There are over 550 PFI contracts in the public sector with a capital value of £57 billion. 78 projects are due to expire by 2028, but the profile increases substantially between then and 2030, with a further 91 projects being handed back. A recent National Audit Office (NAO) report on managing PFI assets and services has concluded that many contracting authorities don't currently take a strategic or consistent approach to managing PFI contracts as they approach expiry, leading to future value for money (VFM) risks.
There are three key areas that contracting authorities need to consider so that they can manage this process and ensure a smooth hand-back
Many contracting authorities haven't created defined programme plans to execute a successful expiry. Often there are shortfalls when it comes to both governance and resourcing. Inadequate resourcing often means that contracting authorities take a reactive approach throughout the expiry process, which can lead to poor VFM, especially as they enter commercial negotiations with the private sector.
We've supported several authorities to develop both resourcing and governance arrangement surrounding PFI expiry and their overarching commercial strategies. We work with local authorities to map resource with suitable commercial and technical acumen. Where resource isn't available, we can help the contracting authority work through the operational contract management, the expiry process, including commercial negotiations, and help design and procure the future service needs.
The commercial position
In many cases contracting authorities don't fully understand their contractual rights and obligations included in project agreements. This is especially the case in many early PFI contracts which were created before the Standardisation of PFI Contracts.
By working with the authority, we can decipher project agreements and present these back in layman terms. We focus on the commercial elements to answer key questions which will help create a strong commercial strategy to take forward. These include:
- the hand-back clauses and the potential impact of each option on the authority
- contractual right to view the maintenance and lifecycle funds
- rights surround the unitary charge and the potential to withhold this depending on asset condition
- provisions for any rectification work required for the assets
- the SPV’s financial returns and financial measures
PFI contracts often surround vital assets and provide essential services to local communities. Once the PFI expires the responsibility for asset-maintenance and future service delivery revert to the contracting authority. What's noticeable with many contracting authorities is a delay in planning for expiry and designing a future services strategy, which can lead to issues including rushed procurement that can reduce VFM. Additionally, contracting authorities often don't understand the provisions included within a project agreement surrounding the right to information.
We've helped contracting authorities design future service strategies, collate, and interpret contractually available information in line with the project agreement and implement the strategy, including running a competitive procurement exercise and agree a transition phase with the existing service provider.