The United Kingdom's sophisticated but uneven infrastructure networks are the product of fragmented and reactive development over hundreds of years. Transport, communications and power generation networks face pressing capacity and quality issues that must be addressed against a background of ongoing instability in the financial markets and stringent environmental and planning regulation.
Project finance structures have been used in the United Kingdom for many years. In the early 1990s, the government introduced private finance initiatives (PFI) as a way of funding a range of infrastructure projects. Since then, the PFI scheme has funded projects in the United Kingdom with a capital value estimated to be hundreds of billions of pounds.
Various UK government institutions, under the general auspices of the Treasury, have sponsored PFI, although the relevant contracting authorities have been a range of government ministries, local authorities and other public bodies. Banks in the United Kingdom have readily funded PFI and other public-private partnership (PPP) transactions. As well as 'simple' project financing, the City of London has produced PPP-focused investment funds and a secondary market in interests in project companies, allowing equity stakes in project companies to be sold on as investments, as they then bear, in effect, a government-backed income stream. In particular, the secondary market in project company equity stakes has provided an exit route for investors in PFI or PPP transactions, especially parties wishing to participate in the development or construction phase of projects but not wishing to maintain an interest in the project once it is built, during the service delivery phase.
The UK PFI scheme attracts political controversy. This is for three reasons: the additional cost of PFI finance, relative to the cost if the government borrowed on its own account; the concern that 'accounting incentives'2 may sometimes cloud the evaluation of whether a PFI scheme represents good value for money; and the level of 'profits' generated by investors in the secondary market in project company equity.3
II THE YEAR IN REVIEW
Over the past few years, the projects and construction sectors have felt the effect of the UK government's deficit reduction policy. In July 2011, the UK government announced plans to deliver £1.5 billion of savings across operational PFI projects in England. By June 2013, government departments had reported £1.6 billion of formally agreed savings to the Treasury, as well as a pipeline of further expected savings.4 In March 2015, the government announced that the savings initiative had secured £2.1 billion in savings and that another £2 billion in savings was possible.5 Consequently, investment in new PFI projects has seen a decline in recent years: the combined capital value of PFI projects that reached financial close between 31 March 2014 and 31 March 2015 was £0.7 billion, down from £1.4 billion over the same period in 2013–2014 and £1.6 billion over the same period in 2012–2013.6
Despite the somewhat bleak picture that is suggested by the annual investment figures and focus on public sector savings over the past few years, prior to the 2017 General Election, government policy had shifted to a renewed focus on economic stimulus through infrastructure investment. The most recent update to the infrastructure pipeline underpinning the National Infrastructure Plan, released in December 2017,7 combined the infrastructure and construction plans with a total value of more than £460 billion of public and private investment.
Although the ruling Conservative Party lost its overall majority in the 2017 UK General Elections, the Party's manifesto pledges to deliver the National Infrastructure Plan do not appear undiminished. The manifesto had also promised significant investments in core infrastructure construction, with an emphasis on the railway and road networks.8 This pledge ties in with a number of ongoing priority railway projects, including HS2, a high-speed rail network that will link London to a number of key cities, and Crossrail, an ambitious ongoing project that is aimed at increasing London's rail capacity by 10 per cent.9
One significant development on the PFI landscape was the collapse of Carillion, a major private outsource group for UK government infrastructure projects in January 2018. This has provoked a wave of review and criticism of the scheme, which is ongoing at the time of writing, and coincided with a government audit of PFI and PF2 contracts, published in January 2018, which queried the economics of the schemes.10 Much of the controversy, however, focused on construction and the provision of national health services, and it appears that the Department of Transport remains the most committed to PFI contracts. As of June 2018, for example, it was in the course of negotiating further infrastructure programmes to fund major road reroutings in Wiltshire and Essex.
While there have been significant developments in public policy relating to projects and construction in recent times, the legal landscape has remained largely stable. The Public Contracts Regulations 2006 (PCR 2006) were repealed in favour of the Contracts Regulations 2015 (PCR 2015).11 The new measures included in the PCR 2015, which implement EU Directive 2014/24 on public procurement into UK domestic law aimed at clarifying and simplifying the existing procurement regime to make it more efficient and flexible. These include changes to the competitive dialogue procedure that is used by contracting public authorities when entering into particularly complex projects. The United Kingdom has also implemented two further EU directives relating to procurements: EU Directive 2014/23 implemented by way of Concession Contracts Regulations 2016; and EU Directive 2014/25 implemented by way of Utilities Contracts Regulations 2016. The legal landscape remains unchanged as of June 2018 notwithstanding the United Kingdom's formal notice of its intention to leave the EU, tendered in March 2017; it is anticipated that the status of EU directives will be clarified in the course of negotiations throughout 2018.
