The Public-Private Partnership Law Review: United Kingdom


i History

The UK was one of the pioneers of public–private partnerships (PPPs) in the early 1990s, although the private financing of infrastructure had occurred before this. The Conservative governments in the 1980s and early 1990s had embarked on an extensive privatisation programme of publicly owned utilities, including telecoms, gas, electricity, water and waste, airports and railways. In addition, there were a small number of free-standing transport infrastructure concessions2 where the concessionaire relied on end-user revenue for its return, rather than payments from the public sector.

The term PPP is used in the UK to describe a variety of different forms of public–private sector cooperation. This chapter focuses chiefly on the private finance initiative (PFI) and its successors, given their widespread use and influence on other models used in the UK. PFIs, which were launched in 1992, are design-build-finance-operate projects structured as a purchase by the public sector of ongoing services, rather than capital assets, with these services defined as outputs.3 Service payments are principally met from public funds rather than end user charges.

In 2012, the government launched a revised PFI model called PF2, which closely resembled the PFI model but involved a number of changes designed to increase transparency, promote efficiency, ensure value for money and encourage finance from alternative sources of institutional capital (such as infrastructure and pension funds).

The use of PFI/PF2 has been heavily affected by changing political sentiments over the years. In the 2018 Budget, the then Chancellor of the Exchequer announced that PFI/PF2 would no longer be used to deliver new infrastructure. This remains the government's position, but alternative models continue to be used, and government has stated that it will consider new private finance models as well as how the existing models can be applied in new areas. The future of PPPs in the UK is considered in Section VIII.

ii Regional variations

The devolved administrations in Wales, Scotland and Northern Ireland are not bound to follow UK government policy on PFI and have the capability to use alternative models (as does Transport for London). The Welsh government is currently using a mutual investment model (MIM), with the first project delivered under the MIM reaching financial close during 2020 and the 21st Century Schools and Colleges Programme (which will use the model) underway. The Scottish government has previously used the non-profit distributing (NPD) model, under which there is no dividend-bearing equity, and returns for private sector participants are capped. However, the Scottish government adopted the MIM in 2019, which will be used in future projects, alongside other available infrastructure investment tools.4 The model has a number of similarities to PF2 and is described in further detail in Section II.ii.

The year in review

i Covid-19 pandemic

In April 2020, the Infrastructure and Projects Authority (IPA) issued guidance supporting the continued provision of vital services under PFI projects during the covid-19 pandemic. While the effects of the covid-19 pandemic and measures to restrict its spread continued into 2021, contractors and subcontractors by and large appear to have managed to continue service delivery on projects and have not faced significant financial difficulties. We are not aware of any major disputes of PFI contracts relating to covid-19 and understand that, in most cases, both authorities and contractors have followed the IPA guidance. However, in the face of cost pressures and the withdrawal of government support, there may be an increased need for restructuring.

June 2020 saw the introduction of the Corporate Insolvency and Governance Act 2020, with new insolvency and rescue procedures. Many of these new procedures have not yet been tested in a PPP context. Part of the reason for that are the broad exclusions that limit the impact of certain new provisions on PPP project companies and their funders. For example, in relation to contracts forming part of a PPP or PFI project, companies are not eligible for the new moratorium procedure or the new ipso facto provisions. The latter prevent termination or exercise of other rights set out in contracts for supply of goods and services where the trigger is the customer's entry into insolvency proceedings, which, in other contexts, has given rise to questions around termination and the operation of lenders' acceleration or step-in rights.

ii MIM

The A465 'Heads of the Valleys' Road project is the first PPP to be procured under the Welsh government's MIM. Financial close on the project was achieved in October 2020, just over four months after the announcement of the preferred bidder.

As of June 2021, all new road building projects in Wales have been shelved in an effort to reduce carbon emissions (although this does not affect projects that have already commenced, such as the 'Heads of the Valleys' Road). The Welsh government is conducting a wide-ranging review to determine whether plans to increase road capacity can be justified in light of the climate crisis. In November 2021, the Llanbedr Access Road scheme became the first project to be scrapped as a result of the review.

Other schemes under the Welsh government's MIM include the redevelopment of the Velindre Cancer Centre in Cardiff and the 21st Century Schools and Colleges Programme.

iii Managing PFI contract expiry

During 2021, the IPA has focused on PFI contract expiry. In a report to the House of Commons in March 2021, the Committee of Public Accounts estimated that around 200 PFI contracts will expire in the next 10 years, accelerating from 2025 onwards.5 Expiry presents a significant risk to value for money and continuity of public service.

