MoD signs "cost saving" PFI contract

The MoD has signed an innovative £1bn contract for the supply of its marine services.

The Future Provision of Marine Services (FPMS) PFI contract, won by consortium Serco Denholm Marine Services, includes maintenance services at several UK Royal Navy ports and requires the contractor to buy a fleet of new vessels to be used to meet contract terms. The MoD will have the option to buy the vessels at the end of the 15-year contract covering any outstanding debt commitments to Serco.

The ownership of project assets by the contractor and the use of asset financing such as residual value risk, makes the FPMS an unusual PFI contract.

Simon Carida from Linklaters, who advised on the FPMS, said: “The financing structure also impacted on the project agreement which would otherwise have followed treasury and MoD standard forms more closely. We had to revisit the rationale for “standard” drafting to ensure its appropriate application and this resulted in a number of project-specific derogations to address the hybrid structure and the unique nature of the principal project assets.”

Mathew Job, managing associate at Linklaters, said the fact that the vessels would be procured by the private sector would bring “considerable cost saving” to the MoD.

He added: “The government pays for services and not assets which means that it can spread the cost over the life of the project. It also means the people who are responsible for maintaining the vessels are also the people who own the vessels. There is continuity of interest.

“It means that the risks inherent in being an asset owner stay with the private sector, for example if one of the vessels turns not to be very good that Serco’s problem and not the MoD’s.”