PFI Seminar Tuesday 15 th May Newcastle | Leeds | Manchester 2 - - PowerPoint PPT Presentation

Newcastle | Leeds | Manchester

PFI Seminar

Tuesday 15th May

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Housekeeping

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Newcastle | Leeds | Manchester

Melanie Pears Tim Care

Your speakers

Lucy Probert David Taylor

Partner | Head of Public Sector Solicitor | Public Sector Partner | Public Sector Solicitor | Public Sector

Newcastle | Leeds | Manchester

Agenda

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1.00pm Registration & refreshments 1.30pm Presentations 3.00pm Refreshment break 3.30pm Presentations resume 5.00pm Networking and close

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Introduction

Melanie Pears

Newcastle | Leeds | Manchester

Case Study 1 – Insolvency of a subcontractor

Lucy Probert and David Taylor

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The Facts » In 2000, the Home Office entered into a PFI contract with Chainsandbars Ltd ("Project Co") to design, build, finance and maintain 4 prisons in the north of England. » The prisons were completed and opened in 2002. » Project Co subcontracted the maintenance and other FM Services (including cleaning and catering) to a specialist provider, Porridge FM Co Limited ("FM Co"). » Earlier this year, FM Co's parent company issued a profits warning and there are rumours in the press that creditors are pushing for both companies to go into liquidation.

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Possibilities for FM Co – things that might happen

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» Scenarios for FM Co » Parent Co insolvent but FM Co continues » FM Co into administration » FM Co into liquidation » Administration » Contract between FM Co and Project Co continues subject to Project Co's rights to terminate the FM Contract » FM Co run by administrators for benefit of creditors » Administrators attempt to sell as a going concern. » Replacement of FM Co » Liquidation » Contract with Project Co terminates automatically » FM Co ceases to exist – requires a replacement FM Co….. BUT » The Carillion situation (more on that later….) » What can the Home Office do?

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Contract Structure

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» Contract is between the Home Office and Project Co, not FM Co. » Project Co is on the hook for the delivery of the Services subcontracted to FM Co » Provisions for relief / remedies on FM Co insolvency? Unlikely…. » Sole remedy clause - Performance Regime » Steps Home Office can take are against Project Co » Contract is between the Home Office and Project Co, not FM Co. » Project Co is on the hook for the delivery of the Services subcontracted to FM Co » Provisions for relief / remedies on FM Co insolvency? Unlikely…. » Sole remedy clause - Performance Regime » Steps Home Office can take are against Project Co Home Office Project Co FM Co

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Replacement of a subcontractor

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Project Co's only real option » SOPC clauses » Project Co should bear the risk of poor performance by FM Co as part of risk transfer » Home Office should not be disadvantaged by change and performance regime should not be interrupted » Impossible to find a replacement if very minor default could cause a termination so…. » Relief for a short period » Bedding in period in Payment Mechanism? » Cancellation of warning notices and accrued SFPs » Limited to x no of times under the Contract » Consent of the Home Office required – reasonableness obligation, technical competence and financial standing

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Failure to Provide the Services

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» i.e. what happens if FM Co is liquidated and /or the administrators fail to provide the Services in the meantime…. » Project Co's problem! » Consequences for Project Co under the Payment Mechanism – no relief » Warning notices and accrual of Service Failure Points » Possible grounds for Project Co Event of Default i.e. termination » Possibilities for the Home Office » Is Authority Step-In available? » Contingency planning by the Authority » Recovery of costs – but remember sole remedy » Take services in house? i.e. Authority replaces FM Co (require consent

• f Project Co)

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Tricky bits

12 12

» Price / tendering exercise » No renegotiation – material variation » Staff – applicability of TUPE? » Pensions » Transfer of assets / equipment / licences » Continuity of services » Risks to the Home Office if they take Services in house » TUPE » Transfer of liability / risk » Balance sheet treatment

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The Carillion situation

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» Liquidation » BUT government intervention » Unique situation » Contracts run in short term by Official Receiver » Contracts are being sold » TUPE may not apply but some staff are transferring » Fettering the rights of the Authority to object? » Affecting the risk transfer?

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The Home Office – some advice

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» Monitor closely and discuss with Project Co » Enforce the Performance Management Regime to ensure access to remedies » Consider contingency arrangements / step in should FM Co fail without warning » Insist on adherence to consent

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Questions?

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Lucy Probert Solicitor | Public Sector

lucy.probert@wardhadaway.com 0191 204 4286

David Taylor Solicitor | Public Sector

david.taylor@wardhadaway.com 0191 204 4247

Newcastle | Leeds | Manchester

Case Study 2 – Resolution of construction defects

Lucy Probert and David Taylor

Newcastle | Leeds | Manchester

The Facts

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» In 2007 the Local Authority entered into a PFI contract with Make Schools Great Again Ltd ("Project Co") to design, finance, build and maintain 10 schools. » Each of the schools followed the standard BSF PFI contract. » The schools were built by the construction subcontractor, Construction4U ("BuildCo") and were mostly completed in 2009. » They have since been maintained by the FM subcontractor, GrangeHill FM Co ("FM Co"). » Large cracks have appeared in the ceilings of one of the schools. » What can the LA do?