The PFI Centre of Excellence established a programme of expiry health checks (EHCs) to support PFI contracting authorities in assessing their readiness for expiry. The first phase of the EHCs took place between summer 2020 and spring 2021. In August 2021, the IPA issued 'Managing the Risks of PFI Contract Expiry', a support plan for contracting authorities based on lessons learnt during the EHCs. The IPA offers a structured programme of review, guidance, advice and support for PFI projects within seven years of expiry.6 The IPA proposes to undertake a health check of PFI projects to assess their readiness for expiry and to share knowledge with the private sector counterparties.

iv Discontinuation of LIBOR

In October 2021, the IPA issued an updated guidance note on the impact that the transition from LIBOR to SONIA will have on PFI projects.7 The note includes recommendations for procuring authorities, a specimen authority consent letter and a table of key amendments to financing agreements. Key recommendations include that: authorities should not mandate or direct any changes necessitated by the transition; there should be no refinancing gain resulting for the SPV; and authority consent should not be linked to any other commercial issues or disputes with the SPV.

v UK infrastructure bank

The UK Infrastructure Bank (UKIB), launched in June 2021, currently offers private and public sector financing and is working to establish its advisory services. The government hopes the UKIB will catalyse economic growth, bring geographic balance to UK infrastructure investment and aid the country's drive towards net zero carbon emissions.

Since its launch, the UKIB has made or committed to make several investments including:

  1. a £107 million investment in the South Bank Quay development to service the offshore wind sector;
  2. a £100 million investment to provide high-capacity broadband to hard-to-reach UK premises; and
  3. a commitment to invest £250 million in a private fund seeking to double the amount of subsidy-free solar power in Britain.

vi National Security and Investment Act 2021

The National Security and Investment Act entered into force on 4 January 2022 and overhauled the review of transactions and investments on national security grounds in the UK. The new regime confers on the government a call-in power over a wide range of transactions where it is judged that there may be a risk to national security, and imposes mandatory notification obligations on parties involved in transactions in 17 specified sectors (including defence, energy and transport). The government can exercise the call-in power in relation to transactions that completed on or after 12 November 2020.

General framework

i Types of public–private partnership

The predominant form of PPP in the UK has been the PFI/PF2 project, with more than 700 in operation with a total capital value of £57 billion.8 As discussed above, the PFI/PF2 model will not be used for new infrastructure developments. However, there are other private finance models that are used in the UK to deliver infrastructure.

PFI/PF2 and similar models

PFI/PF2 is a project-financed structure where the public sector procurer awards a contract through competitive tender for the design, build, financing and operation of certain public infrastructure. The contractor is a special purpose vehicle (SPV) formed by the successful bidder (or more commonly a consortium of bidders) for the purpose of the project. The construction and subsequent service provision are subcontracted by the SPV on the basis of a full flow-down of the risks under the PFI/PF2 contract to its subcontractors (who are often related entities of the bidders).

The Welsh MIM9 is similar in terms of structure and risk allocation and, as with PF2 projects, makes provision for the public sector to take an ownership stake by investing alongside the private sector investors. A defining feature of the MIM is the requirement that the project delivers community benefits, such as providing training and apprenticeships and meeting local supply chain targets.

Concessions and user-pay models

Concession-based and other user-pay models typically use project-financed structures similar to PF2 projects but, rather than the contractor's revenue coming from payments made by the procuring authority, revenue comes from user charges. This structure is relatively rare in UK public infrastructure, but has been used for projects such as tolled roads and river crossings.10 Following the retirement of the PFI/PF2 model, concession-based and other user-pay models may be used more widely for infrastructure projects.

Strategic infrastructure partnerships

Strategic infrastructure partnerships involve a public sector body appointing a contractor (or contractors) to deliver a programme of projects, bundling together several projects that would otherwise be too small on their own to justify a project-financed structure. They may also be relevant where there are several phases of works in a project.11

Delivery partner (integrator)

The integrator model contemplates a contractor being appointed to manage the delivery of a project on behalf of the public sector through pre-procurement, procurement, construction and into operation. The delivery partner integrates the underlying procurements so that they deliver an overall asset or service to the procuring body. The delivery partner generally assumes a client-side role rather than delivering the underlying assets or services itself.12

RAB structures

The RAB model has been widely used in the water, rail, power network and airport sectors, among others. Under this model, the relevant activity is made licensable and the licence permits the licensee to recover an agreed return on expenditure efficiently employed in developing and operating the project assets, subject to independent regulation.

While typically the RAB model has been used for operating businesses with an established asset base, the £4.2 billion Thames Tideway Tunnel 'super sewer' project demonstrated that it is capable of being used to deliver greenfield infrastructure projects. The model is set to be used to deliver other UK infrastructure,13 including new nuclear power generation,14 and aspects of the carbon capture, usage and storage (CCUS) value chain15 (see Section VIII for further information).