III DOCUMENTS AND TRANSACTIONAL STRUCTURES
i Transactional structures
Project finance structures take various forms, depending upon the nature of, and revenue generation model for, the project. Infrastructure projects that generate income from end users, such as toll roads and bridges, will commonly be structured on a build-operate-transfer or build-own-operate-transfer basis.
In these structures the completed project should generate sufficient income over the concession period for the project company (the private sector consortium that will be responsible for the overall delivery of the project) to cover repayment of borrowings, operation and maintenance costs for the facility and the generation of an equity return for investors. Where the completed project will not generate sufficient revenue to satisfy this financial model, the government may take an equity stake or provide grants to plug the funding gap.
In the United Kingdom, the PFI model has been used extensively for the delivery of public sector projects, most notably in health, roads, prisons and education. Private Finance 2 (PF2), a new approach to PPP announced by the UK government in late 2012, is still in its infancy and only a small number of projects have been agreed via PF2.12
As would be expected, project finance generates a large number of transactional documents. The precise requirements will depend upon the type of the project, the ownership structure, the regulatory environment and the nature of public sector involvement.
Typically, the project company will be a limited liability company. The relationship between its shareholders will be governed by the company's articles of association and a separate shareholders' agreement. The project company will enter into the project agreement, sometimes known as a concession agreement, with the public or government body. Under this agreement, the project company will accept responsibility for the construction of the project and for the operation and maintenance of the facility and the delivery of associated services during the concession period. The project company will look to pass down all construction-related risks to the construction contractor under a fixed-price design-build contract. A separate operation and maintenance (O&M) contract will be entered into for the concession period following completion of the works.
The capital funding for the project will generally be provided through non-recourse lending, secured against the income streams of the project company. As the funder will not have security over the asset itself, the bank will require step-in agreements with the project company as well as step-in rights in respect of construction and O&M contracts so that the funder itself is able to take control of the project if there is any failure in delivery.
Offtake agreements will be required where the output of a project, such as oil or electricity, is to be supplied to a particular customer. Minimum revenue generation through offtake agreements may be a key requirement of the project company for it to service its debt. Separate support agreements may be required where specific licensing or financial support is required.
iii Delivery methods and standard forms
Engineering-procurement-construction and design and construction contracts are primarily used for project finance-based transactions to deliver maximum risk transfer to construction contractors. Under such contracts, the contractor will be responsible for the entire design and construction of the works, usually on a lump-sum basis, with the contractor liable for liquidated damages in the event of delayed completion.
Engineering-procurement-construction-management (EPCM) has developed more recently in certain markets, including petrochemical, mining and power. It is a type of management contract pursuant to which the contractor manages the design and construction that is carried out by others. However, a key distinction between EPCM and traditional construction management is that the EPCM contractor actually carries out the detailed design and engineering for the project as well as the management of trade contractors and the construction process.
The specific form of construction contract utilised will depend upon the nature and location of the project. Where standard forms such as FIDIC (International Federation of Consulting Engineers) or NEC3 are used, these are often subject to substantial amendment to reflect the required risk profile. Many construction contracts used in transactions involving project finance are, however, drafted on a bespoke basis.
The UK government has taken steps to compel the standardisation of the contracts pursuant to which PPP and PFI projects are undertaken. This has been done by way of government guidance and standard documentation that may apply depending on the nature of the project and funding arrangements.
IV RISK ALLOCATION AND MANAGEMENT
i Management of risks
The following risks may be encountered in project finance transactions:
- construction risks – including the risk of design or construction difficulties, unforeseen conditions and project delay;
- operation risks – failure of the completed project to meet performance requirements and ongoing operation and maintenance issues;
- revenue risks – the risk that the project does not produce the required output or that the anticipated market for the facility does not materialise;
- insolvency risks – the risk of insolvency of a key player in the delivery or operation of the completed project;
- environmental risks – environmental liabilities that arise out of construction or operation of the facility; and
- political risks – risks associated with political instability or policy changes brought about as a result of change in governments.
