Article

How to prepare for PFI expiry

Nick Moseley
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Businessmen with computer
Hundreds of private finance initiatives (PFIs) are set to expire in the next 10 years. Nick Moseley, and Nathan Holloway from Tetra Tech, explain the essential actions needed to prepare for PFI expiry and how local authorities can navigate these changes effectively.
Contents

With over 350 PFIs expiring across the next 10 years, sufficient preparation for the expiry process is essential. Local authority section 151 officers and heads of estate want to avoid entering an expiry process that is anything other than smooth, given the potential intensity of resource required to manage a complex process that could disrupt the running of essential authority assets.

Understanding your asset condition and lifecycle cost feeds directly into financial calculations about the options available, so you can form a clear plan up to and beyond the date of PFI expiry. Specialist technical guidance and financial advisory are key to navigating this process. 

Here, we set out clear actions local authorities can take to manage the risks of PFI expiry and prevent the public sector from bearing unnecessary costs.

As most authorities will be aware, the National Infrastructure and Service Transformation Authority (NISTA) offers Expiry Health Checks (EHCs) for projects within seven, five and three years from expiry. However, the burden falls on the local authority to provide up-to-date contractual and survey information – something that, in practice, can be difficult to access. This often puts early strain on the authority/SPV relationship, even before expiry discussions formally start.

Recognising the financial capacity challenges in local Government, we have set out a cost-effective approach to initially assess key items. These are the must have items that identify potential problem areas at pace, enable constructive negotiation with the PFI’s private sector partners, and provide a structure to allow for regular monitoring of issues through the remainder of the contract – noting certain areas may require escalation.

The items in the timeline below cover financial and technical areas, given the importance of these two core workstreams working in tandem as part of an effective expiry solution.

More than seven years until expiry  |  Seven years  | Five years | Three years | One year

 

More than seven years until expiry

At this stage, you have not yet reached the National Audit Office (NAO) recommended seven-year window required for PFI expiry.

It's good practice to ensure you have access to relevant information about the PFI, including Management Information (MI) reports and a copy of the PFI contract and supporting schedules, i.e., the financial model and up-to-date supporting information around Unitary Charge (UC) invoices paid by the local authority.

If not already present, t's recommended that you document the current contract management processes and SPV relationships. This is key for corporate memory, given the term length that the management process will elapse over.  

Finally, NISTA has produced several key documents that will boost your understanding of each stage in the process. These include practical guidance on PFI expiry and common pitfalls, highlighted in the 2021 Expiry Health Checks Learnings Report and the White Fraiser Report on the PFI sector.

Seven years (foundation and planning)

With seven years until expiry, you have entered the recommended window to begin expiry planning. This should be conducted in collaboration with private sector partners, including around future service requirements.

Conducting a stock take of the available information, both through a financial lens and of the asset condition, is necessary to inform the strategy required for expiry planning.

A diagnostic on the financial information and the financial position of the SPV will shape the priority items for the remaining period of the contract. For example, it's important that the SPV has the money available to bring the assets to their required handback condition, per the PFI project agreement.

To understand what work is required to reach this point, an initial high-level ‘health-check’ of the assets would be a useful exercise. Rather than an expensive full scale condition survey, a more focussed review of the key elements of the asset may be preferable to achieving the desired checks.

Key elements may include fire safety, health and safety and high value building elements, such as superstructure, roofs, windows, and primary electrical and mechanical systems in plantrooms.

Building on this, a spot check compliance review of documentation/certificates around areas as fire and gas safety inspections, air and ventilation safety inspections, drainage, plumbing, and water hygiene may also prove insightful.

This ‘health-check’ type survey will provide feedback on the current asset condition, and when supplemented by a proactive plan around maintenance and compliance, will likely address issues before they escalate and potentially increase financial costs across the remainder of the contract.  

