CITY LAWYERS WORKING ON PFI DEALS HAVE NOTHING BUT PRAISE FOR THE PROPOSED NEW LEGISLATION, ROBERT VERKAIK DISCOVERSThe efficacy with which the new government has addressed the legal and policy hurdles holding back the Private Finance Initiative (PFI) looks set to empower the many lawyers working on PFI projects up and down the country.Lawyers have had to remain impotent for too long while the private and public sectors failed to see eye to eye on the biggest deals.

Sometimes it has even been the lawyer's task to keep the parties apart.

After all, if the existing law gives rise to risk, then it is the lawyer's duty to advise caution.The key to unlocking many of these high-profile deals is in new legislation.

And a number of law firms have been in the thick of the drafting process, liaising closely with government departments.The fruits of their labours, two new Bills relating to the National Health Service and local authorities, are aimed at removing the uncertainty surrounding the question of ultra vires (see below).

A team of lawyers at Clifford Chance has been helping the government with both of the Bills.

Clifford Chance partner Tim Steadman helped the Department of the Environment, Transport and the Regions with the drafting of the Local Government (Contracts) Bill, published last month and aimed at ending doubts over PFI in local government PFI contacts.

Mr Steadman said: 'We have been liaising with the Department of the Environment and the 4Ps, the body set up to promote local authority PFI, to ensure that the Bill should be acceptable to the funders of PFI projects.'Both governments have identified the role of the lawyers as crucial in getting PFI to work.

The Private Finance Panel and the government departments' PFI units have a number of lawyers working with them on special secondments.

Simmons & Simmons partners Edwin Godfrey, the joint deputy chief executive of the Private Finance Panel, has been at the heart of efforts to standardise contracts in PFI deals as well as working on the vires issue.

Last week it was announced that the man chosen to head-up the new PFI taskforce, which replaces Mr Godfrey's panel in September, is Adrian Montague, a former partner with Linklaters & Paines and now a banker at Dresdner Kleinwort Benson.

Meanwhile, the Bates review of the PFI, the recommendations of which were published last month (see [1997] Gazette, 11 June, 6), has led to the prioritising of 14 NHS projects and the setting-down of a 29-point plan.Giles Frost is a PFI partner at City law firm Wilde Sapte and is involved in one of the flagship PFI projects, the £200 million Norfolk and Norwich hospital.

Mr Frost says: 'It's all been very positive.

We've got a new government which has moved quickly to remove doubts, and will be in power for the next five years, possibly another ten.'Mr Frost says PFI has come a long way, even in just two years.

He recalls at a Confederation of British Industry conference two years ago being lambasted by Kenneth Clarke, the former Chancellor of the Exchequer, when he asked whether the government envisaged any more legislation to solve the ultra vires question.Mr Frost says: 'It wasn't really Ken Clarke's fault.

The advice he was getting from the civil servants was at odds with what the banking markets were saying.'Malcolm Bates, the Pearl Group chairman leading the PFI review, is keen that the new Treasury taskforce will have a more shaping and monitoring role.

The on-the-ground experience of the 25-member executive will have to be carried out by individual departments.

While this does not pose a problem for the self-standing PFI units in defence and health, other departments, such as education and the Home Office, have come to rely on the work of the PFI professionals to sort out the nuts and bolts of the PFI projects.Rowe & Maw partner Christopher Causer describes the Bates review as a good mix of the 'macro and micro'.

He adds: 'There are some very practical and down-to-earth suggestions for improving the PFI process, such as the recommendations on refunding bidders' costs in full where a project is abandoned.' He also applauds streamlining at the early stages of procurement and the removal of 'time-wasting' questionnaires that have been used in some projects.Frank Suttie, head of PFI at Garretts, adds: 'Excessive tendering timescales and the high costs involved have long been at the core of private sector concerns over the last Government's stalled PFI.'Mr Causer also praises the creation of the new taskforce which, he says, will allow the government to concentrate its efforts to 'push projects forward in one body'.But Mr Godfrey, who is to return to his law firm in September, says: 'There now remains the question of whether the government can staff up in time.

