Preparing for PFI Expiry

Published on
5 min read

PFI (Private Finance Initiative) was once a big industry. Then, in the early 2010s, it fell out of favour. Whilst operational PFI projects ticked along, with a lack of new government projects, it could be said to be an industry with its glory days behind it. Could that be about to change? Could the PFI industry see a massive expansion in the years ahead?

The challenge of PFI expiry

In February 2022 the Infrastructure and Projects Authority (IPA) published its practical guidance “Preparing for PFI contract expiry”.

PFI projects have a standard contract length in the region of 20-30 years, many of those contracts were signed in the late 1990s. In England alone there are approximately 550 PFI projects, that number reaches approximately 700 in the UK in total. The IPA guidance covers those projects in England, with the remainder subject to guidance from the devolved administrations.  

Simple arithmetic tells us that lots of projects will start expiring over the next few years. There are two fundamental questions: (i) in what condition should the PFI asset (e.g. an NHS hospital) be handed back to public sector, and (ii) what will the services such as cleaning, catering, and building maintenance look like in respect of that asset on day 1 after handback and contract expiry?

Isn’t this still years away?

The IPA estimates that it takes 7 years on average to get a PFI contract ready for expiry. Even though most of the contract expiries will be in the 2030s and 2040s, it is estimated that approximately 120 projects should soon be in some stage of the 7-year expiry process already.

The risks of not planning

The public sector contracting authority (CA) should already have been paying for the PFI asset to be maintained in a proper condition ready for handback. But if a substandard asset is handed back, the CA risks paying again after contract expiry to bring the asset up to standard.

If contract expiry is mishandled, there is a risk of operational disruption, lack of service continuity, financial loss and reputational damage to the CA. Plus, the transfer back of considerable risks e.g. health and safety and statutory compliance, which might not have been foreseen.

How to implement an effective PFI expiry

The answer is planning, plus a recognition that the IPA’s 7-year timetable is realistic. The IPA counsels against extending the PFI contract, so at a high level there are two options: (i) the CA procures a new services contract, or (ii) it takes the services back in-house.

The 8 bullet points below highlight the IPA’s key recommendations:

  • The CA should set up a new dedicated team to run the expiry process. It cannot rely on its “business as usual” team.
  • At the start of the 7-year process the CA should commission a review of all its project documents to understand how the current services are operated, the expiry process, the condition the PFI asset should be handed back in and its information rights to obtain information concerning the above. The IPA does not recommend a high-level review. The IPA recommends a detailed review as, for instance, the FM contract might have a considerable number of sub-contracts beneath it which the CA will need to understand if they are essential to provide services post-expiry.
  • This review might throw up ambiguities which need to be resolved with the PFI ProjectCo, its investors and the services subcontractor. For instance, the handback criteria might not be clear and will need to be commercially agreed. Plus, the CA might need to agree a protocol if it needs to obtain information it is not contractually entitled to.
  • Any legacy issues with the private sector and all disputes need to be resolved so they can’t be used as leverage in the expiry process. A public and private sector relationship “clean slate” is required.
  • PFI contracts traditionally require a final asset survey 24-18 months before contract expiry. However, the IPA thinks this is too close to the contract end date. It recommends an additional survey 5 years before contract expiry. This is because in complex projects it might take this long to survey the assets and to then fund and undertake any works identified by the survey. Extra time might be needed if there is a dispute between the parties on asset handback which could take some time to resolve. This should lead to the production of a 5- year plan to bring the assets to the handover condition, followed by the contractual final survey 24-18 months before expiry to monitor progress.
  • Even if the handback criteria are clear and agreed by all parties, the assets might no longer be fit for the CA’s purpose. This could be due to changes in service delivery, law, guidance or policies. Contract variations might therefore be needed pre-expiry which, again, take time.
  • The CA should also have a clear plan for future service delivery and the personnel and skills it needs to deliver them. The PFI expiry process and new service plan will have to be run together as the IPA considers that it is difficult to plan the new services without understanding the existing services.
  • Whilst there are many actions on the public sector, the private sector should also be engaging at the same time in this process alongside its public sector partner. This isn’t just a public sector list of actions. There will be a knock on everyone’s door at some point.

End thoughts on PFI expiry

The summary above represents a fraction of the points covered in the IPA’s guidance. PFI contract expiry is a “cliff edge” fixed date, that may be difficult to postpone. As the IPA is not prescriptive about the form a PFI contract expiry should take, this whole process will be labour intensive to implement a bespoke new services solution for each project. That’s why it’s important to plan early. A key challenge will be to find the people with industry experience when the demand for skilled people hots up.

To answer the original question, the PFI industry could become busy again very soon.

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