SoPC 4

SoPC 4

Ciara Seymour summarises the principal changes introduced by the revised version of the Standardisation of PFI Contracts guidance.

SoPC 4

On 21 March 2007, HM Treasury published the fourth version of its Standardisation of PFI Contracts guidance ("SoPC 4"). Compliance with this up-dated guidance is mandatory for all projects in England still in competitive procurement on 1 May 2007.

The principal changes introduced by SoPC 4 focus on key operational areas and are mainly guidance based rather than required drafting. Of those parts which are drafting, a lot of them are not new but simply a consolidation of the changes made in December 2005 which were published by way of an addendum to the previous guidance. The most significant changes introduced by SoPC 4 are as follows:

• A new chapter on payment mechanisms has been included and this is mainly guidance covering development and calibration. The guidance provides that payment mechanisms should be keep as simple as possible whilst still incorporating all necessary criteria and variables.
• HM Treasury has recognised that the majority of projects require a significant number of changes in services to be implemented during their term and thus an efficient change process must be developed. Accordingly the previous required drafting has been replaced with "Change Protocols" which will set out procedures for agreeing and carrying out variations. The expectation is that each sponsoring department will develop a protocol specific to their sector taking into account issues such as the source of the change, the size and timing of the change and the type of change.
• SoPC 4 introduces provisions to allow an Authority to terminate the PFI agreement at certain fixed points with a fixed compensation sum due in respect of equity. This is a significant area of new guidance which is not mandatory and therefore it remains to be seen how authorities (and indeed bidders) will respond to the same.
• The price variation provisions have been up-dated to reflect HM Treasury's preference for market testing rather than bench-marking. However, SoPC 4 does set out those circumstances in which it may not be appropriate to market-test, for example, where there is no competitive market for the relevant service.
• SoPC 4 introduces a new chapter which provides guidance on how Authorities should apply due diligence in the bid process to avoid contractor distress and pointers on recognising and managing the same.
• New chapters have been included on bond and corporate finance providing an overview of the key features associated with each and the necessary derogations from the standard drafting which may apply when the same are used. However, SoPC 4 does not express a preference for one type of funding solution over another.
• Additional required drafting has been included which provides that the Contractor must notify the Authority of all refinancings as soon as it becomes aware of the same. Furthermore, Contractors are required to ensure that their finance documentation includes provisions ensuring that they are notified of any refinancings, thus enabling them to inform the Authority.
• The guidance has been up-dated to take account of the introduction of the Competitive Dialogue Procedure.
• The new guidance provides that such agreements are best avoided and will only be allowed where they are value for money in their own right and are not related to any one particular solution.
• The existing SoPC provisions in relation to the provision of information have become mandatory drafting and further provisions have been included to give Authorities increased rights to information.

Although SoPC 4 does not apply to Northern Ireland, the Strategic Investment Board are currently updating SoPCNI 2 to reflect the same. This piece of work is expected to be finished by the end of the summer.

Going Forward

SoPC4 is to be welcomed as it consolidates all of the new changes as well as those introduced in 2005. Furthermore, it contains some useful drafting, although the fact that the changes consist mainly of guidance means that it should not cause a significant shift in the market.

Ciara Seymour is an Associate in the firm's Corporate Department specialising in infrastructure schemes. She is currently advising the Sperrin Lakeland Trust on the Enniskillen Hospital PPP Project and the successful Bidder in the East Down & Lisburn education PPP Project. Ciara can be contacted at: ciara.seymour@lestrangeandbrett.com

Quote: SIB ..... updating SOPC2