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Exiting a PFI (Private Finance Initiative) contract is no ordinary feat. With their unique blend of complexity and detail, terminating such a contract is not unlike untangling a web, which is normally woven over 25 years.
This intricate tapestry, interlaced with finance provisioning, asset renewal, and many contractual entities, necessitates careful timing and meticulous preparation on the journey from initiation to exit.
While some arrangements might be effortlessly extended, PFI contracts cannot be extended - and with many soon scheduled to conclude, many contracting authorities might be 'sleepwalking' into a minefield of problems.
To help get to the crux of the way forward with expiring PFIs, we sat down with Paul Quarrell, Co-Founder & Principal of PFI expiry experts, Reappraise Consulting Ltd, to get their opinions and advice on how to approach PFI expiry with confidence.
Reappraise Consulting Ltd has been working with public organisations and multi-academy trusts since 2015 to ensure they receive the right PFI advice and support with procurement and FM management.
Skip ahead to read about:
- Putting PFIs into Context
- Challenges of Expiring PFIs
- What should you do going forward?
- What does this mean going forward?
📚 Putting PFIs into Context
First launched in 1992, Private Finance Initiatives (PFIs) were a mechanism by which private enterprises could be contracted to wholly complete and manage public projects.
The UK government's decision to discontinue the PFI model in 2018 was motivated by a significant amount of negativity surrounding them.
Paul said, “one key factor in this decision was to restrict private sector funding influence in public infrastructure projects. Since then, there has been a lack of government public infrastructure funds allocation resulting in limited investment.”
Early PFI contracts in the UK differed from those established after the introduction of HM Treasury's standardisation measures in 1999. In the early PFI contracts, there was a lack of understanding and experience on both sides, with private sector contractors benefiting from top-quality consultants while the procuring authorities relied on less capable internal legal teams, creating a bias in favour of the contractors.
However, with PFI establishment as a common practice, authorities began employing high-quality consultants, levelling the playing field. Standard framework contracts, such as 'BSF Schools', were introduced.
Yet despite these improvements, problems have arisen as the earliest PFI contracts approach their expiry, highlighting issues stemming from a lack of understanding and established processes.
⏳ Challenges of Expiring PFIs
The discontinuation of PFIs has introduced a series of challenges and implications for UK public infrastructure projects.
These challenges encompass various aspects of asset management, financial considerations, contractual complexity, staffing, legal compliance, long-term planning, and public accountability.
It is imperative that contracting authorities get ahead and plan for any upcoming PFI public projects that are due to expire.
Paul highlighted 8 key challenges that will affect the sector, and how they might be addressed.
🏚️ Asset Condition and Maintenance
Public organisations are concerned about the condition of assets returned at PFI contracts conclude, because maintaining assets adequately throughout the contract term avoids costly refurbishments or replacements.
To address this, Paul suggested that “a collaborative approach can ensure good relationships are maintained with a joint sense of purpose.” Additionally, maintenance and compliance audits should be conducted to ensure proper servicing of plant and equipment, thereby preventing early replacements.
💷 Value for Money
“PFI projects' cost-effectiveness is a growing concern”, said Paul. “PFI contracts are expensive as they include lines of profit for all activities (think of an onion with each layer being a profit line)”.
Paul suggested an approach by which the public sector should consider separating capital works and maintenance costs for evaluation to determine the overall cost-effectiveness.
📝 Contractual Arrangements
As PFIs were designed to last 25 years, the contract terms and conditions can be complex. Public organisations may struggle to negotiate favourable terms or transition to new arrangements.
To manage this complexity, Paul recommends that you explore similar contract structures for separate services or adopt a total facilities management approach. Paul added that “a legal review of PFI contracts is essential to comprehend obligations and impacts, especially at the contract's expiry.”
💳 Financial Implications
Managing the financial implications of PFI expiry is a major concern.
Paul urged that “public organisations must plan for potential costs associated with taking over assets, including any outstanding debt or liabilities.” Conducting your own appraisals will help develop a future asset strategy to help identify the appropriate governance arrangements and budget allocation to address contract expiry impacts.
