2.1
APPLICATIONANDIMPLEMENTATION
2.1.1 This guidance uses a range of approaches to issues from explanatory text to specific drafting.
Significant parts of the standard drafting are now sufficiently well established to be included in transaction documents without amendment. The drafting specified as required drafting (and accompanying definitions) in the following Sections should not be amended (except as envisaged by its accompanying footnotes and guidance notes):
REQUIRED DRAFTING TABLE
CHAPTER SECTION TITLE
Introduction 1 None
Assurance and
Standardisation 2 None
Duration 3.2.4 Duration of Contract Land Equipment and
Property Interests 4 None Public Sector Equity 5 None
Change in Ownership 6.1.2 6.1.3 6.4.3 6.4.7
Ownership Information
Change of Ownership definition Change of Ownership
Restricted Share Transfer Services and Service
Commencement 7 None
Late Service
Commencement 8 None
Maintenance Services 9.1.4
9.5.2 Maintenance Surveys Surveys on Expiry and
Termination 10.5.1 Surveys on Termination Flexibility and Change 11 None
Changes to Documents 12.1.1
12.2.1 Changes to Project Documents and Initial Financing Agreements No Increased Liability from Changes to Project Documents or Financing Agreements
Warranties and
Undertakings 13.4 Authority Warranties Supervening Events 15.2.1.2
15.2.3.9 15.3.2.1 15.3.3.5 15.4.1.1
Compensation Events – Purpose and Scope Delays in Service Commencement Due to a Compensation Event
Scope of Relief Events
Consequences of a Relief Event Scope of Force Majeure Change in Law 16.2.1
16.5.1 16.5.2 16.6.8
Definition of Change in Law
Discriminatory and Specific Change in Law General Change in Law
Allocation of Risk – Qualifying Change in Law Insurance 17.5.4 17.6.4 17.8.15 17.9.3 17.9.10 Reinstatement Economic Test
Insurance Premium Risk Sharing Schedule Uninsurable
2.1.2 In certain circumstances (e.g. on large, complex or novel deals), Authorities may still need to consider making changes to standard drafting, in order to address project-specific issues. In such circumstances, which should be limited, HMT (through Infrastructure UK) must be consulted.
CHAPTER SECTION TITLE
Authority Step-in 18.2 18.3.3 18.4.4 18.5.3 18.5.4 18.5.5 18.5.6 18.5.7 18.5.8 Authority Step-In
Step-In without Contractor Breach Step-In on Contractor Breach Right of Inspection
Inspection of Facilities
Contractor’s Reasonable Assistance
Access on Breach of Maintenance Requirements Health and Safety Requirements
Damage Price and Payment,
Availability and Performance Mechanism
19.10.2 19.11.6
Payment Indexation Payment Mechanism and
Monitoring 20 None
Capital Contributions 21.3.2 Capital Contributions Set Off and VAT 22.4 VAT on Payments Early Termination 23.1.2.1 23.1.2.4 23.1.3.9 23.2.2.1 23.2.3.3 23.2.4.1 23.2.7.6 23.2.8.9 23.2.9.11 23.3.1.1 23.3.2.2 23.4.1.3 23.4.2.3 23.4.3.4 23.5.3.3 23.6.2.2 Authority Default
Termination on Authority Default
Compensation on Termination for Authority Default Events Leading to Termination
Termination for Persistent Breach by the Contractor Rectification
Retendering Election and Liquid Market Retendering Procedure
No Retendering
Termination on Force majeure
Compensation on Termination for Force Majeure Prohibited Act
Corrupt Gifts and Fraud and Termination for Corrupt Gifts and Fraud
Compensation on Termination for Corrupt Gifts and Fraud
Voluntary Termination by the Authority Termination by the Authority for Breach of the Refinancing Provisions
Calculation and Payment of Early Termination Payments
24.4.1 24.5.3.3 24.5.4 24.7.2 Set-off on Termination Method of Payment Method of Payment Exclusivity of Remedy Treatment of Assets 25 None
Direct Agreement and Senior Lenders
26.6.1 Direct Agreement Due Diligence over Sub-
Contracts and Senior Lenders
27 None
Refinancing 28.8.1 Model Refinancing Provisions Bond Finance 29.3.5
2.1.3 This guidance applies to all PF2 contracts in England but does not apply to ICT projects.2 The
PF2 model is not suitable for Projects with a capital value of less than £50 million.