Where possible, the project company will look to pass down risks to its subcontractors. Construction risks can be offset through the terms of the construction contract, with the contractor taking responsibility for defects in the works and delays in completion. Damage to the works themselves will generally be the responsibility of the construction contractor and covered by insurance. Once the project has been commissioned, the O&M contractor will be responsible for any shortfall in its services. Limitations on liability may, however, affect the ability of the project company to recover any costs or losses it incurs or suffers.
Generally, the parties will need to look to the insurance market to cover risks that are not within the direct control of those involved in the delivery of the project. As the project company is likely to have little capital, it will not be able to provide any form of meaningful protection in respect of uninsured risks for which it is solely responsible.
ii Limitations on liability
Project companies and their subcontractors will frequently negotiate limitations on their liability – albeit losses arising from death and personal injury, fraud and wilful default will generally be carved out from sum caps.
Construction contractors will also look to limit their overall liability. The level of cap under the construction contract is usually agreed on the basis of a percentage or multiple of the contract sum. The construction contractor may require a separate cap on its liability for delay damages, often set as a percentage of the contract sum. O&M contracts will usually include an overall cap based on a multiple of the annual fee payable to the contractor.
Both the project company and the construction contractor will usually look to limit or exclude their liability for consequential losses.
Project agreements usually provide the parties with relief from liability in respect of force majeure. If a force majeure event occurs the parties will generally look to agree alternative means of delivering the project. If the event continues for a specific period, the parties to the project agreement will usually have the right to terminate. Force majeure events are dealt with separately from relief events. Relief events may entitle the project company to an extension of time for completion of the project and possibly also financial compensation but not to terminate.
iii Political risks
Project finance transactions in the United Kingdom have not historically been exposed to significant political risks. As a free market economy, foreign investment in UK projects is not subject to significant restrictions. While recent deficit reduction measures have seen some PFI projects scaled back or cancelled, they have not affected projects that have achieved financial close.
The outcome of the United Kingdom's decision to leave the EU in 2016 continues to create unprecedented political and economic uncertainty. The process of withdrawal from the European Union was triggered on 29 March 2017, with an anticipated two-year process of negotiation prior to withdrawal from the European Union. European law will continue to apply in the United Kingdom until formal withdrawal. There are, however, question marks as to which European regulations and directives will be maintained once the withdrawal is complete, which is still unclear as of June 2018. It is currently impossible to predict how the regulatory framework applicable to project finance (which is heavily intertwined with Europe's) will be affected in the event of complete British withdrawal from the European Union, although the question is currently being closely investigated. In May 2017, the European Parliament published the first report on the possible effects of Brexit, which considered various potential models for a UK–EU public procurement model.13
Political risk guarantees have not historically been required for project finance transactions in the United Kingdom. Those investing in the United Kingdom will need to watch this space in the near future.
V SECURITY AND COLLATERAL
Funders commonly take rights over the income stream from a project and in relation to significant contractors and subcontractors. In addition, funders will frequently take parent company guarantees from the investors in project companies and take security rights over the project company itself.
The income from projects (e.g., generated from offtake agreements in energy projects or availability payments from government authorities) is commonly paid through a project bank account at funding institutions. The money will 'cascade' through those accounts, enabling funding institutions to be assured that they will receive their payment first from the income generated by the project financed asset. In addition, the project company's accounts may be assigned to the funders or funders may have floating charges over receivables.
The funders will generally have a charge over shares in the project company held by investors. In addition, the investors may give parent company guarantees to funders.
There are commonly 'direct agreements' between funders and significant contractors (in particular major engineering or equipment supply contractors) and, for example, offtake purchasers in energy contracts. This in theory enables funders to continue with a project without the participation of the project company, by exercising step-in rights in direct agreements, which are generally enforceable under English law.
VI BONDS AND INSURANCE
Contractors and subcontractors frequently provide bonds to employers in both project finance and other construction transactions in the United Kingdom.
Bonds may be 'first presentation' or 'on-demand' bonds. These bonds are commonly used to secure payments made by the employer to the contractor or subcontractor; for example, against the release of retention monies or to support a bid to a public authority by a contractor. The bonds are payable upon presentation of the stipulated documentation during the period of validity of the bond. Banks and the courts are generally reluctant to interfere in their payment and they have been described as being akin to cash in the hands of beneficiaries.
