PFI contracts (whether you like them or not) are vitally important to public infrastructure and are used to support key services such as schools, hospitals, social care, waste disposal, roads and housing. As such, it is crucial that on expiry, there is continuity of service and the infrastructure is handed back to the public sector in a good condition. Given the nature of these contracts, the expiry and transition is likely to be complex. As such, significant preparation is needed. The Infrastructure Projects Authority (IPA) and PFI Centre of Excellence (PFICE) recognise this and have recently published an Expiry Health Learning Report where they have identified a number of themes and lessons learned from a number of recently expired/expiring PFI contracts.
- Expiry Programme Management – Due to the complexity of PFI contracts, the expiry process needs to be very well thought out and project managed. The IPA found that many Contracting Authorities (CA's) did not fully appreciate the complexity of the expiry process and because of this, expiry was not always prioritised in business and resourcing plans. The IPA found that 25% of projects have not started expiry preparation and 80% have not established a robust expiry plan. These figures are noteworthy given that the IPA advise CA's to start expiry preparation 7 years in advance of expiry
- Resourcing and Capability – The complexity of the PFI expiry process requires a significant amount of resources and expertise. The IPA found that there were insufficient people to manage the totality of the operational contract management, expiry and future service provision, with around 65% of projects reporting that they did not have a sufficient team to manage expiry. They found that where people were available, they were often focused on the preparation for future services rather than expiry
- Relationships – In order to achieve a smooth expiry process strong and collaborative relationships with private sector project partners are essential. The general view was that relationships with the private sector were good with around 75% indicating they had good collaborative relationships. However, the IPA did note that some CA's found that although they had good communication with their partners, the relationships often were imbalanced in the private sector's favour
- Asset Condition – In order to form a solid foundation for the new service plan, the assets of the PFI estate need to be in good condition, so the new service provider can hit the ground running. The IPA's view was that the condition of assets was overall good and this will likely be maintained through expiry. However, the IPA did identify a potential risk in that the CA's views on asset condition was insufficiently informed. The IPA are concerned that CA's are comparing the assets to their typically more poorly maintained non-PFI assets. The IPA also recognised that CA's need to be realistic when it comes to asset condition disputes as such issues cannot be left until expiry. With around 80% of CA's having asset condition requirements at expiry, the IPA advises CA's to conduct condition surveys early to ensure that the requirements are being met and, if not, resolve any dispute well in advance of expiry
- Commercial Position – Upon expiry, it is vital that CA's have a solid understanding of their commercial position, as this will influence the CA's position in negotiation with the existing and new service provider. The IPA found that CA's do not have a detailed understanding of their contracts including their rights and the contractor's obligations at expiry. With around 70% of contracts lacking clarity with regards to expiry and CA's not fully comprehending the changing private sector drivers, the IPA's view is that the commercial approach to expiry is insufficiently developed. The IPA highlighted that one of the potential issues is the lack of skill and resources set aside for the expiry of these contracts
- Future Services – The IPA found that many CA's have a limited understanding of assets and service and had no clear future services strategy. They found that due to insufficient resources, the planning for future services was often not prioritised well enough in advance of the expiry process
- General Themes – Generally, the IPA found that some CA's have struggled to access documents that are crucial for expiry, including contracts, financial models and asset registers. These documents are vital for the service transition as they will outline the CA's rights on expiry and the extent to which their project partners have fulfilled their obligations under the contract. Where CA's do have access to such documents, the IPA found that some CA's do not fully understand some of the terms and conditions within the contracts and how they relate to other management information.
For further information and statistics on these themes, please see the report here.
In light of the above themes, the IPA has identified a number of lessons learned for CA's currently approaching expiry:
- Understand your contract and its performance through the operational phase to be better placed for expiry.
- Ensure that PFI expiry, as a major contractual process, is captured and prioritised within business and resourcing plans.
- Start preparing for expiry at least 7 years out, potentially longer for complex PFIs or future service arrangements.
- Make sure you have appropriate governance and leadership in place to manage expiry, noting that this may be different to the business as usual arrangements.
- Put in place detailed and resourced plans that integrate operational contract management, expiry, transition and future services provision to enable robust management of the programme of work.
- Recruit sufficient and appropriately skilled people to enhance the contract management team for expiry.
- Engage with the private sector early on expiry. Seek to adjust your relationship for expiry and build a good understanding of their drivers at expiry.
- Invest in understanding the condition of your assets and quality of data against the contract requirements.
- Understand the contract expiry terms. Build positive commercial strategies to meet your aims and reflect private sector drivers.
- Align your future services activity with expiry & operational contract management; and inform future service provision with data from the PFI.
The themes and lessons identified here may not apply to every CA but it is likely that at least some will apply, so this report offers a good opportunity for CA's to reflect and take stock of their expiry arrangements. We have advised a number of CA's on the expiry of their PFI contracts and have first-hand experience of the above issues. The crux of many of these problems is often lack of resourcing and we have worked collaboratively with a number of CA's to successfully fill this resourcing gap. The overall message of this report is that in anticipation of PFI contract expiry CA's should begin expiry preparations early, identify where they are under resourced and proactively seek to address such resourcing gaps.
Contributors: Andrew Hirst and Joseph Perkis