2.1.4 The HMT letter entitled “Implementation of Standardisation of PF2 Contracts”, published on
the HMT web site sets out the requirements for the implementation and enforcement of this guidance. In short however, relevant Private Finance Units should ensure that their model PF2 contracts for their own sectors comply with this guidance and are approved by Infrastructure UK. Any Authority which wishes to derogate from required drafting (as implemented in the relevant sector standard form) on any particular transaction must make the case for change, based on project-specific reasons, and get this approved by Infrastructure UK. While Authorities who need help in relation to this guidance can contact HMT (through Infrastructure UK), in the first instance Authorities should seek advice from relevant departmental Private Finance Units.
2.1.5 Where the Authority entering into the Contract is a local authority, some additional
considerations apply. For example, it is important that it has the necessary powers to enter into the Contract and that, in so doing, it is not fettering itself in the performance of its normal public duties. In addition the Contract should be certified under the Local Government (Contracts) Act 1997. Local Authorities seeking to enter into PF2 contracts may seek advice and assistance from Local Partnerships.
2.2 USEOFADVISERS
2.2.1 Experience of delivering PFI/PF2 contracts continues to demonstrate that early appointment
of suitably qualified advisers by the public sector is vital to success. These advisers should be required to work with this guidance as the basis for development of the Contract.
2.3 TERMINOLOGY
2.3.1 In this guidance, the public sector party buying the Service is referred to as the “Authority”
and its counterpart as the “Contractor”,3 with the overall scheme referred to as the “Project”. The agreement entered into between the Authority and the Contractor is referred to as the “Contract”. When all those with a financial stake in the Project are referred to then the expression “financiers” is used. Accordingly, the term “financing” refers to all types of financial interest in the Project. Definitions are provided, where relevant, in the relevant chapter, and are repeated for ease of reference, in Schedule 1 (Definition). Schedule 1 also contains a list of all acronyms used.
2.3.2 Guidance is contained in Sections, while actual contract drafting is contained in Clauses
(within the Sections). All contract drafting will be labelled as either “suitable/recommended” on the one hand or “required” on the other (see the required drafting table in Section 2.1.1 above).
2.4 ASSUMPTIONS
2.4.1 The following assumptions apply to the guidance, unless otherwise indicated:
the party contracting with the public sector is a special purpose company with Sub-Contractors providing the actual performance on its behalf;
the project involves some development or a construction phase, followed by an operational phase during which the Service is provided; and
the project is wholly or partly financed by limited recourse debt.
2 For ICT projects refer to Cabinet Office and to Local Partnerships’ ICT Model Services Agreement and Guidance at
http://www.localpartnerships.org.uk
3 The Contractor will be a special purpose company established by the CGU (in conjunction with the Authority) at the start of the procurement and the winning bidder will take an equity stake therein, as explained in Section 5 (Public Sector Equity).
2.4.2 These assumptions are relevant because: (a) that is how many PFI/PF2 transactions are
structured and (b) such a contractual structure is inherently complicated and thus large parts of the guidance will be particularly helpful to users.
2.4.3 Use of these assumptions does not mean however that one financial structure is preferable to
another. The suitability of various structures, including trade–offs between cost, complexity and risk, form part of the public sector’s overall appraisal of bidders’ proposals. Accordingly, no conclusion may be drawn in advance of such appraisal as to which form of financial structure is most appropriate. For guidance on corporate finance funding see Section 30 (Corporate Finance).
2.4.4 Where a project does not fall within the standard assumptions in Section 2.4.1 above
adjustments will be needed to required drafting provisions and Authorities should seek guidance at an early stage.