As alternatives to first presentation bonds, performance bonds are also used on projects. They differ from on-demand bonds insofar as they require some stipulated default to be asserted and evidenced by the beneficiary on their demand. Some performance bonds require that there has first been a judgment or arbitration award that has not been complied with. However, employers tend to resist such stipulations.
As indicated above, the financing banks may also take parent company guarantees from project company sponsors against default by the project company.
Projects are commonly funded by project bonds issued to the London market. Indeed, the timing of such bond issues can drive the timing of completion of the negotiation of project documents, so as to allow financial close for transactions at times favourable to the issue of bonds in the market.
VII ENFORCEMENT OF SECURITY BANKRUPTCY PROCEEDINGS
English law requires that security interests over land and floating charges over a company's property or undertaking be registered. Failure to register security interests where required make those interests unenforceable against parties not on notice of the security interest.
Many security interests, for example, step-in rights and charges of receivables, may be enforced outside insolvency proceedings.
In the event of insolvency, secured creditors' security will crystallise in relation to the relevant asset. Secured creditors will rank ahead of others. Unsecured creditors, in contrast, will rank behind various preferred creditors, including tax authorities and, to an extent, employees and pension interests. However, those preferred creditors will not have interests in relation to secured assets.
VIII SOCIO-ENVIRONMENTAL ISSUES
i Licensing and permits
The United Kingdom is subject to increasingly onerous national and EU environmental regulation (though this may change depending on the terms of British withdrawal from the European Union). Many environmental considerations will be dealt with through planning permission procedures, including requirements to produce environmental impact assessments where appropriate. Specific licences may be required in relation to the construction or operation phases of the project. Projects of any size, once built, are also increasingly caught by carbon-reduction legislation and emissions trading schemes.
Potential environmental liabilities may be significant and affect the overall bankability of the project. Banks will therefore need to understand the nature and scope of potential direct and indirect liabilities before committing finance to the project as these may ultimately affect the project company's ability to repay the loan. Environmental liability attaches to the polluter, which is likely to be the owner or occupier of the land. If a bank were to have security over the project itself and to enforce this, the bank could itself assume environmental liability.
ii Equator Principles
The Equator Principles are internationally recognised principles used in assessing and managing environmental and social risk in project finance transactions as well as project-related corporate loans and bridge loans. EP III is the current form. Financial institutions that adopt the principles commit to not providing loans to projects where the borrower will not or is unable to comply with social and environmental policies that comply with these broader principles. The Equator Principles are not mandatory and have no legal status, but have been widely adopted by funding institutions. In excess of 70 financial institutions in a number of countries have adopted them.
IX PPP AND OTHER PUBLIC PROCUREMENT METHODS
PPP financing models have been used for a broad range of infrastructure and other public sector projects in the United Kingdom, including for health, education, transport, prisons, waste and defence projects. PFI has been by far the most common form of PPP structure in the United Kingdom in recent years.
There is no special legal or statutory framework for PFI, although some sector-specific legislation has been enacted to facilitate PFI arrangements, primarily in the health sector. PFI projects are subject to the general principles of English law. Non-statutory guidance has been published for many sectors and the government has developed standardised documentation that can be used for PFI transactions. PFI projects will invariably be caught by the public procurement regime in the United Kingdom, meaning that they must be tendered in accordance with the procurement rules.
The main features of PFI are similar to those of other project finance arrangements. The project company – a special purpose vehicle (SPV) for the project – is responsible for constructing, operating and maintaining the project and providing ancillary services. Funding will be provided from the private sector, comprising predominantly non-recourse lending but with equity provided by participants in the project company, which may include the UK government. The project company will be paid a fee (or unitary charge) to cover its costs, including the servicing and paying off debt, and to deliver a return to the equity investors. The fee will, to an extent, be dependent upon required service levels being achieved.
The PFI model was amended in 2012 by the introduction of PF2 on 5 December 2012.14 PF2 allows the public sector to participate in projects as a minority equity co-investor15 and facilitates funding models that make use of institutional investor capital. While PF2 is still relatively new and only a small number of projects have been agreed under it, it has been employed for schools and hospitals projects, including the UK government's privately financed Priority School Building Programme.
ii Public procurement
Public procurement in the United Kingdom was governed by the PCR 2006, which implemented the EU Consolidated Directive16 on public procurement.17 The regulations governed the award of contracts for public works and contracts for services and supplies by contracting authorities, including central government, local authorities and other bodies governed by public law. In April 2014 three new Directives were adopted,18 which streamlined existing processes and added flexibility. Of these, EU Directive 2014/24 on public procurement – which repeals EU Directive 2004/18 – was implemented as part of national law by way of the PCR 2015. As noted above, the other two Directives were implemented in April 2016 by way of the Concession Contracts Regulations 2016 and the Utilities Contracts Regulations 2016.
