The time to act on PFI expiry is now!
Vital public services such as schools and hospitals face serious disruptions should government fail to prepare for the expiry of its 700 PFI contracts. A recent report by the IPA estimates it takes seven years to adequately prepare for expiry of a PFI contract and work should have started on those approaching expiry already.
The Government has acknowledged the seriousness of this challenge and has taken some action to address the risk posed but a lack of urgency and planning remains. These PFI projects represent public infrastructure assets worth around £60 billion, and future costs of around £170 billion. The very earliest contracts have expired, and some 200 will expire in the next 10 years, accelerating from 2025 onwards.
Any mismanagement of the expiry process could result in large sums of taxpayer’s money being wasted. A lack of attention from the public authorities running these contracts could also leave the public sector footing large bills for rectification work which the PFI company has already been paid to do. These are notoriously long, complex documents, often subject to multiple revisions over time, and an authority may not hold a complete version of the contract, with either part or all of it lost or held on old technology. In addition the expiry clauses in early PFI contracts were not standardised so authorities are at different levels of risk.
Many challenges remain, and it is unclear how these will be addressed, and at what level of government. Smaller local bodies, especially those with a single PFI contract, are exposed to greater risk as they often have limited resources to effectively manage expiry. Local bodies will need support to manage the expiry risks. By minimising expenditure on maintenance in the final years of the contract, PFI investors can pay out higher dividends and walk away with limited threat of recourse. The IPA is aware of ‘difficult’ investors who are not sharing important information that authorities need to successfully manage the expiry process. The high concentration of PFI ownership among private investors allows the private sector to take a portfolio approach to managing the expiry process, which risks putting the public sector at a disadvantage. A lack of contractual tools to hold non-cooperative investors to account further disadvantages authorities in securing value for money from the expiry process.
The IPA recognised that more support was needed to address the “huge demand” for expertise, skills and capability in contract management—all of which were currently insufficient. It explained that contracts owned by local bodies, which made up more than 80% of all PFI contracts, were “the most concerning area” as local bodies’ investment in contract management expertise had “not always kept pace with the extent required”. The NAO report found that managing the expiry process required a different set of skills, such as contract negotiations and asset management, compared to managing the day-to-day operations, and that many authorities would be unable to provide these in-house. Some smaller authorities have just one person managing multiple PFI contracts, with limited additional support, meaning the resourcing challenges of PFI expiry are magnified.
Recommendations
In conclusion the Public Audit Committee has recommended that the IPA should publish a plan within the next three months for how it will support all public bodies to manage PFI expiry;
-HM Treasury should write to key departments encouraging them to develop sector specific PFI expiry guidance.
-The IPA and HM Treasury should provide an update on the thematic PFI expiry challenges that it has identified following its review of 55 contracts and how it proposes to address them. In addition to this, the IPA should compile a central list of all PFI expiry dates to help authorities prepare for their conclusion.
-The IPA and HM Treasury should outline how they plan to fill the current skill shortages, focusing particularly on those authorities with limited funds to recruit or buy-in external support.
-The IPA and HM Treasury should set out, their plan for providing support to all PFI contracts, especially those owned outside of central government. This should cover:
-What support will be made available, including how additional funding will be provided to authorities with limited resources or those with the most challenging contracts.
-Who is responsible, between the Treasury, the IPA, departments, and local government, for providing support.
-The circumstances under which authorities can access different types of support and the process they need to go through to obtain it.
-The Treasury should outline how it is ensuring taxpayer interests are being protected when the expiry of PFI contracts creates a change of asset ownership between public bodies.
-The IPA should publish a disputes protocol, outlining how disputes can be escalated by authorities, and the steps that can be taken to ensure disputes only need to be resolved by the courts as a last resort. Where disputes do materialise, the IPA should conduct a review to determine whether it is a one-off disagreement or a wider problem that may impact other contracts.
-The IPA should outline the steps it is taking to ensure PFI investors are being fully transparent and compliant with contracts, and what action, if any, it will take if an investor if found to be deliberately non-co-operative.
The full report and Live footage of the the report being read in parliament can be found on the following links;
Parliament Live TV- PAC Report, Managing Expiry of PFI Contracts
Full PAC Report, Managing Expiry of PFI Contracts
Image courtesy of www.unsplash.com