Direct procurement

Direct procurement allows water or energy companies to competitively tender for a third-party provider to design, build, finance, operate and maintain infrastructure projects that would otherwise be delivered and financed by the water or energy company itself. The model is designed to increase contestability within the sector and has been promoted as a way of increasing innovation and whole life costs savings as well as potentially reducing financing costs. Ofwat's proposed direct procurement for customers model is an example of the use of direct procurement in the regulated water sector. In the energy sector, Ofgem uses direct procurement for offshore transmission operators and has proposed that a similar scheme could be introduced for onshore networks.16


The CfD model is the government's main mechanism for supporting low-carbon electricity generation. The model works by paying the developer of a renewable project the difference between the 'strike price' (a price determined by competitive auction, reflecting investment costs) and a market reference price (a measure of average wholesale electricity prices in the British electricity market) for each unit of low-carbon electricity produced. If the prevailing market reference price is below the strike price, a 'top up' is paid by the company administering the contract on behalf of the government (and funded by end users of electricity). If the strike price is below the prevailing market reference price, the investor returns the difference. Holding a CfD provides certainty and stability to generators by reducing their exposure to movements in wholesale prices.

A modified form of CfD is being considered to support the development of projects utilising CCUS and hydrogen projects – see Section VIII.

Joint ventures

Joint ventures can either be corporate, where a new corporate vehicle is established that is jointly owned by public and private sector entities, or contractual, where there is no separate entity and the public and private sector entities cooperate under the terms of a commercial contract.

The joint venture structure is usually used to progress commercial activities formerly carried out in the public sector for mutual benefit, or to realise the commercial development potential of publicly owned real estate, both of which are sometimes done with a view to a subsequent sale. A subset of these structures are mutual joint ventures, where the employees also own part of the joint-venture company. Joint ventures tend to be largely bespoke.

Government-owned, contractor-operated companies

This involves placing a commercial activity in a new corporate entity, transferring it temporarily to an appointed services contractor for the duration of the services and then returning it to the public sector. The government may hold a special share to ensure ultimate control of a strategic asset, but it will not have an economic interest.17

Flexible or hybrid projects

These are specially designed one-off structures for particularly large or complex projects where a procuring body requires a tailored approach; for example, where a long-term PPP relationship is desired but it is not possible to define the service requirement or pricing for the full period. They can borrow elements from several of the above structures.

ii The authorities

The following public bodies play a principal role in the PPP market in the United Kingdom:

  1. HM Treasury, which sets and oversees fiscal and general policy, and approves project business cases;
  2. the Cabinet Office, which oversees the standards and efficiency of government functions and procurement, and approves individual procurement routes and structures;
  3. the IPA, which reports to HM Treasury and the Cabinet Office, and supports the successful delivery of infrastructure and major projects. The IPA publishes national infrastructure delivery plans to cover infrastructure policy over a five-year period;
  4. the National Infrastructure Commission, which assesses and provides expert advice to the government on the long-term infrastructure needs and priorities of the country;
  5. the UKIB, which provides finance for local and private infrastructure projects;
  6. procuring bodies (e.g., central government departments and local authorities), which structure and procure projects, enter into and manage contracts and pay for the services. These include departments and executive agencies of central government, local authorities and other public bodies;
  7. independent regulators, including those that regulate certain areas of activity (including environment, health and safety and data protection) and particular sectors (such as gas and electricity, water, rail and communications);
  8. UK Government Investments, a company wholly owned by HM Treasury that coordinates government shareholding of publicly owned companies, advises the government on corporate finance and oversees the UK's corporate assets;
  9. planning authorities, which decide whether to grant development consent for a project (the relevant planning authority will depend on the size and location of the project); and
  10. the Comptroller and the National Audit Office, which scrutinise government spending.

iii General requirements for PPP contracts

There is no specific PPP law in the UK. PPP projects are for the most part promoted under the general legislative and common law powers of government and public bodies. However, in certain cases, primary legislation has been passed to enable PPP projects to be financeable.18 Central government departments may act under the Crown's common law powers, which broadly confer unfettered legal power except where expressly or impliedly limited or restricted by legislation. Local government and other public bodies have powers conferred by legislation, which have generally proved adequate to promote PPPs.

The general UK legal framework, including contract, company, competition, employment and tax law, applies to PPPs as to any other projects.

The choice of which PPP model to use on each project is for the procuring body to decide, and there is no standard approach or structure. The Cabinet Office and HM Treasury will oversee any decision on the structure of the project and ultimately (and most importantly) its source of funding.19

The approach to PFI/PF2 has largely been standardised since HM Treasury first issued its Standardisation of PFI Contracts (SOPC) guidance in 1999, which set out recommended and required provisions that should feature in the relevant contract. SOPC guidance has been updated on a number of occasions, with the latest version, Standardisation of PF2 Contracts, being issued in 2012. A number of procuring authorities also produced their own standard forms. The Welsh MIM has followed a similar approach with the use of standardised contractual documentation.