Contracts caught by the regulations, which will generally include most PFI contracts, must be advertised by the contracting authority in the EU's Official Journal and must follow a specified award procedure. The procedure will vary depending on the nature of the contract. Since its inception, the competitive dialogue procedure has been used for many PFI projects for capital works, and some clarifications have been made to it by way of the PCR 2015.
Once the award decision has been made, the contracting authority must notify all bidders of its decision. This must be followed by a standstill period during which any unsuccessful bidder may challenge the award and apply for it to be set aside. The English courts have power to grant injunctions preventing the parties from entering into contracts and to order the setting aside of awards. They can also award damages in the event of breach of the regulations.
In addition to the procurement regulations, public procurement in the United Kingdom (until withdrawal from the European Union) is subject to general principles of European law, including non-discrimination, equal treatment, mutual recognition and transparency.
PF2 projects are subject to a streamlined procurement process. The competitive tendering phase is limited to 18 months, measured from the issuance of project tender to the appointment of a preferred bidder. Projects that do not reach the preferred bidder stage within this period may be terminated.
X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES
The United Kingdom does not have special licensing or other requirements for foreign contractors. From a practical perspective, while it is necessary for contractors to comply with local requirements in relation to health and safety (in particular in relation to construction, design and management regulations) and tax regulations, there are no particular compliance registration issues that must be addressed by foreign-based contractors.
The United Kingdom does not offer particular incentives for foreign investments. Until the United Kingdom's formal withdrawal from the European Union, all UK investment must be satisfactory from the perspective of EU procurement regulations and wider EU law. EU law will, for example, prohibit incentives that might be characterised as state aid. In terms of investor protection, the United Kingdom is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). The United Kingdom is party to a large number of bilateral investment treaties (BITs) with a range of other states. There is some question at present as to whether investment treaty competence now resides at EU level following the Lisbon Treaty. However, UK BITs remain in place at present and afford protection to investors. Those treaties will give the normal treaty protection to investors, including protection against expropriation without compensation, the right to fair and equitable treatment and the right to repatriate profits.
The United Kingdom does not generally impose restrictions on foreign investments in particular industries. There are, for example, significant foreign investment holdings in UK infrastructure, including airports and military dockyards.
The regime in relation to the repatriation of profits is unrestricted. The United Kingdom does not impose currency exchange restrictions, nor are there any laws that preclude the removal of profits or investments from the United Kingdom. Other than the normal incidents of taxation, there are no particular restrictions on remittances of investment returns. While the United Kingdom may impose withholding tax on repatriated profits, it also has a comprehensive regime of double taxation treaties.
XI DISPUTE RESOLUTION
Disputes arising from construction and engineering works in projects are commonly dealt with in the United Kingdom by three separate regimes: adjudication, arbitration and High Court litigation.
All construction contracts must, under statute,19 include provision for the adjudication of disputes. If a construction contract does not include provision for adjudication then statute will imply an adjudication regime into it.
A construction contract is, broadly, one that provides for the carrying out of construction operations. It includes a contract that provides for the provision of advice or other services in relation to the conduct of construction operations. It was a requirement that construction contracts had to be in writing to be covered by the statute. This is no longer the case,20 and statutory adjudication will now apply to construction contracts made orally. Unless the adjudication provisions of the contract are compliant with the requirements of the statute, the adjudication scheme21 stipulated by the statue will apply.
There are exceptions to the statutory adjudication regime, even if the underlying contract is for the carrying out of construction works in a commercial context. Three exceptions are of importance in the context of projects. First, construction contracts in relation to some energy and process plants are exempt from the statutory regime. Second, offshore construction works, in particular in the North Sea are exempt. Third, the main concession agreement between the government or government entity and the SPV in a PFI or PPP project will, even though it will provide for construction operations, be exempt from the provisions for statutory adjudication. That third exemption can cause commercial difficulties in relation to dispute resolution on PPP projects as, although the main PPP agreement will be exempt from required statutory adjudication, construction contracts between the SPV and contractors will not be exempt. This can expose SPVs in such transactions to the commercial risk of a mismatch (either of timing or results) in the event that the dispute arises.
