From the 1990s onwards, successive UK governments used Private Finance Initiative (PFI) contracts to finance and provide public sector infrastructure across a range of sector including roads, schools, waste, blue light and hospitals.
As the responsibility for design, build, operation, maintenance and financing of these projects was launched in the direction of the private sector, authorities were to some extent able to step back and admire as new facilities were delivered and then managed by contractors. The first waves of these contracts are now coming to the end of their lifespan and there is question over whether authorities are ready to deal with the responsibility for these projects as they hurtle back in the public sector's direction. Without proper planning, authorities may find that they are in for a nasty surprise.
- Early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at contract expiry
- These contracts may have been revised and amended but not always properly documented so it can be challenging to understand the terms on which the parties are currently operating
- The majority of the people who were present at the contract's inception 25-35 years ago may no longer be working for the your authority.
In the past year there has been a growing recognition of the oncoming tide of PFI handbacks creating momentum and pushing central government and authorities to act. We consider below the existing reports on the state of authority preparedness for handback.
Reports so far: red flags
Scottish Futures Trust report – take practical steps early. This contains the most practical, hands-on advice published to date. It encourages early engagement by the public sector, starting between 5 and 10 years before expiry depending on scale and complexity. It stresses the importance of putting together a project team from the outset which embodies the various skillsets within a procuring body to meet the challenge ahead. There is emphasis on knowing your asset and its condition so as you can negotiate any remedial works far in advance of handback. The report conducted surveys on a number of early projects and provides readers with a useful template for an asset condition survey.
National Audit Office report – departments need to engage with authorities right now. The report singled out the public sector's inconsistent approach to handback, due to the large number of public authorities who hold PFI contracts. This means the public sector has a weak position approaching expiry and the report recommends government should help authorities to present a more united front.
The NAO believes that seven years before expiry is the appropriate time for authorities to begin engaging. Authorities should first assess the condition of assets, undertake an assessment of the risks, assemble contract documents and put a plan in place on how to escalate when problems arise.
The key recommendations of the report were aimed at the Infrastructure Projects Authority and the Treasury. The Treasury should start engaging with authorities now, putting together financial support to fund dispute resolution and dedicated staff. The IPA should provide contract expiry training, specialist guidance documents and a process for identifying project risks.
PAC hearing: a wake-up call
The Treasury and IPA were put to the test during an evidence session held on 8 February by the UK Parliament's Public Accounts Committee (PAC). It was emphasised that 182 public sector organisations only have one PFI contract. As such, it would be hugely inefficient and uneconomical to expect every organisation to develop its own handback approach.
The PAC session built on a number of themes outlined in the SFT and NAO reports. The Committee gave HMT and the IPA three months to come up with a formal response setting out concrete steps they are taking to help the disparate organisations. These actions should include:
- IPA should develop a 'PFI Health Check' tool, to be used in the seven years leading up to expiry
- A plan to address handback skills shortages in authorities with PFIs
- Key departments should develop sector-specific PFI guidance packs for smaller authorities
- The IPA should create a centralised and accessible list of PFIs, including their expiry dates
- HMT should support authorities where there is a change of ownership on expiry of a PFI, particularly academy trusts
- The IPA should create a central dispute resolution process to help authorities avoid litigation
- Any developing trends of broad PFI handback issues should be identified by the IPA
- The IPA could possibly be expected to take enforcement action against deliberately non-co-operative PFI investors.
For those of you who have run out of things to stream, you can view the PAC evidence session here.
The PAC published a report shortly afterwards which crystallised these recommendations, creating unavoidable action points for the Treasury and the IPA.
Why engage now?
The PAC evidence session was a good demonstration of the work still required in order to be ready for expiry. There is still time to act for the majority of PFI handbacks, and the government should ramp up support if it takes on the PAC suggestions. However, you should not rely entirely on central government to manage your handback and reprocurement process.
We outline the main action points which can be taken now by any authority that has a PFI:
- PFI Health Check – the IPA's first formal step will be to take authorities in England, who are seven years out from their PFI expiry, through a one week health check exercise that will assess your preparedness and management of key PFI documents. Take time now to check that you have the following documents in advance of contact from the IPA:
- Project Bible: is it complete and reflective of the changes to the contract that have taken place since the contract came into being?
- Financial model: do you have a grasp of how the key changes throughout the project's life have affected the model?
- Future plan: what is your plan for the assets?
- Plan for exit: do you know who you will need in the team to deal with the handback, support you will require, methodology for assessing asset condition, anything defined in your contract dictating how asset condition surveys should be conducted, life cycle maintenance reports, last 3 performance reports, and latest SPV audited accounts
- Future service provision: what are your future plans for facilities management? Will it be a reprocurement, a mixed model, or moving entirely back in house? If moving back in house, have you considered TUPE, HR, pensions liability issues?
- Leave time to negotiate – there are only a handful of private sector companies involved in PFI contracts, versus 328 separate public authorities. Even at central government level, the contracts are divided between a number of departments who at present all have their own approach. The private sector will take a portfolio approach and quickly become well versed in handback negotiation. This makes early negotiation doubly important in order to secure the best terms
- Be mindful of capacity – you will have to manage the transfer of potentially the operation of your whole estate back to you, and making sure it is in the condition you expect it to be. You will also have to undertake procurement for a replacement service provider, with questions over what services you want going forward and how much of it will be outsourced. Both these tasks are labour intensive on their own, and if they are left too late it will overwhelm your capacity to deal with them
- Government support will be limited – Treasury and IPA support will likely be in the form of sector specific guidance, best practice, and escalation routes. The IPA will create a small team, but their headcount will likely be around 21. The departmental approach will be more of an oversight and escalation route, and so you should take the lead on your own handback circumstances.
Despite the seemingly overwhelming nature of the approaching issue, there are a number of actions which, if undertaken in a timely fashion, can break the matter down into manageable milestones that will ensure a smooth handback and reprocurement of the project. So don’t say you weren't warned, the PFI boomerang is now returning. The question is, will you be ready to deal with it?
This article is the first in a series by Womble Bond Dickinson on all aspects of PFI handback and how you can ensure you are ready for the process.