The UK’s Infrastructure Project Authority’s recent guidance for private finance initiatives/private finance 2 contractors (effective as of 2 April until at least 30 June 2020) on covid-19 emphasises an intention by the public sector to ensure service provision (and unitary charge payment) continuity, to the extent possible.
Contractors operate critical UK infrastructure, supporting vital public services, and this is recognised upfront.
The guidance states: “PFI contractors should consider themselves to be part of the public sector response to the current covid-19 emergency.”
The public sector expects to provide relief to contractors from contractual obligations in respect of issues arising from covid-19, but not in respect of underlying performance issues (the guidance suggests net availability payments from the previous three months should be used as a ‘performance baseline’) provided that contractors use “best efforts” to continue to provide services.
In doing so, the public and private sectors will need an open dialogue on increased costs.
“The role of PFI/PF2 contractors throughout the emergency could define future contracting models as governments around the world consider using PPP[s]”
Where increased costs are incurred, they should be on an open book basis, meaning contractors should keep records and minute decisions on expenditure carefully to ensure that decisions can be justified when scrutinised later in possible public audits or at the point of recovery on invoicing. General government procurement guidance should also be reviewed in this context.
PFI/PF2 contractors are being asked to stand shoulder-to-shoulder with their public sector partners on covid-19. It is an opportunity for the industry to continue to demonstrate publicly the tangible benefits that PFI/PF2 contracts can have to the delivery of public services.
What to focus on
However, in an environment severely disrupted by covid-19, what action might an asset manager take first?
In practice, it is unlikely to be that simple, and asset managers will most likely be managing a number of competing priorities, including:
■ dialogue with the contracting authority as to what impact covid-19 has had and is likely to have on the project (including any unavoidable costs and impact on any volume based revenues)
■ dialogue with the project company’s lenders (especially where the project in question contains demand risk)
■ contract review (further below)
On dialogue with contracting authorities, contractors should continue to review their business contingency plans and liaise with their contracting authorities on which contractual obligations and performance deductions mechanisms may be temporarily qualified, whether any cleaning or health and safety standards are required by the contracting authority to be temporarily increased, and how any temporary amendments or arrangements will be documented.
The detail of the guidance suggests that, where services provision is impacted by covid-19 despite the “best efforts” of the contractor, there should be a “temporary moratorium” on unitary charge payment reductions through performance deductions to allow the contractor to continue to operate and pay its workforce and suppliers.
In line with more general procurement guidance, the public sector is advised by the IPA to have regard to the net level of unitary charge payments over the previous three months (ie to potentially ‘wipe clean’ the impact of covid-19, but not performance issues existing prior to covid-19).
The guidance also highlights any temporary contractual relief or amendment agreed should be recorded in bespoke documentation. Although some standards may be temporarily qualified or reduced, it may be the case that cleaning/health and safety standards are temporarily increased (noting that the guidance emphasises that health and safety standards should not be reduced), with adjustments to unitary charge payments to address such increases as appropriate.
Whether increases could be retrospective (for example, to account for any previously, independently increased cleaning activity) is not detailed in the guidance and likely subject to commercial discussions.
“The public sector does not view covid-19 as a force majeure event”
Senior lender consent may well be needed for any contractual relief or amendment in respect of contracts and sub-contracts (as well as any repayment/cashflow/financial covenant issues arising under facility agreements) resulting from covid-19, and senior lenders may look to attach conditions to any consent, waiver or forbearance requested – including potentially distribution lock-ups and security/quasi-security maintenance/confirmations.
As applicable, asset managers should engage early with senior lenders (and, as applicable, sub-contractors), make timeframes clear to counterparties at the earliest opportunity, and proactively seek to understand what conditions senior lenders may seek to attach to any consent, waiver or forbearance.
On contract review, the guidance highlights the public sector does not view covid-19 as a force majeure event. Although this is likely to be the case (based on this guidance in this specific context), we nevertheless recommend that contractors, practising prudent and active asset management, review the precise drafting of the force majeure provisions in contracts and sub-contracts, and any other related relief, such as “excusing cause” concepts, any specific hardship concepts (as this related to any underwriting volume based income streams) or public emergency drafting in contracts.
We briefly note, subject to review of any relevant drafting, it is unlikely a contract will be frustrated by covid-19 as a matter of English law.
Forged through adversity?
The guidance notes that a set of FAQs will be developed (and that the guidance may be revised), and provides an email address for queries (firstname.lastname@example.org). As of 15 April, no FAQs have been released or revised guidance published.
PFI/PF2 contracts remain important components in a balanced infrastructure investor portfolio, so the guidance ought to be welcomed, providing clarity and emphasising the need for the private and public sectors to work together to deliver critical services during this national emergency.
The role of PFI/PF2 contractors throughout the pandemic could define future contracting models as governments around the world consider using public-private partnership models to deliver much needed infrastructure in key areas such as healthcare, education, water, wastewater and transport. This could become a partnership forged and defined through adversity.
Mark Richards is a partner and Alexander Hadrill is an associate at Bryan Cave Leighton Paisner