The statutory adjudication regime requires that a dispute in relation to a construction contract can be referred to adjudication at any time. The construction contract must provide that an adjudicator will be appointed within seven days of the referral of the dispute to adjudication, following which the adjudicator must make his or her decision within 28 days. That 28-day period may be extended by the agreement of the parties or by 14 days only with the agreement of the referring party. As such, it can be a very compressed, summary procedure. A decision is often made by the adjudicator on the basis of the written material before him or her, without an oral hearing. While originally conceived for payment disputes, there is nothing that precludes more complex disputes, such as to the quality of design or workmanship or delays, or professional negligence matters, being referred to adjudication.
The decision of an adjudicator is binding but has only temporary binding effect. This means that the decision must be complied with, but either party can subsequently litigate or arbitrate the same dispute without restriction.
The decisions of adjudicators are enforceable through the English courts. Since the introduction of adjudication as a statutory dispute resolution mechanism in 1998, while there has been much jurisprudence in relation to adjudicators' decisions, English courts are generally reluctant to refuse to enforce adjudicators' decisions. The courts will only refuse to enforce where there is a clear lack of jurisdiction (e.g., where the contract concerned falls within one of the exceptions or, until recently, where there was no contract in writing) or where there has been a clear breach of the rules of natural justice (e.g., when an adjudicator purported to act as a mediator between the parties and then proceeded to act once again as adjudicator).
Actions to enforce adjudicators' decisions are generally brought by way of application for summary judgment before the Technology and Construction Court (TCC).
There is a long tradition of construction arbitration in the United Kingdom. Much of this is conducted by industry specialist arbitrators, including individuals whose original professions are as engineers, architects or chartered surveyors, who subsequently train and qualify as arbitrators. The Royal Institution of Chartered Surveyors is one of the largest nominating bodies for arbitrators and adjudicators in the United Kingdom. However, construction arbitration has diminished significantly in the United Kingdom since the implementation of statutory adjudication.
iii High Court litigation
Disputes arising from project finance transactions or construction contracts are generally heard in one of two specialist courts in England and Wales: the TCC or the Commercial Court.
The TCC is a specialist court dealing with technical matters, in particular building and construction disputes and IT disputes. While it is formally a part of the Queen's Bench Division, the judges in the TCC have significant day-to-day experience of technical disputes, both as judges and, frequently, in practice at the Bar before becoming judges. The TCC deals with project-related disputes where those disputes relate to the execution or conduct of the project or in relation to alleged defects.22
The Commercial Court is also part of the Queen's Bench Division. Once again, the judges in the Commercial Court have significant relevant experience, both as judges and in practice at the Bar. Disputes arising on project finance transactions, in particular if they are related to financing or other issues around the transaction or its structure, rather than its technical implementation, may be heard by the Commercial Court.
In addition, both the Commercial Court and the TCC hear applications in relation to commercial arbitration proceedings. If a project finance transaction or a construction contract is subject to arbitration then, if a challenge is brought to the arbitration or the award, that application may be heard either in the Commercial Court or in the TCC.
iv International dispute resolution
As indicated already, the United Kingdom is a party to the ICSID Convention and to a large number of BITs.
Parties to project finance disputes in the United Kingdom may submit their disputes to arbitration outside the country (albeit such disputes may well first be subject to adjudication). The United Kingdom is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The enforcement of awards made outside the United Kingdom pursuant to the New York Convention is given effect in England and Wales by the Arbitration Act 1996.
While within the United Kingdom, arbitration proceedings may be ad hoc, and so subject only to the provisions of the Arbitration Act 1996, parties frequently subject their disputes to arbitration under the rules of one of the arbitration institutions. While institutions such as the Royal Institution of Chartered Surveyors are frequently named in domestic construction contracts, international project finance transactions frequently rely upon arbitration under the rules of the London Court of International Arbitration or the International Chamber of Commerce.
Parties to disputes in England and Wales are also now encouraged by the courts to use other non-binding dispute resolution techniques, in particular mediation. Where parties refuse to use mediation and instead insist on litigating, the court can apply costs sanctions to that refusal to mediate. Mediation is available from a range of professional providers, including a number of independent mediators. However, mediation services are also provided by the Centre for Effective Dispute Resolution and the Chartered Institute of Arbitrators.
