Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
ADSCR
Annual Debt Service Cover Ratio. DSCR which is computed on an annual basis.
Awarding Authority
The public sector body (Local Authority, NHS Trust, Police Authority etc) which is procuring a service through PFI.
B
BAFO
Best and Final Offer. Final priced bid submitted by bidders at the end of negotiations.
Basis Point
1/100th of 1% which is a measure that is normally used in the statement of interest rates. 100 basis points equal 1%.
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C
CAFODS
Cash Available For Debt Service equals the project’s net revenues before financing costs and is used in the cover ratio calculations. Net revenues are equal to revenues less costs and other adjustments which will vary between loan agreements. The definition may also vary between DSCR & LLCR calculations.
Commercial Close
The date on which the Awarding Authority and the Service Provider enter into the Project Agreement.
Compliant Bid
A bid which meets the Awarding Authority’s requirements as set out in the ITN. An Awarding Authority may reserve the right to reject a bid which is non compliant.
Concession Period
The period over which the Service Providers are engaged by the Awarding Authority which includes the construction and operating periods.
Coupon
Rate of interest payable on a loan, bond or other financial instrument.
Cover Ratios
Ratios used to test the adequacy of net cash flows generated by the project for purposes of meeting the funding obligations including the Loan Life Cover Ratio (LLCR) and Annual Debt Service Ratio (ADSCR).
Credit Spread
Rate that reflects the credit risk which is added to the base interest rate to derive the total interest rate for the loan.
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D
DSCR
Debt Service Cover Ratio is a measure of a project’s net revenues before financing costs (CAFODS) as a multiple of the debt service for the period and is normally calculated on an annual or semi annual basis and can be based on historic or future cash flows.
DSRA
Debt Service Reserve Account. A reserve account which is established to cover the following 6 months principal and interest on the senior debt.
Due Diligence
A thorough analysis and appraisal, often by a bank, of a project prior to making an investment decision primarily to assess risk. Covers financial, technical, insurance and legal aspects.
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E
Equity
Level of capital put into the project by members of the SPV.
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F
Financial Close
The date at which the Project Agreement becomes unconditional which normally occurs simultaneously with Commercial Close.
Financial Model
Computer spreadsheet model detailing the expenditure, revenues, financing and taxation of the project with associated profit and loss accounts, balance sheets, cash flow statements and supporting schedules.
FITN
Final Invitation to Negotiate.
FM
Facilities Management which refers to the operational phase of a PFI project where the facility provider is responsible for providing Soft and Hard FM services.
Force Majeure
An act of God. An event that is outside the control of any party to the contract.
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H
Hard FM
The maintenance of buildings, engineering, landscaping and similar elements of an asset.
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I
IRR
Internal Rate of Return. The rate at which future cash flows both positive and negative are discounted back to today to give a Net Present Value (NPV) of zero. Usually applied to project before tax, project after tax and shareholder real and nominal cash flows.
Interest Rate Swap
An agreement to exchange a series of cash flows based on fixed or floating interest payments on an agreed notional principal, for a series of cash flows based on a different interest rate. The swap is used to fix the interest rate on the senior debt for the term of the facility.
ITN
An Invitation to Negotiate and submit priced bids issued to Bidders by an Awarding Authority.
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L
LIBOR
London Inter Bank Offering Rate. Bank base rate of interest at which banks will lend to each other.
LIFT
NHS Local Improvement Trust Initiative.
LLCR
Loan Life Cover Ratio is a measure of the project’s ability to repay the outstanding debt from projected net revenues before financing (CAFODS) up to end of the term of the loan facilities and is a comparison of the discounted net present value of the net revenues with the outstanding debt at the comparison date. The discount rate is normally the weighted interest rate of the facilities included in the calculation. Various cash balances may also be added to the NPV when performing the calculation.
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M
Margin
The margin of interest which is charged on a loan by a bank which is added to the base rate to derive the total interest rate for the loan. The margin will tend to be higher during the construction phase of a project in order to reflect the increased risk.
Market Testing
Periodic competitive tendering during the operational phase of a project to ensure that the client is still receiving value for money.
Mezzanine Debt
Type of debt which is between senior debt and equity. The cost of mezzanine debt is greater than senior debt as there is more risk involved.
MIPS
Median of Public Sector Schemes. An index series produced by the Department of the Environment for the public sector, calculated from rates for work and bills of quantities from accepted tenders.
MLA
Mandatory Liquid Asset Cost. The charge for a sterling loan in the UK to cover non interest bearing deposits at the Bank of England which is added to the base interest rate to derive the total interest rate for the loan.
MRA
Maintenance Reserve Account. A reserve account which is established to cover the future maintenance expenditure which can include both Hard & Soft FM. Normally expressed as a series of percentages (e.g. 100%, 67%, 50%) of the relevant years expenditures (e.g. current year +1, current year +2, current year +3).
