The Private Finance Initiative: The Unloved Child
Preparing for the End: A Summary of the NAO Report on Expiring PFI Projects
PFI can sometimes be seen as the unloved child of previous governments’ desire to invest in public sector infrastructure without ballooning public debt. The child has now grown up and PFI projects are reaching middle age and beyond. What needs to be done about the projects that are reaching the end of their term and what lessons can be learnt from the few projects that have already come to an end? These two questions were subject of an insightful NAO report which was published during this summer (Managing PFI Assets and Services as Contracts Ends, NAO, 3 June 2020).
The report highlights that of the 700 or so PFI projects, 72 are due to expire in the next seven years meaning that assets worth an estimated £3.9bn will largely revert to the public sector. Even the harshest critic of PFI will concede that one of its primary advantages is that the contracts should ensure that the assets are maintained to a good standard as specified in the contract. Will this be the case as the assets are handed back? Furthermore, what can the public sector do to ensure that this is the case?
The NAO carried out a survey of 107 English PFI contracts of which 89 were operational and are due to come to their end within the next seven years. The remainder have already expired. The survey’s questions covered themes such as asset use, the PFI contract and handover provisions, retention funds, disputes, preparation for expiry, staffing, governance, information requests and monitoring.
The key findings of the survey can be distilled into three main themes: resources, preparation, and relationship management.
1. Resources
The survey found that there is an imbalance between the public and private sector in the approach and resources deployed on the management of PFI contracts. This is consistent with what is seen in the day-today management of PFI contracts. The responsibility for the management of the contracts is devolved to over 300 authorities with limited resources making it difficult to adopt a strategic and consistent approach. This is to be contrasted with the private sector where six companies are responsible for managing 45 per cent of the PFI contracts.
What the report does not point out is that the funding for the project resources is often embedded in the financial model for the various projects, in other words, the public sector is paying for the resources that are being used to create the imbalance.
The report comments on the fact that at least 30 percent of respondents to the survey considered that they did not have adequate in-house resources or expertise to manage the end of life process for their PFI contracts. This resource gap will need to be filled by external consultants from either the public or private sector.
2. Preparation
Alexander Graham Bell famously coined the mantra, “before anything else, preparation is the key to success.” This is particularly pertinent in the case of expiring PFI contracts. Adequate preparation prior to their termination is essential if authorities are to avoid disruption to services and to minimise the risk of the assets being returned to the public sector in an unacceptable condition. If anything, the report understates the challenges that authorities will face as the PFI contract comes to an end. It will be necessary to make alternative arrangements for the delivery of hard and soft facilities maintenance services. This will mean bringing large teams of people in-house or going out to market to procure these services. How will this fit with the wider estate strategy for the authority? If the asset is handed back in a poor condition, the authority will have no remedy, as by this time, the project company will have ended. Furthermore, it will join the long queue of assets looking to receive funding to rectify the backlog of planned and reactive maintenance. The challenges for authorities where the asset does not revert to the public sector could be even greater, as it may have to procure alternative accommodation.
The above challenges will be exacerbated if the authorities have not effectively managed the contract prior preparing for expiry. For instance, if the authority has not kept an up-to-date copy of the contract (including all variations), commissioned condition surveys (if provided for in the contract) and maintained asset registers, it will be on the back foot as it engages with the project company.
When should authorities start to prepare for the end of the PFI contract? There is evidence that where authorities started their preparation for expiry at least four years prior to the contract end-date, this left insufficient time. This should not come as a surprise in light of the challenges that we have discussed. What is surprising if not a little alarming is that of the 89 projects surveyed, 14 had not started their preparations, and five had left themselves less than two years to prepare.
3. Relationship Management
The report identifies that as a PFI project nears end of life, there are opposing interests between the project company and the authority. The former wants to avoid spending reserves on life-cycle maintenance so as to enhance distributions to shareholders whilst the authority’s interest is in receiving an asset in good condition.
A well drafted project agreement would anticipate and provide for this conflict to be avoided or effectively managed. Unfortunately, as the report points out, the contracts which are now nearing their end were the first out of the box and so did not benefit from the lessons learned on later projects. We have seen project agreements were there are virtually no detailed provisions for hand back and experience shows that to rely on the dispute resolution provisions to resolve such issues does not usually end well.
The NAO addresses their recommendations, individually and collectively, to the Infrastructure and Projects Authority (IPA) and the government departments who sponsored the PFI projects, such as Education, DHCS, MoJ, Defence etc.
The recommendations can be boiled down to:
Building internal capability, resource and data to provide support and guidance
Proactively providing programmes of support
Providing financial support to authorities
Developing a strategy to manage the relationship with private sector PFI stakeholders
The NAO report is most timely even though most PFI projects will not expire until after 2030 and with a peak being reached in 2037 when 57 projects are due to expire in that year. When Philip Hammond, the then Chancellor of the Exchequer, announced in October 2018 that there would be no more PFI projects, he also announced an initiative to ensure that the existing projects were being effectively managed. If the IPA and sponsoring departments can support authorities to better manage their contracts this will not only provide better value for the taxpayer now, but it will also address the challenges identified in the NAO report.
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