XII OUTLOOK AND CONCLUSIONS
The United Kingdom has a sophisticated market for project finance projects, across all of the public sector and in relation to significant privatised infrastructure. The City of London remains a significant source of funding for both domestic and international projects and will continue to be in the future. Helpfully, English law remains one of the laws that are preferred by parties to govern project and project finance documentation. Domestically, the use of new public procurement methods, such as PF2, will increase as parties become more comfortable with them over time.
While political constraints in the United Kingdom will limit capital expenditure in certain sectors, the United Kingdom has committed to spending significant sums on infrastructure projects over the course of the next decade. It remains to be seen if the Conservative Party will deliver on this commitment.
However, Britain's future withdrawal from the European Union has introduced unprecedented political and economic uncertainty. Although Brexit has been triggered, the negotiations on the terms of the British exit are ongoing at the time of writing and the fallout may continue for some time to come. An outcome that sees the United Kingdom leaving the European Union completely, without any specific carve-outs, will have a significant impact on the legal framework relevant to project finance since much of it draws from EU procurement rules and wider EU law.
1 David Brynmor Thomas and Hannah McCarthy are barristers at 39 Essex Chambers.
2 See, for example, the conclusions of the House of Commons Treasury Committee in its report 'Treasury – Seventeenth Report: Private Finance Initiative' (19 August 2011) that 'most PFI debt is invisible to the calculation of public sector net debt (PSND) and is therefore not included in the headline debt and deficit statistics'. According to the Fiscal Sustainability Report published by the Office for Budget Responsibility in July 2015, 'this generates a perception that PFI has been used as a way to hold down official estimates of public sector indebtedness for a given amount of overall capital spending, rather than to achieve value for money'. This is especially so given the not-insignificant role played by PFI: 'if all capital spending under PFI were to have been carried out through conventional debt financing, PSND would have been 1.9 per cent of GDP higher at end-March 2014'.
3 See, for example, the observations made by the briefing paper titled 'PFI: costs and benefits' published by the House of Commons Library on 13 May 2015, which observed (at page 9) that some of the earlier PFI projects had expected returns as high as 20 per cent.
4 'HM Treasury: Savings from Operational PFI Contracts', published by the National Audit Office, November 2013.
5 Page 14 of 'PFI: costs and benefits' published by the House of Commons Library on 13 May 2015.
6 'HM Treasury PFI Data Summary', December 2013, December 2014, March 2016.
7 The National Infrastructure and Construction Pipeline 2017, published by HM Treasury 6 December 2017.
8 Pages 14 and 15 of the Conservative Party Manifesto 2015.
9 'Top 40' annex to the National Infrastructure Plan 2014, published by HM Treasury, December 2014.
10 National Audit Office, PFI and PF2, 18 January 2018.
11 With the exception of defence and security public contracts, the PCR 2015 will directly apply only to England, Wales and Northern Ireland and will not extend to Scotland.
12 Page 15 of 'PFI: costs and benefits' published by the House of Commons Library on 13 May 2015.
13 'Consequences of Brexit in the Area of Public Procurement', published by the European Parliament in May 2017.
14 'HM Treasury: A new approach to public-private partnerships', December 2012.
15 The equity investment is to be managed by a central unit located in the Treasury and separate from the procuring authority.
16 Directive 2004/18.
17 There are also the Utilities Contracts Regulations 2006 (from Directive 2004/17).
18 Directives 2014/24, 2014/25 and 2014/23 (the latter being a new Directive on concession contracts).
19 Part II of the Housing, Grants, Construction and Regeneration Act 1996, as amended by Part 8 the Local Democracy, Economic Development and Construction Act 2009.
20 Since the coming into force of the Local Democracy, Economic Development and Construction Act 2009 on 1 October 2011.
21 This scheme is contained in a statutory instrument and sets out default terms for adjudication: The Scheme for Construction Contracts (England and Wales) Regulations 1998 and The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011. The latter applies to construction contracts covered by the Local Democracy, Economic Development and Construction Act 2009. Similar schemes apply to Scotland and Northern Ireland.
22 The TCC also runs a scheme called the Court Settlement process, which is a mediation process run by TCC judges. It provides parties with access to a TCC judge to assist with settlement.