They are going to have to act quite quickly to replace the expertise.'Nevertheless, Mr Godfrey wholeheartedly supports the prioritisation programme which effectively ends the non-regulatory policy of the past.Certainly it has thrust lawyers into the driving seat of many of the 14 high-priority NHS trust projects.

City law firm Beachcroft Stanleys, which has for a long time been building up its PFI practice, is advising on five of the schemes worth a combined £250 million.

Pinsent Curtis has used its presence in Leeds, Birmingham and London to win three of the contracts to advise NHS trusts worth £200 million.Despite the new legislation, lawyers still have to get to grips with the complexities of drafting transfer of risk contracts which establish a mechanism for payment and penalty which is clear to both sides.Pinsent's PFI partner Arthur Lovitt points out that it will be those firms which have geared up to the new PFI market that will be in a position to succeed: 'We have developed a successful strategy to offer legal services to NHS trusts from the time of their creation in 1991.

As a capital investment part of the public sector, we recognised immediately the relevance of private finance to the NHS.'Giles Frost says the prioritisation programme will mean advisors who do not have the experience to help bring multi-million deals to fruition will be cut out of the equation.He says there have even been one or two local law firms advising on PFI deals whose inexperience has held back the process rather than delivered the deal.BIBI BERKI TALKS TO THE CITY FIRMS WHICH HAVE ALREADY BEEN INVOLVED IN PFI PROJECTS ABOUT THEIR EXPERIENCESWhen the paymaster general, Geoffrey Robinson, announced the results of the review into the PFI, he spoke about the need to reinvigorate the scheme.

The PFI, it was reported, needed 'new life' breathed into it.

It was 'plagued with problems' and suffered from too many obstacles.

In its fitful evolution since it was launched by the then-chancellor, Norman Lamont, in 1992, it has met with cri ticism, scepticism and general consternation over its legal complexities and minefields.But legal complexities are the stuff of life for law firms dealing with major construction and infrastructure projects.

The big players who are involved in PFI work could have been forgiven for thinking the scheme never went through a lull at all.

To these firms, PFI work has been a healthy fact of life for some time, and will continue to be so now that Labour has made it clear that it has no ideological problems with the private sector getting involved in public projects.

To most of these practices, PFI is an extension of their project finance work or local government and public sector representation.

It is not that having to contend with ultra vires problems in the health sector, for example, has not been difficult -- and this looks like being cleared up soon with new legislation -- but there have always been clients who need new school buildings or who want to build them.

And the recession meant that companies were looking around for new projects all the time and were prepared to secure them in any way available.In the City, the larger firms found themselves drawn into large-scale projects under the auspices of the PFI.

The best known of these schemes include the £3 billion Channel Tunnel rail link, the £300 million second Severn crossing at Bristol and the £190 million refurbishment of the Treasury.

Other PFI schemes which have had high profiles include the project to build a new visitor centre and transport-link at Stonehenge -- although this was put on hold when the Millennium Commission withdrew linked funding -- and the building of a bridge linking the Isle of Skye to mainland Scotland.

The recession had severely reduced the number of roads built and clients wanted to get involved in any schemes, private or public.

Political ideology never came into the equation.At Clifford Chance the project finance arm of the firm was already strong.

It simply used its existing skills to absorb the additional needs of PFI.

It took on Dartford (the bridge) and Severn, which was in the early days of PFI.

Since then, says Tim Steadman, a partner in the project and finance group, PFI has flourised in the area of prisons and roads, is 'getting there' on property, and is about to 'burst forth' in the field of health.Instead of creating a separate PFI department, the firm created a steering group which co-ordinates initiatives.

Because these draw on so many different disciplines, says Steadman, there is no point in having a full-time PFI specialist.

To this end, the members of the steering group hail from -- among others -- the property, finance and construction groups of the firm.A deal starts life as a Europe-wide advertisement.