Other forms of PPP contract may be more bespoke, although it is common for procuring authorities to adapt drafting and provisions set out in the most recent SOPC guidance.

All PPP projects are subject to various government approval processes that evolve over time and differ depending on which public body is procuring the project. Each procuring body must follow its own relevant approval process. Local government bodies and other non-departmental public bodies usually require sign-off from their sponsoring department.

All of these approvals are obtained by the procuring body and not the contractor. Once it has successfully bid for the project, the contractor need only obtain the licences and consents that would be required by any business undertaking the relevant activity. The contractor is not required to obtain any PPP-specific consents.

Bidding and award procedure

i Procurement regulations

The procurement of works, goods and services contracts by public bodies in the UK is currently governed by a series of regulations that originally implemented various EU directives. These regulations continue to apply post-Brexit, but with certain necessary practical adjustments to address the UK's departure from the EU, such as the removal of the requirement to advertise contracts in the Official Journal of the European Union in favour of a new UK e-notification service.

The main UK procurement measures are contained in the Public Contracts Regulations 2015 (PCR), which apply to the procurement of works, services or supply contracts that have a value in excess of the published thresholds for that year and are not otherwise excluded. The PCR require publication of the opportunity on the UK e-notification service and compliance with detailed rules when carrying out the competition. This regime applies to the majority of PPPs.20

Besides the PCR, there are three specialised sets of regulations that govern the procurement of certain types of contracts excluded from the PCR. All of the regulations require the application of overriding principles of fair procurement, including the equal treatment of all bidders, transparency of the procurer's requirements and decision-making processes, and non-discrimination.

Where the full regime applies, there is a choice of procedures. However, the majority of PPPs and other large or complex contracts are awarded pursuant to either the competitive dialogue procedure or the competitive procedure with negotiation. Both procedures involve the contracting authority inviting short-listed tenderers to participate in rounds of dialogue or negotiation before inviting final tenders and selecting the one that is most economically advantageous.

There has been a significant government policy focus on shortening procurement timescales. As part of this, the government promotes extensive pre-procurement market engagement, which is expressly permitted under the UK regulations. Conversely, public consultation is not usually a feature of the PPP process, although procuring authorities remain subject to freedom of information laws and concluded contracts are often published (usually in redacted form).

In the run-up to Brexit, the government announced that it intended to move away from the EU-derived regime and replace the current UK procurement regulations with a new system based on the World Trade Organization's government procurement agreement. The government published a green paper in December 2020,21 which set out the government's proposals to replace the current four sets of procurement regulations with a single, uniform set of rules for all contract awards, supplemented by sector-specific sections where different rules are justified. Following a consultation, the government announced in December 2021 that it intended to press ahead with the reforms.22 A bill is due to be put forward during 2022 and the resulting new law is expected to enter into force in 2023.

Whether the competitive dialogue or the competitive procedure with negotiation is used, the procurement process essentially follows the same steps.

ii Expressions of interest

All above-threshold contracts to which the legislation applies must be published on Find a Tender Service, the UK e-notification service. The notice must describe the nature and estimated value of the contract and provide a link or address where further information can be obtained.

The information pack will include a selection questionnaire to be completed by interested parties and returned to the authority. Respondents will be assessed based on their responses to the questionnaire, and those that meet the minimum requirements will be scored and ranked. The authority then selects a shortlist of usually between three and five respondents who will be invited to the dialogue or negotiations stage of the competition.

iii Dialogue, negotiations and final tenders

Bidders shortlisted will then be provided with a suite of documents referred to as the invitation to participate in competitive dialogue, or the invitation to negotiate (depending on the chosen procedure). The documents will include details of the timetable and process for dialogue or negotiation.

Following the receipt of initial tenders, there will be a period of dialogue or negotiation with each bidder. The authority may, in principle, discuss and negotiate all aspects of the tenders, but must also have regard to the core principle of equal treatment and must maintain the confidentiality of each bidder's technical solutions.

Following one or more rounds of dialogue or negotiation with bidders, the authority will eventually bring discussions to a close and invite final tenders from the remaining bidders, specifying a common deadline for their submission.

iv Evaluation and grant

Once the final tenders have been submitted, the authority will evaluate those tenders by applying its evaluation criteria. The overall objective is to identify the most economically advantageous tender, which essentially represents a balance of quality and price. The contract may only be awarded to the bidder that receives the highest weighted score in accordance with the authority's evaluation methodology.

