How the public sector can protect itself from PFI contract expiry

Private Finance initiative (PFI) contracts have been and will be with us for some considerable time but there’s an ever-increasing number of PFI contracts now set to expire. 

PFI expiry – the start of the end

PFI projects were created to form a public / private partnership intended to raise funds for capital projects aimed at constructing new fully managed facilities for the public sector such as hospitals, schools and roads. Since its inception in 1990, approximately 700 functioning PFI contracts have been established and active in the UK, totaling £57 billion of capital value. 

Primarily, it was envisaged that the benefits of entering PFI Projects were that managed assets would be maintained throughout the contract life and ultimately returned in a good condition when returned to the contracting authority. 

2018 saw the government announce that it would no longer adopt the PFI models for further projects. Existing PFI contracts remain in place and the earliest ones are now starting to expire - most PFI contracts result in the assets being returned to the contracting authority once the contract ends.

In order to protect the significant investment made by the public sector over the lifespan of the PFI projects, preparation for contract expiry is vital to ensure that contracting authorities are the recipients of compliant and viable assets for continuation of use in the delivery of services – whether in healthcare, education or other public services.

Within the last 2 years, the number of PFI contracts reaching expiry has begun to rapidly increase. Various government-initiated papers on this subject have resulted in a foundation of guidance being published to contracting authorities as a prompt to begin planning for such events.

PFI contract expiry could prove a significant challenge for the public sector, a challenge not seen since the start of the PFI, requiring substantial support and guidance being offered through our expertise.

Failure to prepare is preparing to fail

In February 2022, guidance information published by the Infrastructure and Projects Authority (IPA) offered practical guidance for contracting authorities on managing the expiry of PFI projects and the transition to future services provision. Whilst being non-prescriptive, the analysis backed guidance does set out credible points for contracting authorities to initiate when embarking on PFI contract expiration. 

Notably, published figures by the IPA indicate that a significant proportion of contracting authorities require additional work to be undertaken in order to achieve target readiness for expiry. Unsurprisingly, analysis also highlights that those projects closer to expiry are more likely to be less ready for contract expiry than projects due to expire in 10+ years’ time, and therefore are at greater risk.

Guidance issued to contracting authorities centres on the need for coherent preparation and readiness for PFI contract expiry. 

For example, asset condition plays a pivotal part in contract expiry. By assessing and establishing an asset’s current condition, the contracting authority will have an informed view of what steps would be required for the asset to be handed over from the PFI project to the contract authority in a compliant state. 

Assets that are set to be handed over must be in a compliant condition to minimize future financial / operational impact, optimize value for money and allow continuation of service for the contracting authority. A limited understanding of the condition of the asset can endanger future services provision as any health and safety risk will be transferred to the contracting authority in full following handover.

We believe that - without guidance throughout the contract expiry process, contracting authorities are at risk of not having the necessary level of assurances around achieving value for money and/or asset compliance. There’s also a risk of underestimating the amount of time, resources and complexities involved in managing PFI contract expiry, and of inheriting multiple risks that could jeopardise the continuation of services alongside unforeseen cost pressures as a result of ineffective assets.

As a minimum, contracting authorities must consider necessary actions in preparing for contract expiry including:

• contract expiry strategy initiated 5 years prior to contract expiry as a minimum
• contracting authorities must lead on this process and collaborate with project companies, technical and contract specialists
• senior contracting authority executive ‘buy in’ is essential
• determine whether the asset meets the authorities long term strategy
• understand the contractual expiry process in place
• establish / strengthen existing governance arrangements surrounding the contract to support expiry
• ensure performance governance is in place and value for money initiatives are being realised
• engage with legal and technical specialists and experts for support and further guidance
• ascertain the condition of the assets set to be handed over early to allow remediation work(s) to be completed in plenty of time
• establish a full understanding of the condition of the asset and devise suitable remediation plans to ensure compliance
   

In summary, PFI expiry is not far off. With the bulk of PFI expiries soon to be at unprecedented levels, the public sector has an opportunity to plan expiries sooner rather than later. With the necessary governance, guidance and support, contract expiries will be a successful process but will require the right level of focus, resource, and expertise to navigate the contracting authority through the complex handover process during contract expiry. Senior leaders should take appropriate action now to manage the risks involved, on-board the right expertise and resources and for adequate budgets to be assigned to PFI Expiry.