The challenge of PFI expiry
In February 2022 the Infrastructure and Projects Authority (IPA) published its practical guidance “Preparing for PFI contract expiry”. This applies across all sectors.
PFI projects have a standard contract length in the region of 20-30 years plus. Many of those contracts were signed in the late 1990s. In England alone there are approximately 550 PFI projects with c.700 in the UK in total. The number of expiring projects each year will now increase dramatically with the peak years expected to be 2036 / 37.
There are two fundamental questions: In what condition should the PFI asset (e.g. an NHS hospital) be handed back to public sector? 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?
Depending on the specifics and timescales of each project, this comes on top of considering day to day contract management and decarbonisation initiatives.
Isn’t this still years away?
The IPA estimates that it takes seven years on average to prepare for expiry. It is estimated that approximately 120 projects should soon be in some stage of the seven year expiry process already.
The risks of not planning
The public sector contracting authority (Authority) 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 Authority 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 Authority. In addition, there is the transfer back of considerable risks eg, 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: the Authority procures a new services contract, or it takes FM services back in-house.
The eight bullet points below highlight the IPA’s key recommendations:
- Dedicated team - the Authority should set up a new dedicated team to run the expiry process. It cannot rely on its “business as usual” team.
- Project Agreement review - at the start of the seven year process the Authority should commission a review of all its project documents to understand how the current FM 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 Authority will need to understand if they are essential to provide services post-expiry.
- Handback criteria - this review might throw up ambiguities which need to be resolved with the PFI ProjectCo, its investors and the FM services subcontractor. For instance, the asset handback criteria might not be clear and will need to be commercially agreed. Plus, the Authority might need to agree a protocol if it needs to obtain information it is not contractually entitled to.
- Disputes - 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.
- Surveys - PFI contracts traditionally require a final asset survey 24-18 months before contract expiry. However, the IPA consider this to be too late. It recommends an additional survey five years before contract expiry. This is because in complex projects it may take some years 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 five year plan to bring the assets to the handover condition, followed by the contractual final survey 24-18 months before expiry to monitor progress.
- Future use of facilities - even if the handback criteria are clear and agreed by all parties, the assets might no longer be fit for the Authority’s purpose. This could be due to changes in FM service delivery, law, guidance or policies. Contract variations might therefore be needed pre-expiry which, again, take time.
- Future service delivery - the Authority should also have a clear plan for future FM 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 FM services without understanding the existing services.
- Private sector engagement - 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 only of the points covered in the IPA’s guidance. PFI contract expiry is a “cliff edge” fixed date, that cannot easily be postponed. Bespoke solutions for each project will be required. A key challenge may be the availability of people with appropriate skills and industry experience as activity levels increase. Early preparation is key.
How can we help?
We are already advising our clients on PFI expiry, so we have experience in this sector now and have developed contract review templates and toolkits to get to the bottom of key issues quickly.
If your PFI project otherwise needs a health check, we offer a wider range of services to help you get the best out of your PFI project. These include running awareness workshops, payment mechanism reviews, cost saving and efficiency variations, termination exit plans, refinancing, insurance risk sharing and many other areas.
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.