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N
NPV
Net Present Value which refers to the present value of the cashflows associated with a project after discounting at a specified rate which reflects the cost of capital or alternative use of funds.
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O
OJEC
Official Journal of the European Community which is a publication that carries notices for procurements by public authorities and utilities above a certain threshold.
OJEC Notice
An advertisement which must be placed in the Official Journal of the European Community for contracts for public works which exceed a specified cost threshold.
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P
Payment Mechanism
The mechanism for determining the Unitary Payment for the provision of services taking account of any deductions for sub-standard performance.
PCT
Primary Care Trust. Organisation providing community and primary health care services as well as commissioning acute services for their local population based on local health care needs.
PfH
Partnerships for Health Ltd which is a joint venture between Partnerships UK and the Department of Health that is working with local health authorities to deliver the NHS LIFT Initiative.
PFI
Private Finance Initiative. The UK Government's initiative to encourage the development of private finance in the public sector.
PFI Credit
A PFI Credit determines the level of financial support provided by Government in the form of revenue support towards the notional capital costs of a PFI project. A PFI Credit offers revenue support consisting of two elements, namely a repayment element (4% of outstanding debt / 2% for housing projects) and an interest element (paid at the statutory rate of interest prevailing for the year).
PITN
Preliminary Invitation to Tender.
PLCR
Project Life Cover Ratio which is similar to the LLCR but the net revenues are included to and discounted from the end of the project rather than the end of the term of the loan facilities.
PPP
Public/Private Partnership. An arrangement between public and private sector organisations to their mutual benefit.
PQQ
Pre-Qualification Questionnaire designed to assess the standard and suitability of bidders selected from the initial expressions of interest stage of an OJEC notice. The aim is to produce a shortlist of bidders who qualify for the next stage of the procurement process.
Preferred Bidder
Preferred Bidder. The bidder selected by the Awarding Authority for final negotiation of the PFI contract.
Primary Care
Care provided by GPs, dentists, pharmacists and opticians.
Project Agreement
The agreement between the Awarding Authority and the project company governing the project.
PSC
Public Sector Comparator. A benchmark against which value for money is assessed. The PSC is constructed on the assumption that the procurement is undertaken through conventional funding and that significant managerial responsibility and exposure to risk is retained by the public sector.
PUK
Partnerships UK is the organisation established by HM Treasury with the aim of increasing and improving investment in UK's public services from private resources and is itself a Public Private Partnership.
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R
Reserve Bidder
A suitable alternative to a Preferred Bidder who the Awarding Authority can enter into negotiations with and promote to preferred bidder status should negotiations with the existing preferred bidder not prove successful.
Residual Value
The value of the assets at the end of a contract.
Revenue Sharing
Arrangement which allows the Awarding Authority to share in any returns to the Service Provider over and above an agreed return.
Risk Matrix
A table containing a list of the various risks and uncertainties to which the project is exposed, together with an assessment of the likelihood of their occurring and which party is assuming the risk.
Risk Transfer
The allocation of risks associated with the operation of a PFI contract to the party best able to manage it. The transfer of risk from the public to the private sector is a basic justification for PFI.
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S
Senior Debt
Debt funding provided by banks which is cheaper to borrow than subordinated and mezzanine debt and equity, and has first call on cash flow for debt service.
Sensitivity Analysis
Analysis of the effects on a project of varying important parameters and assumptions.
Service Provider
The private sector partner selected to provide the contractual service to the awarding authority which may also referred to as the Special Purpose Vehicle, Project Company, Consortium, Concessionaire or Contractor.
Sinking Fund
An alternative to a maintenance reserve account whereby a portion of the Unitary Charge is paid into a reserve on a regular usually indexed basis. Maintenance expenditure is paid directly by the fund which also attracts interest on the balance of the fund.
Soft FM
Services, other than building and engineering (Hard FM), which support the operation of the facility. Soft FM typically includes catering, cleaning, parking etc.
SPV
Special Purpose Vehicle which is a company set up for the purpose of an individual project or contract whose costs and revenues are derived solely from the individual project. Several participants each take a less than controlling stake in the SPV so that the funding does not appear on the balance sheet of any one company.
Subordinated Debt
Debt finance for a project company which ranks ahead of equity but after senior debt and may be supplied by the SPV shareholders or a third party such as an investment bank.
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T
Tail
Number of years remaining in the concession after the bank funding has been fully repaid.
Term Sheet
Funding offer from a bank which lays out the amount of finance that will be provided and the conditions under which the funds will be made available.
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U
Unitary Payment
The payment by the Awarding Authority to the Service Provider for the provision of the facility or service which is the subject of the Project Agreement. Also known as the Unitary Charge.
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V
Variant Bid
Alternative bid which meets minimum specifications but varies in technical terms from the Compliant Bid usually with the aim of offering better value for money.
VFM
Value for Money.
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