Following the decision to award the contract to a preferred bidder, final negotiations may be carried out with that bidder to finalise details of the contract, provided these do not materially modify essential aspects of its final tender. The authority must notify all unsuccessful bidders of its intention to contract with the preferred bidder and refrain from signing the contract for a standstill period of at least 10 days from the date of the notification. This provides unsuccessful bidders with an opportunity to issue a claim in respect of any alleged breach of the procurement rules before the contract is signed with the preferred bidder.

v Subsequent amendments to PPP agreements

Where a PPP project falls within the scope of the regulations (whether the PCR or the other regulations referred to above) and has been awarded pursuant to those rules, there are limitations on the extent to which the project agreements may subsequently be amended without triggering a requirement to hold a new competition.

Any substantial modification has to be treated as giving rise to a new contract that must be put back out to tender, unless a specific exemption applies. A modification will be considered substantial if it renders the contract materially different in character; changes its economic balance or extends its scope considerably; or if the changed parameters would have attracted different bidders or led to a different successful bidder in the original competition. However, the regulations do allow for exemptions, inter alia, where the modifications were provided for in precise review clauses in the initial procurement documents or where the need for those changes has arisen from circumstances that a diligent authority could not have foreseen.

The contract

This section focuses on the PFI/PF2 model and SOPC guidance. As the PFI/PF2 model will not be used for new infrastructure, this section is most relevant to existing projects. However, the SOPC principles and standard provisions continue to influence the terms of other PPP projects, particularly those using a project-financed structure.

i Payment

Once the project is operational and is performing to the required standard, the contractor is generally paid a unitary charge that covers the cost of the asset as well as service provision. While certain capital expenses may be covered by capital contributions, generally capital expenditure is financed by equity and debt finance and recovered through the unitary charge.

The payment mechanism sits alongside the performance regime and together they give financial effect to the agreed risk allocation by applying deductions to the unitary charge in the case of non-availability or a failure to meet service standards. The unitary charge is typically indexed, and certain components of the charge may be subject to periodic benchmarking or market testing.

ii State guarantees

Projects procured by central government may carry a state credit rating. State guarantees of non-departmental public bodies are not common but have sometimes been provided in certain sectors and on the most complex projects. In 2012, the government introduced the UK guarantee scheme to support major projects, which will run until 2026 and is managed by the IPA (see Section VI.ii for further details).

It is unusual for the contractor to take significant demand or usage risk in PFI/PF2 projects, but for certain projects this may be appropriate. There are examples of the government providing usage guarantees to mitigate demand risk in such cases.

iii Asset and land ownership

The authority will usually own the land and lease or licence it to the contractor. However, where a project is equipment-based (rather than building-based), the contractor usually acquires the assets and the authority is given the right to use and, in certain cases, obtain ownership of the assets to fulfil its statutory duties.

Assets will generally be handed over to the authority at the end of the term of the contract, though certain exceptions exist.

iv Amendments and variation

As projects are long term, the contract usually will include a change mechanism to address changes to the requirements during the life of the project.

PFI/PF2 project contracts usually cover three main changes concerning:

  1. use or functionality of the asset;
  2. capacity of the asset or service; and
  3. the specification and standards of the service.

If the contractor wishes to amend project and finance documents, the authority's consent will be required, although certain minor changes may only require notification to the authority once they have been made.

Changes are priced and agreed in accordance with the change mechanism, which will usually provide for an independent determination to resolve any disagreements between the parties.

v Risk allocation

The PFI/PF2 structure seeks to transfer the majority of the risk related to the construction and operation of the relevant asset to the contractor. This is achieved primarily through the payment mechanism and performance regime. The contractor typically will not earn revenue until the relevant asset has been completed23 and, once services have commenced, its revenue will be reduced if the services are not provided or are not provided to the required standard.

The authority retains or shares in the risks associated with certain supervening events, the occurrence of which entitle the contractor to relief from performance and, in certain cases, additional compensation. The extent of the available relief or compensation, or both, will depend on the nature of the event. There are three specific types of event:

  1. compensation events: events where the risk should lie with the authority, such as authority breaches of contract, and the contractor should receive relief from its obligations and compensation on a 'no better, no worse' basis;
  2. relief events: events outside the contractor's control but which the contractor is best placed to manage (or insure against) and which should provide the contractor relief from default termination (while still bearing the financial risk of delay or non-performance); and
  3. force majeure events: limited circumstances outside the contractor's control (and generally not capable of being insured) that are neither parties' fault. The affected obligations may be suspended, although termination rights may arise if the event cannot be addressed within a reasonable time frame.

vi Change in law

The authority will assume the risk of changes in law that expressly discriminate against the contractor or that specifically refer to the provision of services of the type being provided by the contractor.