What could go wrong if you don’t do this now

Without gathering this initial information, it will be difficult to form a strategy and pathway for PFI expiry. Being well-informed at the initial stages of negotiation with the private sector allows for a more productive discussion and understanding about what needs to be achieved over the remainder of the PFI contract period.

More directly, a lack of up-to-date asset information is likely to lead to increased costs due to non-identification of assets that need to be improved or replaced. There's likely to be a knock-on impact of issues which cause operations to be shut down or delayed due to maintenance requirements.  

Five years (initial review)

The required actions with five years remaining on the PFI contract will solidify the planning already undertaken. A five year period is appropriate timing to produce a financial forecast to cover the remaining contract period, including the lifecycle model and five-year spend. This ensures the SPV has available funds for the handback works required, based off the final condition survey combined with industry estimated usable lifecycles.

This checkpoint represents another opportunity to review processes and documents, including the financial model and whether any changes to asset condition have taken place. A comprehensive condition review will identify any remedial works needed, serving as the basis of an updated asset register and aligning with the PFI Asset Condition Playbook guidance.

This is also likely to be the final opportunity to consider any potential technology upgrade requirements to assets if appropriate, prior to the SPV being fully focused on expiry.

What could go wrong if you don’t do this now

This checkpoint will solidify your understanding of the PFI position, finalising the expiry plan for the remainder of the contract. Without this, there's a risk of insufficient time to rectify any major asset issues or manage the finances of the SPV to ensure all contractual obligations around handback can be fulfilled.

Three years (interim review)

The interim review, with three years remaining on the PFI contract, will be used to revisit the key documentation. While these actions will predominantly fall within the day-to-day management of the PFI, prioritising this via regular touchpoints with the SPV will ensure that all parties are on the same page in progressing towards expiry.

Ideally, the five-year financial forecast for the remaining contract period and asset condition survey should be used as the base position for this review. This will enable you to update the condition ratings and add or remove any changes in the survey data and asset register. This opportunity can also be used to identify any required repairs, maintenance or asset replacements, update the lifecycle model, and review the latest documentation and ensure that all assets, compliance and testing certificates are in place (including drawings).

What could go wrong if you don’t do this now

An update of this nature ensures that items "don't fall between the cracks", providing reassurance about the status of the asset and SPV while there's still time to rectify issues. Without this interim review, there's a risk that items drift across the final five years of the contract and are identified as too close to expiry to be rectified.

One year (final preparations and compliance)

With one year remaining, final preparations should be well underway, aligned to the plan formed over the previous six years.

At this stage, the condition survey should be refreshed, which builds on the version completed three years before expiry. The aim is to update condition ratings and reflect any changes to the asset register. Repairs and replacements identified over the past two years should also be reviewed.

A final financial assessment of the lifecycle model and SPV is crucial to confirm sufficient funds are in place to meet remaining obligations through to contract expiry and asset handback. This updated survey underpins confidence that the PFI is on track for expiry and all parties are prepared.

What could go wrong if you don’t do this now

This is a critical final step to understand that the PFI is in a good position for contract expiry. Conducting these steps in a collaborative manner between the public and private sectors will ensure that the parties have clear responsibilities over the remaining months of the contract. This is essential for avoiding positions of disagreement or dispute when arrangements around important assets are likely to be changing for the first time in over 20 years.  

What can you do now?

The actions set out above provide a clear pathway for "getting on the front foot" and achieving a smooth, collaborative PFI contract expiry.

While NISTA offer EHCs to local authorities within specific expiry windows, collating the information required and using it to create a strategy for PFI expiry alongside the private sector is a burdensome activity for councils tight on financial and technical resource.

A short, targeted condition survey combined with a high-level assessment of the financial model can form the bedrock of a productive expiry planning process. A risk-based, cost-effective exercise of this nature brings benefits that last over a five+ year period, demonstrating strong value for what could be a sensitive, thorny issue to manage.

For more insight and guidance, get in touch with Wayne Butcher or Nick Moseley.

You can also contact Nathan Holloway or Danny Payne at Tetra Tech for technical support.