💼 Staffing and Skills
Public organisations may need to build or acquire the necessary skills and expertise to manage assets and services effectively once they are returned. This may involve staff training or recruitment.
An essential consideration is the impact of TUPE arrangements on staffing levels, along with potential imbalances in capability due to different skill levels between in-house teams and transferred contractor staff.
“This may produce an imbalance of capability so the authority may wish to consider how best to resolve the impact of training requirements.”
Moreover, there is an opportunity to develop contemporary training programs to attract a new cohort to the profession and enhance understanding of its significance.
⚖️ Legal and Regulatory Compliance
Ensuring compliance with legal and regulatory requirements during the transition from PFI contracts to public management is crucial to avoid legal disputes and financial penalties.
Paul's recommended approach would be to conduct a comprehensive legal review of all PFI contract documentation to gain a clear understanding of commitments and potential opportunities.
7️⃣ Long-Term Planning
Developing long-term plans and strategies for asset and service management post-PFI is critical to include future investments, upgrades, and maintenance.
“As part of this long-term vision, assets due for authority handback should undergo strategic assessment, and planning should encompass a 10-year life cycle plan, maintenance strategy, and a full facilities management strategy, allowing for effective budget allocation and benefits realisation,” said Paul.
🗣️ Public Accountability
As PFI contracts come to an end, there is increased scrutiny and demand for transparency and accountability from the public, stakeholders, and government bodies.
The Infrastructure and Procurement Authority (IPA) offers valuable support through its PFI expiry team, and conducts Expiry Health Checks (EHC) to assess an authority's readiness for contract expiration. Such support is crucial in preparing for a time-consuming and resource-intensive event.
🔮 What should you do going forward?
Effective governance and oversight are pivotal in ensuring that PFI contracts deliver value for money and meet the long-term needs of the public. Lessons can be drawn from both successful and problematic PFI projects in the UK.
Paul argues that authorities must be totally cognisant regarding their understanding of contract delivery. They should have a competent contract management PFI team dedicated to, and responsible for, governance. This ensures there are no surprises with respect to either life-cycle renewal or maintenance of the asset. They must undertake financial checks to ensure that contracted unitary charge payments are correct.
Also, where any service shortfalls are suffered, suitable deductions are made against the contract payment. This can be complex and can cause considerable complexities and should be managed carefully.
The White Frasier report, commissioned by the National Audit Office (NAO), highlights the changing approach of public authorities in managing their PFI contracts. It suggests that many public authorities are moving away from a light-touch approach and adopting a more rigorous contract management style. However, this shift has sometimes been marked by overly strict enforcement of contract terms, occasionally leading to disputes, broken relationships, and a loss of goodwill. The report also raises concerns about the impact on individuals' well-being when such an approach is pursued.
Successful governance and oversight in PFI contracts require a balance between rigour and professionalism. Lessons from both successful and problematic projects emphasise the importance of sustained communication, including dialogue with various stakeholders and financial experts, to ensure a smooth transition from PFI contracts to future service provision. This ongoing communication is key to achieving successful outcomes in the complex landscape of PFI contracts.
🎯 What does this all mean?
Whilst it may feel like transitioning from a PFI contract to future service provision is akin to navigating a maze, Reappraise want to reiterate the need for continuous dialogue with a diverse array of stakeholders, including financial aficionados. These discussions, often marathons of negotiation, highlight the essence of sustained communication in ensuring a triumphant transition.
Addressing these issues effectively requires careful planning, financial management, and a comprehensive understanding of the specific challenges associated with each PFI project.
Public organisations may also seek expert advice and engage in open communication with all stakeholders to navigate the complexities of PFI expiry successfully.
Reappraise are happy to offer assistance and advice on all aspects surrounding PFI expiry and what happens beyond the end date. If you are 7+ years out from expiry and want to know how to begin the process - or have experienced any issues throughout the expiring process - get in touch with Reappraise.
To learn how Tussell can help you keep on-top of your live and soon-to-expire contracts, click here.
