Global PFI/PPP Handback, Smart Cities and Green Renewal

Introduction

There is much discussion of the upcoming wave of PFI/PPP-based infrastructure projects in the UK and certain markets in Western Europe, the Americas and Southeast Asia, which are approaching expiry. In these projects, procuring authorities will either re-assume responsibility for, or retender the social, transport and energy assets delivered under them.

It is widely recognised that the handback process stems from the terms of the project agreement in each transaction. However, what is often lost in the detail is how all project participants, and not just procuring authorities, can play a role in shaping the renewal of existing infrastructure on terms which are:

• Socially beneficial to a tech-savvy society
• Practicable and administratively manageable for the procuring authority, particularly following years of public sector austerity in certain markets
• Capable of enabling profitable new opportunities for project sponsors and developers
• Sustainably financeable
• Optimised by thermally-efficient technology
• Politically and economically attractive to ESG-focused organisations and governments

In an era where net zero and post-pandemic infrastructure renewal are at the top of the agenda of many governments, we think it would be remiss for parties not to consider these aspects and how they have been implemented in legal and finance terms outside of PFI/PPP.

In addition, we see potential for incumbent project sponsors (and their lenders and sub-contractors) to take proactive steps to reshape existing opportunities to their advantage in those markets where infrastructure project development has traditionally been a task for the public sector.

Smart Cities and Green Renewal

PFI/PPP projects written in the 1990s and early 2000s came into a world where the true effects of climate change and the potential of the renewable energy revolution were in their infancy, battery technology was yet to make its debut in the automobile, accessing the internet meant dial-up rather than broadband or LTE/5G, streets and buildings were lit with incandescent lighting rather than LEDs, and logistics and distribution primarily concerned high-street retailers rather than home consumers. Almost all existing infrastructure was developed in this period and is now out of date.

Accordingly, when considering how, and indeed whether, existing infrastructure assets should be handed back to the public sector, a wholly different set of legal and technical questions and considerations are now relevant:

 

• Does the infrastructure still effectively serve the needs of its local community or could it be partly repurposed/reimagined for current socially-beneficial purposes such as low-cost housing, healthcare, education or perhaps to assist with logistics/distribution considerations in a particular area?
• Can and should the infrastructure be repowered by on-site renewable energy generation or alternatively connected by private wire to a new source of renewable energy?
• Is there an opportunity for the infrastructure to incorporate new EV charging, battery storage and hydrogen infrastructure?
• Does it make sense to install or upgrade high-speed fixed data/fiber connection or should fixed wireless be considered instead?
• Is there an argument in favour of offering infrastructure to deliver edge-based data storage and high performance computing (HPC) facilities within existing buildings and applying heat generated for local heat networks?
• Would existing buildings benefit from an insulation upgrade or should parts be rebuilt afresh?
• How can debt and equity financiers be incentivised to share in some of the upside, and bear some of the risk, by means of sustainability-linked finance?

 

Lessons learned

Experience in PFI/PPP projects which have already expired or which have terminated early, either voluntarily or as a result of a problem during the construction or operation phase, has demonstrated that:

 

• The contractual handback process varies considerably across contracts, with particularly early contracts not having any handback provisions at all.
• Certain circumstances, including where there is a dispute, can merit a process which is almost entirely outside the original contractual terms.
• While early termination might appear politically attractive on its face, procuring authorities can encounter difficulties resourcing project administration.
• Where handback is to be combined with retendering, there is a natural desire for the transition to the new project to be seamless, but in practice the timing pressure that it introduces can make it unavoidable to take shortcuts in structuring the retendered project.
• The costs of termination can be much higher than the procuring authority might originally have forecast, particularly owing to swap termination costs in the current low-interest rate environment, which looks set to continue for some time.

 

These and many other lessons give important context for all those approaching handback and retendering in the years ahead.

Legal detail

The considerations mentioned above will then feed into the detail in the existing project agreement and, if applicable, new procurement exercise, including:

 

• Which parts of the infrastructure are to be handed back to the procuring authority and what condition will those assets be in.
• Technical due diligence on the assets to be handed back and whether the procuring authority and indeed third parties can benefit/rely on this during both handback and retendering (to avoid a partial duplication of costs).
• Retentions of rights post-asset handback.
• Transfers of land, staff and technology.
• Adjustments to amounts payable and application of any residual value mechanics.

 

While part new-build, part refurbishment is nothing new in PFI/PPP, the extent of technological change currently taking place means that an even broader holistic appraisal of the legal, financial and technical options across the rebuild/refurbishment spectrum now needs to be undertaken of existing infrastructure.

Global application

While this note refers in part to the most common form of PPP in the UK, the Private Finance Initiative (PFI), very similar considerations apply to PPP projects approaching expiry or early termination globally.

Our global team of over 250 projects lawyers advises sponsors, commercial and institutional lenders, ECAs and/or multi-lateral agencies, corporates, funds, governments and governmental bodies on major projects internationally and is equipped to handle PFI/PPP Handback, Smart Cities and Green Renewal across most markets. We are located in the world’s major financial hubs and across key global regions in Western and Eastern Europe, the Middle East, Sub-Saharan Africa, Asia and the Americas.