The client will then respond and be asked to pre-qualify for negotiation.

At this stage, says Steadman, the clients can use the firm or not, depending on how confident they are.

They are whittled down to a shortlist, typically of four or five bidders, and then detailed proposals follow, which result in the final choice of bidder.

Steadman says the role of the law firm while this is going on is to 'keep costs down'.Although it has had its shaky moments, PFI has a pretty glowing future, says Mr Steadman.

'It will run and run.

The government will get better at doing it and you'll find that the public sector will have more confidence.' The firm is reaping the rewards of this increasing confidence.

It is involved in many hospital projects and a number of property initiatives for the Ministry of Defence.At Linklaters & Paine s there has been a dedicated team working on PFI projects since the early 1980s.

The firm advised on one of the first prison schemes -- Fezakerley in Liverpool.Like Clifford Chance, Linklaters has seen largely good business out of the PFI.

But for both Mr Steadman and Bruce White, a partner in the project finance department at Linklaters which specialises in PFI, the initiative has had its more perilous moments.'There was a bad spell in the course of last year when people withdrew from the road market.

There was real frustration in the private sector that a lot of money was spent on PFI with very little to show for it.

Negotiations were taking a considerable amount of time,' says Mr White.When it came to projects involving the health trusts, he says, 'we had to advise on the shortcomings of the legislation'.

It took the government some time to remedy the problems in this area.

But, like Mr Steadman, Mr White sees a sure future in this area of work.On the other side of the coin, firms representing local authorities, health trusts and other public bodies have seen clients come forward to embrace the scheme because it is their only way of securing much-needed building and investment.

At the forefront is Eversheds, the national practice which represents 300 local authorities -- in other words, virtually all of them.

And in the Leeds office, parties can call upon the expertise of Stephen Cirell, a partner in the public sector unit and the author of a soon-to-be published guide to the initiative called Private Finance Initiative and Local Government.The firm has about 80 PFI deals of all sizes currently on its books.

They range from IT projects in Kent and Harrow and a new sports centre in Lincoln, to the Sheffield city centre redevelopment.

PFI can make use of the national nature of its practice by drawing on lawyers in just about every location.

Although the area is booming, it is still not universally accepted, says Mr Cirell, who is the chairman of the firm's PFI policy group.

'There's still a lot of scepticism and cynicism.A lot of clients think it's not the right way to go about things,' he says.

But in areas such as health, there is such a long queue for work that clients so no other way around than to take the PFI path.Because of the original vires problems affecting health trusts and local authorities, there had been a log jam of deals.

These should slowly be loosened by new legislation.

'Health is much more advanced than local government,' says Mr Cirell.

'In local government only one deal has been signed.'Mr Cirell's view of the PFI future is not so different to that of his City counterparts.

'Labour has confirmed that it's going to keep it and try to make it work better,' he says.

'It will streamline it and enhance it.'It remains to be seen what the new government will do to boost enthusiasm for the initiative among construction and engineering groups, which have been its harshest critics.

The CBI has also spoken out against it.

The lawyers make no stand on the politics.

But they have embraced the scheme as another arm to a side of business which suffered so drastically in the lean years.TIM WEEKES TALKS TO LOCAL GOVERNMENT LAWYERS ABOUT THE ULTRA VIRES PROBLEM WHICH HAS SCARED BANKS OFF PFI DEALSThe government has a real problem with local government finance.

Two of its priority policies are on education and housing, but these services are delivered mainly or partly by local government, which has no more spare cash to spend than the rest of the public sector.

Unlike some other parts of the public sector, h owever, attempts to get round the cash shortage in local government by using private sector finance have foundered until now because of the unique legal foundations of the PFI.Local government lawyers have therefore come into the spotlight as they try to reconcile the desire of councils to tap the flow of private sector funds while staying clear of any legal challenge to their transactions.For the lawyers, most of the problems stem from the fateful ruling in the case of Credit Suisse v Borough Council of Allerdale (see [1996] The Times, 20 May).Since Allerdale's guarantee on an investment in timeshare flats was deemed to be ultra vires, bankers have been frightened of lending to projects in local government -- and particularly PFI projects.

