15. There are a number of parties involved in agreeing a PFI contract, including the public authority, the project company, its shareholders, potentially parent companies (who normally provide a guarantee), the subcontractors (who agree the specification, and sign sub-contracts to the PFI contract), and the lenders. Each will conduct their own due diligence on the contract.
16. Their due diligence will cover a number of aspects including the feasibility of the specification, construction risks, finance risks and operational risks, as well as the commercial and contractual terms.
17. PFI secondary market transactions of equity normally occur once construction is complete. As construction is considered to hold much of the risk of a PFI project, a project that is into its operational stage is often considered to be a safer investment. Consequently the equity becomes worth more and is attractive to a different type of investor seeking a lower but more constant return.
18. In theory, it is possible that a party to the contract might undertake less due diligence than they otherwise would if they believed both 1) that the secondary market provided them with an exit before risks will arise; and 2) that the buyers of equity in the secondary market would not undertake their own due diligence and will underestimate the risks involved in the project.
19. It is also possible to argue that where buyers of equity in the secondary market are securitising the equity and are highly leveraged, that they retain less exposure to the project's risks. But we have no evidence that this means that they have such little exposure that they are unconcerned about due diligence.
20. However, even if the secondary market were leading to the shareholders undertaking less due diligence, it is not clear what the effect on the contract would be. The sub-contractors, lenders and public authority would still need to work together to deliver the project and their due diligence would still be crucial.
November 2009