The authority may share in the cost of meeting capital expenditure arising as a result of other unforeseeable changes in law during the operational period (with the contractor expected to price in the impact of general changes in law during the construction period).

The contractor is also protected from changes to its operational costs arising as a result of a general change in law through indexation of the unitary charge and, where appropriate, benchmarking or market testing provisions.

vii Early termination and compensation

The authority will generally have the ability to terminate the contract for contractor default, including material or persistent breach and insolvency, subject to the contractor's right to rectify breaches that are capable of being rectified within a specific period. Authority termination rights are usually subject to the step-in rights of the project's senior lenders.

In most cases (but not always) the authority is required to compensate the contractor on termination for a contractor default. This compensation is generally calculated by reference to the market value of the asset, through a re-tender to a new contractor where there is a liquid market, or by assessment of an independent expert where there is not.

The contractor will be able to terminate the contract for authority default, which will generally be limited to non-payment, breaches that frustrate the services and non-permitted assignment. The contractor will usually be fully compensated in these circumstances, including the repayment of project senior debt and equity returns.

The project contract may also include rights for the authority to voluntarily terminate the contract, and in this case the contractor will be fully compensated.

Continuing force majeure events that cannot be resolved within a reasonable time frame may lead to termination. The compensation will be on a no-fault basis and, while senior debt will be repaid, the contractor sponsor's equity will only be repaid at par value.

The contract will set out in detail the provisions for calculating the termination compensation. The termination compensation regime is always a key focus for a project's senior lenders and equity investors.

viii Refinancing

Standard form PFI/PF2 contracts include provisions for the sharing of refinancing gains. The authority typically has the right to approve any refinancing, and provisions are included in the contract to allow the authority to share in any qualifying financial gains achieved through refinancing (usually on a sliding scale).


PPP projects are typically financed by a mixture of debt provided by lenders on a limited recourse basis (i.e., the lenders' principal recourse is to the project's cash flows only and does not extend to other assets of the project or the project's equity investors, subject to any construction guarantees or letters of credit that may be given) and equity. PFI/PF2 projects have a high level of debt-to-equity, typically a ratio of around 90:10.

i Equity

PFIs were generally set up using a conventional holding company–project company structure. Historically, it was the construction contractors bidding for the projects that provided the upfront equity capital investments. However, third-party financial investors (such as infrastructure funds) regularly acquire equity in PFI projects once they have been completed, and on more recent projects have invested at an earlier stage as a result of market growth and contractors' capital constraints.

Equity is usually provided in the form of subscription monies and subordinated debt, the latter being structured either as the issue of unsecured loan notes or shareholder loans. The subordinated debt is generally regarded as equity for financial gearing ratio purposes.

One of the main differences between PFI and PF2 is government participation in the project equity. In PF2 projects the government, through an arm's-length HM Treasury unit, provided an element of the equity capital into the project vehicle (typically 10 per cent). The purpose of taking an equity stake was to strengthen the collaboration between the public and private sectors, and enable the public sector to benefit from increased financial transparency and decision-making capabilities on such projects. As described above, the Welsh MIM also provides for the Welsh government to take an equity stake (up to 20 per cent).

ii Debt

Commercial banks have tended to be the most common source of senior debt for PFI and PPP projects and they have been an important source of debt throughout the lifetime of the model in the UK. As commercial banks will tend to lend at a floating interest rate, borrowers also take out matching interest rate swaps to fix their interest rate exposure.

There has for a long time, however, been a view in the market that institutional money (for example, from pension funds and insurance companies) is a more natural fit for the long-term fixed rate debt that PFI and PPP projects require, and the market has frequently sought to find financing structures that would access the public bond market, through which much institutional money is invested or lent. However, certain characteristics of the public bond market impeded this, including that bond proceeds are usually issued as a single lump sum, the passive nature of bond investors and bond market liquidity constraints for low or sub-investment grade projects.

Prior to the 2008 financial crisis, this manifested itself in the rise of monoline-wrapped bond finance, in which monoline insurers or guarantors with strong (typically AAA) credit ratings took project credit risk for an appropriate fee and provided a financial guarantee or credit insurance policy to bondholders, enabling the bonds to be issued with the benefit of the monoline credit rating.

Since the 2008 financial crisis, banks have been increasingly reluctant to issue long-term loans because of stricter regulatory requirements and capital constraints, and as a result there has been continued focus on institutional lenders as a source of alternative sources of debt financing to fill the void.

