Case Study – Turnaround of a Multi-School PFI Concession (by Nigel Brindley)

Background

This 30 year concession was for the design, build, financing and operation of a multi-site schools PFI project in the UK. The project was acquired as part of a large portfolio, the due diligence for which identified a dispute that management representations indicated was resolved with settlement documentation pending. It quickly became apparent that this was not the case.

The dispute with the client involved the contractual interpretation of the payment mechanism resulting in £300k pa of unrecovered disputed costs. This resulted in an unsustainable cash outflow that would have led to insolvency within 18 months. The consequences would have been the collapse of the concession with a total loss of investment, negative publicity and reputational damage to one of the UK’s largest PFI investors. The alternative would have been considerable further equity investment to save the project with no prospect of a return.

This dispute was complicated further by various unresolved construction disputes, excessive energy consumption and unreported loan covenant breaches. Furthermore, the operating contract had been re- let following the collapse of the original contractor on terms inconsistent with the main agreement and relationships between the parties was poor due to the lapsed time without resolution.

Objectives

  • Resolve all project disputes and avert the collapse of the
  • Refinance the company to avoid any further equity
  • Restore long-term viability of the project and rebuild equity

Action Taken

  1. I established strict cashflow controls to ensure continued solvency.
  2. Qualified waivers were secured from the senior lender under a ‘reservation of rights’ letter.
  3. My initial client negotiations were unsuccessful as the dispute had become too entrenched and I referred the dispute to mediation. I prepared the company’s submission, evaluating a range of settlement options for prior equity approval.
  4. The concessions made at mediation were inadequate to bridge the differences between the parties. I discounted a possible referral to the formal dispute resolution procedure (too lengthy and expensive with insufficient certainty of outcome) and secured equity agreement to a further round of negotiations.
  5. I negotiated with the main operating contractor a commercial contribution to a settlement and amended contract terms that considerably increased my negotiating flexibility. I held a series of meetings with the authority’s Finance Director and Chief Education Officer to improve relationships and promote better understanding between the parties. I determined various aspirations for and frustrations with the school facilities outside the terms of the dispute.
  6. I developed commercial options to address these wider issues which could create greater value to the authority than the equivalent cost to the concession. By extending the negotiations to include these, the basis of a mutually acceptable settlement emerged.
  7. I prepared the ‘heads of terms’ for the contractual and commercial amendments which included wrapping-up all historical disputes with a back-dated settlement. This enabled a cash contribution by the authority which could part-fund agreed additional capital works.

Outcome

  1. All disputes resolved, loan breaches repaired and future project viability secured.
  2. The need for new equity was avoided and the acquisition valuation preserved.
  3. An open, trusting relationship was established with the authority based on honesty and integrity.

Commendation: Senior Litigation Partner – Stephenson Harwood LLP

“Nigel has a wealth of experience in infrastructure asset management and brings a pragmatic and sensible approach to projects. His energy and determination was instrumental in achieving the successful resolution of an intractable dispute that had lasted many years before Nigel’s intervention to break the deadlock and deliver a workable solution that all stakeholders could agree”

Written by Nigel Brindley

 

Nigel Brindley

Expert, Nigel Brindley, advises investors in construction and infrastructure projects and businesses and is a non-executive director. He specialises in performance improvement and has advised a Private Equity firm in the acquisition of two distressed construction companies in 2018.

Previously, Nigel led the asset management and investor reporting for Barclays Private Equity’s infrastructure funds. He fulfilled a similar role at the investment division of Mowlem prior to its acquisition by Carillion.

Nigel’s background is in managing high profile construction projects (including BP Oil’s New Headquarters and the MI5’s Thames House Refurbishment). Nigel started his career at Arup where he was a design engineer on the iconic Lloyds Building in London.