Private Finance Initiative (PFI) contracts are becoming an increasing focus of attention for both the public and private sector, as their initial contract terms begin to come to an end at an accelerating rate. Most contracts came into being during the 1990s and 2000s, as the UK Government sought to offload the initial capital expenditure of large infrastructure projects onto the private sector, with the contracting authority benefitting from a flattened curve of costs spread across the whole life of the project. In the coming years the 25-30 year typical terms of these contracts are going to begin expiring at pace – 78 projects are due to expire between April 2021 and December 2027, and a further 91 projects in 2028-20301. With the responsibility for these projects are now hurtling back in the direction of the public sector, the UK Government is arming itself to deal with their return.
Help at hand
One tool in UK Government's arsenal is the Infrastructure and Projects Authority, who have launched the PFI Contract Management Programme in response to the approaching issue. The overall aim of the programme is to achieve value for money by ensuring that contracting authorities "have the capabilities, knowledge and tools they need to manage their PFI contracts effectively and to engage confidently with their private sector partners." This is important, because across the UK 328 authorities are responsible for PFI contracts, with 182 authorities responsible for only one contract2, meaning that the large PFI contractors will have a significant advantage of experience when it comes to negotiation. The risk is that these projects will be renegotiated on terms which heavily favour the private sector provider, or that continuity of required services is disrupted due to failed procurement.
The IPA's programme is intended to provide support for PFI projects within 7 years of expiry, which means that authorities with contracts expiring this decade should either engage with the programme as soon as possible, or begin preparing to embark on it imminently. The IPA has undergone a significant recruitment drive in the past year, and the expectation is that the Authority will utilise its bolstered numbers to provide the following support:
Expiry Health Checks
This begins with an initial review of key documentation belonging to PFI projects within 7 years of expiry, and subsequent reviews at 5 years and 3 years to expiry. The review will produce a short-form commercial report, using a 5-tier RAG rating, which risk-assesses the project by overall readiness for expiry. It is intended to flag inherent project risks and authority readiness issues early enough for action to be taken.
Within the current year, the IPA expects that all PFI projects within scope expiring before March 2028 will have been reviewed and is contacting authorities to do this. However, authorities approaching the 7 year to expiry mark can also contact the IPA to initiate the review process early.
Assurance of Action Reviews
All projects which are identified as a red or red-amber RAG rating will be subject to a follow-up assurance of action review, typically within 6 months of the health check. This will assess whether actions taken and/or plans developed since the previous review have significantly improved readiness and ensure projects are on the green pathway to expiry.
Expected to be published in autumn 2021, this guidance will reflect practical lessons and learnings from the health checks undertaken to date, complemented by a supporting toolkit including practical checklists and best practice help-sheets which will evolve over time as expiry experience develops.
Launching in autumn 2021, PFI expiry training will align with expiry guidance and offered to contracting authorities.
Private Sector Engagement
The IPA is actively engaging on expiry with market counterparties such as investors, SPV managers, service contractors, and market counterparties including trade bodies, advisers and consultants. Through this engagement the IPA hopes to build better relationships on behalf of contracting authorities and gain knowledge to share.
This protocol will set the tone for collaborative working, transparency, effective resolution of disputes and sharing lessons learned between the public and private sector. A draft is expected in 2021, with an aim of obtaining market agreement within 6 months of draft issue.
The IPA will continue to provide strategic advice and assistance to government departments and contracting authorities at project level.
Systems Learning & Improvement
The Contract Management Programme reports to a cross-departmental Programme Board and under the strategic direction of an Oversight Committee at Permanent Secretary level. The aim is to identify common themes and issues to draw out key learnings from PFI expiry over time. The IPA has already begun this learning exercise, analysing the first 52 expiry health check reviews undertaken.
The full summary contained within the IPA's report can be found here.
This programme, coupled with the expansion in the IPA's headcount, demonstrates that UK Government is increasingly recognising that support for contracting authorities is needed in order to avoid the risk of a massive loss of value for the taxpayer. As contracting authorities and the private sector continue to navigate previously-uncharted waters, it is clear that ongoing learnings will continue to affect the way both sectors approach the issue. Contracting authorities should engage early to that they are ready for the expiry of their contracts.
1 IPA Support Plan, August 2021
2 Managing PFI Assets And Services As Contracts End, National Audit Office