The most important evolution has come in the past few years, with institutional lenders lending directly to PFI and PPP projects. While these structures are generally known as private placements (reflecting a model in which bonds are placed privately with a small number of investors or lenders), they can be structured in loan or note or bond formats. Many institutional lenders now have large and well-skilled project finance teams, allowing them to participate in lending syndicates on equal terms with commercial banks; they also have the appetite for lending longer-term fixed rate debt at competitive interest rates. As a result, institutional private placements are now the most prevalent route for institutional lending and a common feature in PFI and PPP projects, with institutional lenders providing longer-term facilities at fixed interest rates and commercial banks providing shorter-term facilities, working capital and standby facilities.

An increased focus on ESG has also seen green loans and bonds and sustainable financing products develop. These are largely a way of identifying loans that support environmental and sustainable development projects, offering access to additional market liquidity for infrastructure projects that offer environmental or sustainability benefits, or both, such as renewable power generation and waste management projects as well as the Thames Tideway Tunnel project.

Another policy that was established to encourage alternative debt funding is the UK guarantee scheme (the scheme), under which the government guarantees debt raised to fund infrastructure projects of national significance that have been unable to raise finance in the financial markets. A key characteristic of the scheme is that the government acts as a market investor, so that the fee that it charges must be market-based, and it is only able to offer the guarantee in line with normal lender credit assessment procedures. As a result, the scheme is only available to fund projects that are inherently bankable according to normal project finance criteria, but that have been unable to find funding in the financial markets because of market dysfunction (or other external factors). Ten projects covering different sectors and deal sizes have already benefited from the scheme since its inception, and the government announced in November 2016 that the scheme will continue until at least 2026. However, many commentators regard the scheme as unnecessary for the majority of well-structured at or near investment-grade infrastructure projects.

Recent decisions

2021 saw the conclusion of Bechtel Limited v. High Speed Two (HS2) Limited,24 where the unsuccessful bidder (Bechtel) for a works contract at Old Oak Common (a new station to be built as part of the HS2 project) made allegations as to manifest error in HS2's scoring, inadequate record keeping, abnormally low tender and material differences between the contract tendered for and the contract actually awarded. The court rejected the claim in full, concluding that there had been no manifest error, and accordingly it would not interfere. Although there had been one isolated technical breach (arising from the failure to minute a post-evaluation clarification meeting), it would be disproportionate to overturn the award decision as a result. The court made several noteworthy comments in favour of contracting authorities, including to the effect that the courts cannot remedy a bidder's subjective dissatisfaction with a competition outcome; and that a contracting authority cannot be expected to achieve procedural perfection (along with the associated cost) in order to protect itself from legal challenges.

The court has recently ruled on several challenges to the government's pandemic-related procurement activities, which were brought by the Good Law Project, a not-for-profit campaigning organisation. These claims targeted alleged breaches of the PCR and principles of equal treatment and transparency, for example (1) the failure to publish contract award notices;25 (2) the award of contracts to PPE suppliers by operation of a 'high priority lane' for suppliers referred by ministers (who upon referral were afforded more favourable treatment in award decisions);26 and (3) the unlawful direct award of a contract for the provision of focus group and communications support services on grounds of apparent bias.27 In spite of its status as a third party (and not an economic operator) the Good Law Project was found to have standing based on its interest and expertise in scrutinising the government's procurement practices28 (although the Court of Appeal cast doubt on this conclusion in its most recent judgment).29 The challenges have been partially successful: the court has held that the widespread failure to publish contract award notices was unlawful, and the use of a high priority lane was in breach of the principles of equal treatment and transparency. Most recently however, the Court of Appeal rejected a finding of apparent bias and held that the use of the negotiated procedure available under the PCR was strictly necessary.


While the traditional PFI/PF2 model is currently out of favour in the UK, the government has stated that it will continue to consider new revenue support models as well as extend the use of other existing models.

The government has unveiled the Nuclear Energy (Financing) Bill 2021–2022 which provides for the use of the RAB model for new nuclear power stations.30 The model is expected to closely follow the model that was used to finance the Thames Tideway Tunnel project. During 2021, the government also published various updates on potential business models for CCUS projects31 following the response to its consultation in August 2020. The updated business models provide for the use of the RAB model for the delivery of the transportation and storage components of CCUS as well as CfD-based cost subsidy mechanisms for emitter projects.32

Alongside the possible wider use of the RAB model, the government has broadened the use of the CfD scheme for power generation and has proposed a CfD-based scheme for hydrogen. The Low Carbon Hydrogen Business Model consultation launched in August 2021 and closed on 25 October.33 The proposed model for support of hydrogen projects is a 'Hydrogen CfD' built on the principles of the low-carbon CfD. It remains to be seen how close the 'Hydrogen CfD' will be to the traditional low-carbon CfD; however, there are already some key differences. The government aims to publish a response to the consultation in early 2022.

