A Project Explained

A company such as John Laing acts as a sponsor for a PFI bid. Its role is to assemble a consortium of organisations with the necessary skills and financial strength to fulfil the project requirements over a period that can extend for over 30 years. This includes, therefore, banks or the capital markets (bonds) to provide the senior debt facility (a loan representing typically 90% of the capital needed), other investors to provide shareholder funds (unless Laing is the sole investor), design and build contractors, and facilities management (FM) providers. FM provision incorporates ‘hard’ (e.g. maintenance of buildings) and ‘soft’ (e.g. catering, laundry, grounds maintenance) services. Project requirements such as architectural and ICT services are typically outsourced from the consortium to sub-contractors.

The consortium is usually structured as a Special Purpose Company (SPC) and is owned by the equity finance providers for the scheme. Upon completion of the construction phase, the role of the SPC is to provide the service delivery to the public sector client through its sub-contractors, over the agreed concession period. The public sector client pays for these services once the building/asset is completed and in use, providing a performance-related revenue stream (monthly/unitary fee) that is sufficient to cover the cost of operating the project, service debt and provide a return to the investors. For buildings such as hospitals, the unitary fee payment mechanism is usually structured in the form of:

an “availability fee”, related to whether rooms and facilities are available for use for the purpose intended, with payment deductions for non-availability dependent on the type of room and its area;
and a “service fee”, related to the quality of service provided by contracted staff, with payment deductions made for lack of quality.

The monthly revenue stream for a PFI road or bridge uses a toll system, either a real toll paid by the road users themselves, or a “shadow toll” from the public sector client, where payment is dependent on the amount and type of traffic using the road.

At the end of the concession, ownership and management of the building or buildings is most typically passed from the SPC back to the client, and responsibility no longer lies with the consortium.

The typical structural relationships between the companies in a PFI project can be seen in the diagram. The Holding Company (“HoldCo”) is owned by its investors. The Project Company (“ProjectCo” or “SPC”) is in turn owned by HoldCo. Other relationships between parties are through contracts or sub-contracts.

Single headed arrows denote direction of money flow. The heavier arrows also denote legal ownership over a company. Double headed arrow indicates the specific Project Agreement relationship between the SPC and public sector client.