3.15 The STEPS deal is a large and complex PFI project with both typical and atypical risks. While it has similar operating risks to those displayed in many other PFI deals, the fact that the financing is secured on existing assets means that the risk profile is different from other more standard PFI deals.
3.16 In a standard PFI deal, the financing is raised by the private sector and is secured on the future cashflows of the project. Since those cashflows are dependent on delivery of the service to the public sector, investors will only recoup their investment and make a return if the project is successful. This helps to align the interests of the public and private sectors. It also brings the due diligence processes of the private investor to bear on the project. In the STEPS deal, the private finance provided is secured on the Departments' estates. This gives the private sector investors a much higher degree of security than is traditionally the case in PFI.
3.17 At the time that Mapeley STEPS went to the Departments in November 2001, stating that it had serious financial problems, the Departments had not worked through all the consequences which would arise should the deal collapse in the particular circumstances which then faced them. Nor did they have a fully developed view on the implications of the options available to them to move forward in those circumstances. As a result of the work done in response and effective use of their advisers, the Departments now have a clearer view of the risks inherent in the STEPS deal. They have a clearer understanding of Mapeley STEPS' business model, its finances and investors, and its business focus. They also have a clearer view of the effects of termination and the costs involved. The Departments have taken comfort from Rothschild's view that they got a good deal with the Mapeley STEPS contract and that it is in their interests to continue. They also recognise the operational reasons for seeking a successful conclusion to negotiations. However, as part of their risk management activities, the Departments have assigned roles and responsibilities in the event that termination should occur.