BUILT ENVIRONMENT JOURNAL

How the public sector can manage PFI expiries

Recent guidance published by the UK government aims to prepare public-sector clients for the wave of PFI contract expiries due in the next decade

Author:

  • Paul Styler

05 July 2022

London hospital

From the 1990s to the 2010s, Conservative and Labour administrations alike used the Private Finance Initiative (PFI) to build public-sector assets in the UK.

Projects from transport to education to housing to healthcare were all supplemented by asset funding from banks and financial institutions. These were built and managed under rigid, long-term contracts by the private sector, which also provided some associated services. Politics aside, most of them have gone largely unnoticed, the exception being those part-finished by Carillion.

Over the past 20 years, there have been huge changes in the demands on public services, and the assets that support that service provision. Building standards, regulations and technologies are also now a significantly greater consideration for owners and occupants.

PFI contracts were written 20–30 years ago, and with the buildings being of a similar age, the public sector may be inheriting assets that do not meet today's needs or standards and may require significant investment when the keys are handed over.

Preparing for PFI contract expiry

The 2020 National Audit Office (NAO) report Managing PFI assets and services as contracts end found that there will be more than 200 PFI expiries before 2030, covering £11.7bn in assets.

Prompted partly by this, partly by the industry's acknowledgement of poor expiry provisions in the contracts and partly by a general lack of coordination across the public-sector PFI client base, the UK government's Infrastructure and Projects Authority (IPA) has recently published guidance on preparing for the expiry of PFI contracts.

The document admits to not providing a perfect approach for every project and client. However, it does set out some fundamental principles and messages that, if ignored, will come back to haunt public-sector clients.

It draws on the limited UK experience of PFI expiries to date and extrapolates best practice and factors critical to success. Public-sector bodies should have appointed a senior responsible officer (SRO) for each PFI project, and these SROs will need to take such lessons on board.

The IPA guidance also recognises the complexity of each project. Varied asset types in different sectors will need different approaches, because they are the result of different – but supposedly standard – contracts, entered into by different government departments and sovereign bodies, with a range of funders and investors or contractors.

Although the IPA guidance is a relatively light read, its implications are significant. The IPA echoes the NAO's stance that planning should start seven years before expiry. The guidance offers a range of recommended approaches to reducing service disruption, preventing financial loss and preserving reputation. These are conveniently compartmentalised into contractual, commercial, relationship, asset and future service considerations.

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Successful hand-back will be complex

The scale and complexity of achieving a successful PFI hand-back cannot be underestimated. Any client relying on the provisions of the contract and the goodwill of its contractor or partner to follow them ignores some unpleasant realities.

The IPA guidance does not shout loudly enough about some key aspects of PFI expiry, and it is worth calling these out.

  • It is more than business as usual. Clients are already occupied by their regular duties, so managing the expiry of a complex, commercial project and the break-up of a long-term relationship cannot be added to the burden of an individual or team. Success means taking a pragmatic and process-driven approach to understanding everything from the baseline and strategic intent to the intricate detail of commercial provisions and asset performance and standards. As when the PFI contract was negotiated, the client will need to structure its approach and work across layers of technicality and seniority, aligning commerciality with asset and service knowledge and negotiating guile.

  • It will cost. Even the IPA guidance contemplates actions and stages of discovery and assessment that go beyond those initially envisaged by the contracts. Added to that, time, effort, resource and cash will be needed for a public-sector client to achieve a satisfactory outcome from the expiry.

  • It can affect all aspects of service provision. For some clients, the expiring PFI asset may be the only one used to provide services; for others, it may be one of many in a portfolio across an area. Inheriting it will present possibilities for service realignment and change that may not have been afforded for 20 years. These considerations must be made with cognisance of service outcomes, as well as the risks and economics of achieving them.

  • Don't rely on the centre. Many government departments have their own public–private partnership forum or policy unit that will set the tone for PFI expiries, offering wisdom and ensuring compliance. However, it is unlikely that they will be the named signatories with responsibility for managing the respective contracts and front-line services. They will advise and support, but it is the sovereign local authorities – and, in the NHS, individual trusts – that will need to make the expiry work.

  • The contract is vague and corporate knowledge and expertise is in short supply. All public-sector clients will need to spend time to understand their deal and its implications well before engaging and working with their counterparts – contractors or investors – to agree what should be handed back and what, within the confines of the contract, could be adapted to ensure better outcomes. Similarly, every organisation will need to prepare its staff, functional departments and service users for the change. This will involve training and familiarisation before the hand-back, as well as understanding the implications and obligations of ownership afterwards. The latter may include managing, maintaining and optimising the inherited asset, its data or the services provided from it.

  • Hand-back is a project in its own right. Taking all these aspects together, the expiry of a PFI must be a distinct and significant corporate workstream or initiative in its own right. It will need an empowered and capable SRO with the right support, a bespoke governance structure and accountability, who is empowered to manage, liaise, advise and negotiate with complex and varied stakeholders. The set-up of this project will need the same kind of justification and approval as a business case, as will the strategic intent behind any arrangements made for the asset after expiry.

The IPA can still be commended for preparing and publishing the guidance. Public-sector PFI clients cannot say they haven't been told. However, those clients must now pick up the mantle.

They need to immerse themselves in their own deals and work to their own agendas to achieve their desired outcomes, but within a timeframe determined more than 20 years ago.

But there are of course opportunities here for experienced RICS members and firms to advise and steer public-sector clients through the process successfully.

 

Paul Styler is executive director of infrastructure solutions at Lexica

Contact Paul: Email

Relevant competencies include: Communication and negotiation, Inspection, Legal/regulatory compliance, Risk management

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