5.35 There has been recent experience of the impact of contractor difficulties on PFI projects. Unlike traditional procurement, the public sector has considerable additional safeguards in PFI to ensure that assets and services continue to be delivered without the public sector incurring additional costs. However, procuring authorities should be cognisant of the effect that the financial structure may have on contractor distress. The financial structure may also affect the ability of the contractor to continue to deliver following a sub-contractor distress event. Not least, a very highly geared SPV company will have less risk capital with which to affect a resolution to adverse conditions or unforeseen costs, and thus will need to structure its contractual arrangements so as to pass the vast majority of its construction and operating risks down to its principal construction contractor and operating sub-contractors.
5.36 Procuring authorities may take some comfort from the due diligence which senior lenders (if involved/ PQQ) will conduct, but should conduct their own evaluation of the robustness of the project vehicle. Sub-contractors should be assessed for their financial standing (credit ratings and parent company guarantees may be relevant), against a backdrop of their criticality to the project and ease of replacement. This should be evaluated in the context of the ability of the Contractor to deal with a default by a sub-contractor. If the contractor has a good financial status, including access to increased funding and reserves, or has the benefit of performance bonds or letters of credit in the event of a sub-contractor default, this will assist the contractor in ensuring delivery despite a sub-contractor default. If the contractor is an SPV, the procuring authority should consider the management expertise available to the SPV and the extent of any residual risks held at the SPV level.
5.37 Once a view is formed on the robustness of each bid, this should be evaluated in the wider context of bid quality and price. It is possible for one bid to be cheaper in terms of the Unitary Charge but also more prone to failure and consequentially worse VfM. A high level of risk of failure of an SPV is unacceptable in any project.