The RAB model and CfDs are not suitable for delivering all infrastructure developments. In particular, both models are funded by end-user revenue, making the models unsuitable for most social infrastructure and its use challenging where there are already very high end-user costs (passenger rail transport, for example). There remains a question as to what, if any, model will take the place of PFI/PF2 or whether this gap will continue be met by public sector finance. What is clear is that the private sector will continue to play an important role in the financing of new and existing public infrastructure in the UK, even if that is not through a traditional PPP-like structure.


1 Tom Marshall and Helen Beatty are partners, Sam Cundall is a senior associate and Chloe Njamfa is an associate at Herbert Smith Freehills LLP.

2 For example, the Channel Tunnel, which opened in 1994, and the QE2 Bridge at Dartford, which opened in 1991.

3 The public sector setting what outputs need to be achieved and the private sector deciding how it will achieve them.

4 Scottish Government's Medium Term Financial Strategy: May 2019 (30 May 2019) (last accessed 20 January 2022).

5 Managing the expiry of PFI Contracts, Public Accounts Committee (19 March 2021) (last accessed 20 January 2022).

6 Managing the Risks of PFI Contract Expiry, IPA (16 August 2021) (last accessed 20 January 2022).

8 Managing PFI assets and services as contracts end, Comptroller and Auditor General (5 June 2020), (last accessed 20 January 2022).

9 Current examples of which include the dualling of the A465, the redevelopment of the Velindre Cancer Centre in Cardiff and additional investment in Band B of the 21st Century Schools Programme.

10 For example, the QE2 Bridge at Dartford and the Second Severn Crossing (before the expiry of its concession in 2018).

11 An example of such a partnership is that of the Cambridge University Hospitals NHS Foundation Trust and John Laing, who are collaborating on a series of medical facilities.

12 Prominent uses of the delivery partner model include the Olympic Delivery Authority appointing the CLM consortium in relation to the London 2012 Olympic Games and Transport for London using Crossrail Ltd for the construction of the Elizabeth Line.

13 National Infrastructure Strategy (25 November 2020) (last accessed 20 January 2022).

14 Nuclear Energy (Financing) Bill 2021-22" (last accessed 20 January 2022). At the time of writing, the Bill is to go through a second reading in the House of Commons.

15 Carbon Capture Storage, an update on the business model for Transport and Storage (January 2022) (last accessed 20 January 2022).

16 Energy White Paper: Powering our net zero future, BEIS (14 December 2020), (last accessed 20 January 2022).

17 The Atomic Weapons Establishment (AWE), responsible for the design, manufacture and support of the UK's nuclear weapons, is an example of where such a structure was used.

18 For example, the National Health Service Act 2006 permitted the government to guarantee the payment obligations of NHS trusts in certain circumstances.

19 Previously this has included PFI credits, a form of ringfenced funding that afforded additional spending power for PFI projects to be delivered by local authorities. However, PFI credits have been abolished and have not been used for a number of years.

20 The PCR also lay down a light touch regime, which is applicable to contracts for certain specified types of services including social, health and education services. This regime will rarely be relevant to PPPs.

21 Green Paper: Transforming public procurement, Cabinet Office (15 December 2020),–procurement (last accessed 20 January 2022).

22 Transforming Public Procurement - Government response to consultation (6 December 2021) (last accessed 20 January 2022).

23 There are examples of projects where a part of the charge is payable from financial close in circumstances where the contractor takes over existing infrastructure as well as constructing new infrastructure.

24 Bechtel Limited v. High Speed Two (HS2) Limited [2021] EWHC 458 (TCC).

25 R. (on the application of Good Law Project Ltd) v. Secretary of State for Health and Social Care [2021] EWHC 346 (Admin).

26 R. (on the application of Good Law Project Ltd) v. Secretary of State for Health and Social Care [2022] EWHC 46 (TCC).

27 R. (on the application of Good Law Project Ltd) v. Minister for the Cabinet Office [2022] EWCA Civ 21.

28 R. (on the application of Good Law Project Ltd) v. Secretary of State for Health and Social Care [2022] EWHC 46 (TCC) and R. (on the application of Good Law Project Ltd) v. Secretary of State for Health and Social Care [2021] EWHC 346 (Admin).

29 R. (on the application of Good Law Project Ltd) v. Minister for the Cabinet Office [2022] EWCA Civ 21.

30 Nuclear Energy (Financing) Bill 2021–2022" (last accessed 20 January 2022). At the time of writing, the Bill is to go through a second reading in the House of Commons.

31 This includes updates on the business models for industrial carbon capture and dispatchable power agreements in October and November 2021, and an update on the transport and storage business model in January 2022, (last accessed 20 January 2022).

32 Business models for carbon capture, usage and storage (see footnote 27).

33 Design of a business model for low carbon hydrogen, BEIS (17 August 2021) (last accessed 20 January 2021).

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