21. In general the equity investors in a PFI Project Company are those who are responsible for bidding for, developing and managing the project i.e. the project sponsors. Typically, private sector sponsors for PFI projects can be divided into two main categories:
• "operational" investors, being companies for whom investment is part of a strategy for securing other business as sub-contractors to the Project Company (PC)/Special Purpose Vehicle (SPV), and
• "financial" investors, being entities only interested in the investment and not in ancillary business as Subcontractors e.g. banks and specialised PPP investment funds.
22. To assess the appropriateness and robustness of the PC/SPV the project team should make sure that bid documentation contains sufficient information on the proposed PC/SPV structure so that following factors can be taken into account:
• Whether the sponsors have experience in the sector concerned and, hence, the ability to provide any technical support required by the project.
• Whether the sponsors have worked together successfully before.
• Whether the sponsors have the financial ability (although the obligation to may be limited) to support the PC/SPV if it runs into difficulty.
• Whether the sponsors have a reasonable amount of equity invested in the PC/SPV, which gives them an incentive to provide support to protect their investment if it gets into difficulty.
• Whether the sponsors have arm's-length contractual arrangements with the PC/SPV e.g. where they act as subcontractors for the construction of the project facility.
• Whether there is a reasonable return on the sponsors' investment.
• Whether any of the sponsors have a clear interest in the long-term success of the project.
23. The general assumption for PFI projects is that the PC/SPV contracts with the MOD (with subcontractors providing the actual performance on its behalf) and makes use of a significant level of limited-recourse debt to finance the project. This structure is known as "project finance", meaning that the debt financing - provided by the banks or the bond market - is raised on a project specific basis, relies primarily on the PFI contact and the various subcontracts for security and on specific project cash flows for repayment.
24. All bids should be examined from the perspective of how resilient the proposed project structure is to the contractor/subcontractors experiencing financial distress. Evaluation of and advice on the robustness of the bidders' proposed financial structures should be a key task for the project team's financial advisers.
Relevant Government policy/guidance:
• MOD PFU Guidance Note - MOD Standard Project Agreement v1 for PFI Projects
• MOD PFU Guidance Note - PFI Refinancing
• MOD PFU Guidance Note - Preparing the Invitation to Negotiate for PFI Projects
• HM Treasury: Standardisation of PFI contracts (SoPC) Version 4
• HMT Guidance: Preferred Bidder Debt Funding Competitions - draft outline guidance for feedback
• HMT Guidance: Refinancing of Early PFI Transactions - Code of Conduct
• HMT Guidance Note: Calculation of the Authority's Share of a Refinancing Gain
• HMT Covering Note: Value for Money in Refinancings