So serious is the vires problems that the government is pushing through a Bill specially to combat it.

The Local Government (Contracts Bill), which was announced in June, will enable local authorities to pay compensation to providers of finance in the event of a PFI transaction being ruled ultra vires.In bringing forward the Bill, the government says it wants 'to allay the fears of banks and other financial institutions who may be concerned that they could lose their investments'.Some local authority lawyers, however, are questioning whether this means any more PFI deals will be done.

Although the Bill gives local authorities specific power to enter into partnerships, it does not exempt them from the so-called Wednesbury rules, which require authorities to have exercised their powers reasonably and to have followed due process.This was where Allerdale Council went wrong.

It was ruled to have entered into the timeshare transaction for the 'inadmissible' reason of trying to get round restrictive Treasury rules.

With the Local Government (Contracts) Bill, a deal will still be able to be ruled ultra vires.

What changes is that the local authority will no longer escape its contractual obligations to its bankers.This will pacify the bankers -- but it shifts all the vires risk on to the local authority.

Leonie Cowen, principal of Leonie Cowen Associates, which advises councils on administrative law, says local authorities will now be 'terrified' of what could happen.

It falls to local authority lawyers to check deals to make sure the council has followed due process in deciding to enter into them.

But Ms Cowen says: 'Even the best put together deal can fail, and often it is not easy in preparing a deal for the local authority lawyer to decide whether due process has been gone through.'She says the problems highlight the need to get local authority lawyers involved in drawing up deals as early as possible, and not just to rubber-stamp them at the end of the process.One local authority lawyer even questions the alleged helpfulness of the contracts Bill.

Peter Pilgrem, legal services manager at Isle of Wight council and chairman of the Law Society's local government group, says it is all very well for local authorities to have the power to indemnify banks, 'but they will not necessarily have the money to do so'.He also says vires is only one of the legal obstacles standing in the way of a greater involvement in public/private partnerships.

He says a particular bugbear for local authority lawyers is the lack of power both to form local authority companies and to reinvest all capital receipts in council services.David Jenkins, county solicitor and director of corporate services at Dorset County Council, is more inclined to see opportunities in the PFI than obstacles.

Dorset was pioneeri ng the application of the PFI to schools, was a proposal to rebuild its 1,000-pupil Colfox comprehensive school, even before the contracts Bill was brought forward.Mr Jenkins says it is clear to him that the PFI was a 'perfectly legal' way to build a school under the 1996 Education Act.

He admits that a lot of lawyers representing contractors are concerned about Allerdale, but says: 'We should not pack up and go home on service innovation because of Allerdale.'He says: 'Allerdale DC was seeking to circumvent mainstream capital controls -- we are not doing that.

We have an entirely open relationship with the district auditor and the government.

They are showing a close and enthusiastic interest in what we are doing.' He says 'no lawyer can be 100% certain that a transaction will escape legal challenge', but says he is confident that Dorset, by acting in an open and accountable way, can be shown to have acted reasonably.Jenkins' approach is endorsed by Rob Hann, a council solicitor for ten years and now an executive at 4Ps, the advisory group on local government PFI.

He says that the transactions which have been challenged, including Allerdale, were carried out in the mid-1980s.

Now, he says, there is 'more science to working up projects and preparing the vires foundations'.In his view, local government lawyers have been very good at managing vires issues over the years in a wide range of council activities, and this will also be the case over the PFI.

'Asking the questions "why is the local authority doing this?" and "is that a deal that a reasonable authority could do?" is meat and drink to local government lawyers,' he says.His view, and that of Mr Jenkins, is that the vires problem is one of perception not fact.

He admits that Allerdale has done nothing for the confidence of the private sector and local government, but says nothing in the law stands in the way of the PFI.

The government will be hoping, for the sake of its key projects, that this message will get across to local government lawyers.