement finance trusts) which set up a company to give the public sector a stake in the continuing management of a PFI project.
More than 40 LIFT companies are being set up across the country as joint ventures between Primary Care Trusts (20%), the private sector (60%), and the other 20% for Partnerships for Health, the government-backed organisation leading the roll-out of LIFT projects.
Mr Hughes says Building Schools for the Future, which will invest £22 billion over ten years on a similar model for education, is now exciting the market even more.
As PFI has grown and evolved, the profile of the law firms involved has changed as well, with PFI having become routine enough to take it away from the cutting edge of legal knowledge. In the early days the Magic Circle dominated, now the work has spread more widely to large national firms and sometimes beyond. Some smaller firms can make a niche, such as City-based Trowers & Hamlin in the social housing market, or west London firm Capsticks in health.
Mr Hughes says: ‘It is being seen as requiring less of the speciality the Magic Circle might provide. Quite frankly, a lot of is just the cost. They don’t want to pay £400 plus per hour.’
The latest example of cutting edge work, the type where Magic Circle firms are still involved, is the first of a new credit guarantee finance scheme for a £175 million wing at St James’s University Hospital in Leeds, built by a consortium owned by Bovis Lend Lease and HBOS, and funded by the government. Linklaters advised the Treasury and the secretary of state for Health; Clifford Chance advised HBOS; DLA advised the consortium Catalyst; and Newcastle firm Dickinson Dees advised the hospital. Instead of using private funding from the City, the government has for the first time arranged the debt itself. HBOS was involved because it will guarantee repayment of the debt facilities the government is offering to Catalyst.
Mark Swindell, head of project management at DLA, says the new model will save the Treasury money. But he cautions that there may be fewer organisations willing to see deals financed in this way than by conventional PFI, which will reduce competition and margins. ‘That may impact on how many of these deals get done in the future,’ he says.
Firms often represent different sides of the public private partnership. DLA works 50% for funders, a third for the consortium, and only 15% for the public sector. ‘We only do public sector work where it’s an innovative new area,’ Mr Swindell says.
Clifford Chance similarly works almost exclusively for the private sector side, either funders or contractors. ‘I think straddling can be quite painful. Lawyers are famous for arguing both sides of the same proposition, but it is tricky to spend the morning attacking a force majeure clause from the standard guidance, then spend the whole afternoon defending the same clause (in a different deal).’ But he concedes that it is clearly possible to spread across private and public sector. ‘Freshfields and Allen and Overy manage it,’ he says.
So does Bevan Brittan, quite deliberately. Mr Hughes says: ‘We try to keep 50% public and 50% private because we think that probably provides a good balance and the right level of skill. I think you need to work on both sides of the fence if you’re going to provide the right level of advice.’
Firms have moved into PFI from different areas. Bevan Brittan expanded into the private sector from its public sector roots. Eversheds – which still has a 60:40 public to private ratio – built its PFI expertise from a long-standing expertise in the local government market, Michael Grimes, a partner in its projects team, explains.
Pricing has grown more sophisticated as deals have become standardised and the concept of public-private partnership more accepted. The essence of the process is competitive tender, and law firms have had to become competitive with each other too. ‘The expectation of the market is that we should understand what is required and be ready to bear an element of risk,’ Mr Hughes says. This may be a capped fee, or an agreement that if a tender is unsuccessful, the law firm will not be paid for all the work done.
‘You have to recognise that the losing participants in a tender don’t want to be stuck with a large legal bill,’ Mr Steadman adds.
Stephen Ward is a freelance journalist
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