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Contract Structure

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Local Authority Project Co Build Co FM Co

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Remedies against Project Co

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» Breach of the Authority's Construction Requirements » Breach of maintenance obligations » Breach of Availability Conditions » Rectification of construction defects » Performance Regime - Deductions and Service Failure Points » Availability of retrospective Deductions » Failure to Report » Sole remedy clause – availability of damages? » Termination? » Project Co is a non-asset holding shell company

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What can Project Co do?

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» Against Build Co and FM Co for breaches of subcontracts » Pass down of performance regime » Pass down of defect rectification obligations » Limitation of liability clauses? » Limitation?

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Multi – party dispute

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» Dispute Resolution Procedure » Availability of Court Action » Conduct of claims clauses » Involvement of subcontractors in proceedings » Confidentiality? » Dispute between the Project Co Parties » Where do the failures sit? » Not the Authority's problem – remedies are against Project Co

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What should the Authority do?

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» Report all defects to Helpdesk as soon as they are noticed!!! » Request information from Project Co – how long has it known about the defects? Should these have been picked up under maintenance? Has Project Co been carrying out maintenance as required? » Gather its own evidence – structural survey? » Crystallise the dispute » Initiate the Dispute Resolution Procedure » Consider withholding disputed amounts » If ultimately agreed or determined that disputed amount should have been paid, pay forthwith with interest » Consider any claims under collateral warranties – protective issue of claims against subcontractors? » Consider step in

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Questions?

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Lucy Probert Solicitor | Public Sector

lucy.probert@wardhadaway.com 0191 204 4286

David Taylor Solicitor | Public Sector

david.taylor@wardhadaway.com 0191 204 4247

Newcastle | Leeds | Manchester

Case Study 3 – Removing Services from a PFI

Melanie Pears

Newcastle | Leeds | Manchester

The Facts » In 2008 Northern Hospital NHS Foundation Trust entered into a PFI contract with Healthy Hospitals Limited ("HHL") to design, finance, build and maintain a new £300m hospital. » The FM services include a full range of soft services, including cleaning, patient and visitor catering, portering and pest control. » The contract followed the then DoH standard form. » The soft FM services are all sub-contracted to Soft and Stable FM Co. » The Trust needs to instigate major efficiency savings and believes that it can achieve some of its target by taking the cleaning, catering and portering back in-house. » In order to achieve that it will have to vary the PFI contract. » What are the issues?

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Issues » Procurement/substantial modification » Variation process » Rights to object » Position of the FM sub-contractor » Getting the price right » TUPE and pensions » Interface issues » Due diligence » Business and assets transfer » Varied documentation » Trust and third party costs and waiver fees

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Procurement » What was included in the original procurement documents » Is there a substantial modification? » Regulation 72 of the Public Contracts Regulations 2015 » Risk of challenge » Outsourcing

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Variation Process

» Trust notice » HHL response » Pricing » Deed of Variation » Rights to object » Health and safety » Law » Revocation of consents/new consents » Adverse affect on project operations » Departure from good industry practice » Change in the essential nature of the project » Any limits in the PFI contract » Payment Mechanism impact » Changes to areas and weighting » KPIs » Methodologies

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Position of the FM Sub-contractor » Fixed term sub-contract » Market testing » Compensation for early termination

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Getting the Price Right » HHL to be 'no better no worse' » Maintain HHL's rate of return » Follow the financial model » Risk premium/risk transfer » Role of the funders

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TUPE and Pensions » TUPE should apply to most (if not all) staff » Second generation transfer – New Fair Deal » Where are the staff going – Trust or NewCo? » What does the PFI contract say? » What does New Fair Deal say? » Due diligence » Pension contributions and deficits » Categories of staff – fragmentation » Original NHS employees – broadly comparable » New FM staff in private pension plan » New FM staff in auto-enrolment scheme e.g. NEST

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Interface Issues » What impact can 'soft' services have on the PFI? » What protection does the PFI contract have already? » Why would HHL want more protection?

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Questions? Tim Care Partner | Public Sector and Academies

tim.care@wardhadaway.com 0191 204 4224

Newcastle | Leeds | Manchester

Case Study 4 – Building a Large Extension

Tim Care

Newcastle | Leeds | Manchester

The Facts

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» Same PFI contract as case study 3. » This time the Trust needs to build an extension because, as part of the STP, all emergency services will be moving from another local hospital and the Trust is expanding its cancer services. » The Trust will finance the capital costs, but wants the additional life-cycle and maintenance costs to be wrapped up in the PFI. » If this is done by way of a variation, what are the issues?

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Issues

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» Procurement/substantial modification » Variation process » Rights to object » Pricing » Construction risks » Payment mechanism impact

Newcastle | Leeds | Manchester

Variation Process

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» Trust notice » HHL response » Pricing » Deed of Variation » Rights to object » Health and safety » Law » Revocation of consents/new consents » Adverse affect on project operations » Departure from good industry practice » Change in the essential nature of the project » Any limits in the PFI contract

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Pricing

38 38

» HHL to be in 'no better no worse' position » How does the Trust get best value?

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Construction Risks

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» Delay events » Insolvency of contractor » Liquidated damages » Impact on existing FM services

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Payment Mechanism Impact

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» Existing FM services » Future FM services » Changes to areas and weightings

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Questions? Melanie Pears Partner | Head of Public Sector E: melanie.pears@wardhadaway.com T: 0191 204 4464

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Thanks for joining us

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