May 14, 2021
Private Finance Initiative (PFI) is a form of contract and infrastructure delivery model used extensively by the UK government to design, finance, build, maintain and operate assets, such as roads, schools, and hospitals since the 1990s. In 2018 however, the government announced it would no longer award new projects using the PFI model in the face of growing media and public concerns regarding the overall costs and benefits to the public sector.
There are currently over 700 operational PFI contracts across the UK, and an ever-increasing number are approaching term-expiry. As of March 2021, it is estimated that 72 PFI contracts will be expiring over the next 7 years in England alone with a £3.9bn estimated capital value of assets, which in theory will revert to public sector ownership. Determining whether this is what should happen, and how ready counterparties are to engage, is worth exploring.
Are You Ready for Hand Back?
In early 2020, the National Audit Office (NAO) conducted a survey of 107 PFI contracts covering projects across central government and central bodies. The survey results and report were published in June 2020 and concluded that the main risks to value for money are “hand-back of PFI assets” in a satisfactory condition and continuity of services. The NAO’s other key findings included:
- Lack of consistency in approach by the public sector in managing expiring PFI contracts. This presents a risk to securing value for money during expiry negotiations.
- If the public sector does not prepare well in advance for contract expiry, it risks increased costs and service outages/disruption.
- Inadequate data on asset condition available to authorities may cause hand back of assets with quality inferior to what is expected.
- Many authorities are confident they have started preparing for contract expiry early enough. 57% of respondents claimed to have been preparing for more than four years before expiry. However, the UK Infrastructure Project Authority (IPA) recommends preparations start seven years before expiry.
- Early PFI Contracts are likely to contain significant ambiguities around roles and responsibilities of parties at contract expiry which may open the door for potential disputes.
The NAO report urged the IPA and HM Treasury to help authorities better plan and manage expiry, also acknowledging that contract expiry preparation is resource intensive and may need to utilise the capacity and experience of consultants.
Put simply, the NAO cautioned that the public sector was not doing and has not done enough to prepare for the expiry of these Public Private Partnership (PPP) projects. For the private sector this could mean an inadequately prepared public sector counterparty, and the introduction of added risks and uncertainties around positions and areas of contention that might exist at turnover.
What Happens Next?
This backdrop presents a significant challenge to private sector stakeholders who need to know what to expect as they prepare for ‘PFI hand-back’ and have a clear exit strategy. The earlier these stakeholders prepare, the more the opportunity exists to undertake remedial and risk mitigating measures. It also presents an opportunity for proactive engagement with contracting authorities to successfully implement transition arrangements that are not disruptive to operations in the final years, or potentially demonstrate value and build a compelling case to re-contract for O&M elements.
PFI contracts in many cases were drawn up decades ago, with insufficient detail around what to expect at expiry, especially around the process. Furthermore, those involved in drawing up those contracts may no longer be available. Objectives and priorities of the public sector, and what constitutes Value for Money, may have changed as well in that time. Whilst it is entirely possible, following the NAO report, that the public sector may be better prepared and may take a tougher approach to the management of their PFI contracts and expectations at handover, many public sector organisations may be capacity constrained or face other competing priorities. Recognising this, the IPA is currently procuring consultants to undertake deep-dive contract reviews and provide advice to the public sector.
The Need to Act Now
Preparation for PFI expiry is not a short and sharp exercise, it will be resource intensive. The hand-back process in many instances will also be ambiguous and uncertain. It will require information for both parties to review, enabling each party to make informed positions and plan for the transition. Early planning and engagement can help both the private and public sectors work through the potential uncertainties and complexities in contract clauses written many years ago.
Undoubtedly, there is value in reviewing those parts of the contracts that address transition at expiry that are known to exist but seldom get reviewed during the life of the contract. Therefore, it is highly advisable to prepare for expiry and engage with one’s counterparty early in the process to ensure that expectations and processes are clearly defined and met at expiry. With all stakeholders aligned on the process and expected outcomes, the hand-back process should be orderly and without those potential legacy issues often caused by stakeholder misalignment.