Article

PFI waste contracts – turning expiry into opportunity

ContributorName(contributor, true)
By:
insight featured image
We are fast approaching a contract expiry ‘peak’ for private finance initiatives. Jennifer Brown explains the importance of planning ahead and key questions for identifying relevant concerns and potential next steps.
Contents

704 PFI / PF2 deals reached financial close between 1992 and 2016, with a combined capital value of over £57 billion. With the average operational period of a contract being around 28 years, expiry is due to peak in the coming years.

 

Number of PFI/PF2 contracts expiring in each year

 

 

 Data: Private Finance Initiative and Private Finance 2 projects: 2018 summary data - GOV.UK (www.gov.uk)

The Infrastructure and Projects Authority (IPA) expects senior leaders to commence planning for private finance initiative (PFI) expiry at least seven years prior to contract end.

 

The importance of planning ahead

37 of the PFI / PF2 deals cover waste services. Local authorities must act now to make the best decisions for the future of this provision:

  • Ensure smooth hand-back processes, for continuity of services – critical for service users’ confidence in delivery
  • Reduce the risk of unanticipated issues / liabilities – allowing rectification of issues within the terms of the contract prior to expiry
  • Provide comfort over asset condition and maintenance history – helping to inform future procurements (and avoid risk-pricing)
  • Facilitate scrutiny of operations – ensuring value for money doesn't taper for the residual period of the contract until expiry
  • Allow sufficient time to carefully consider options for the future – creating space for complex stakeholder management in a timely manner

Act too late and this could significantly reduce the opportunity to enforce the local authority’s rights and remedies under the contract (including potentially withholding unitary charges) and any potential claims identified post-expiry may not be recoverable if the project company’s assets have already been removed.

Of course, maintaining a positive and effective working relationship with the incumbent service provider is preferred and a robust communication strategy will assist with this. If desired, there could be the opportunity to extend the existing contract to allow more time to consider future plans and ensure a fully competitive process is developed – as this is the only way to ensure true value for money for council tax-payers.

 

Identifying opportunities after PFI expiry

The expiry of your PFI contract is complex, and sometimes dauting, but it's also an opportunity to refresh the approach to waste services in line with current legislation, societal trends, and evolving technology.

Asking some key questions can help you identify relevant considerations and potential next steps.

How should services be designed to accommodate new waste legislation coming into force?
  • Environment Act 2021 ( in particular, the implementation of consistent recycling, including food waste collections, for households [1] )
  • Robust change in law contract provisions
How can the services deliver social value benefits?
  • Social value themes and policy outcomes relevant to the contract
  • Monitoring and recording performance of commitments throughout the contract lifespan
Should the services be brought in house or re-procured?
  • Internal capacity and capability (existing and potential)
  • Value for money (eg, local authority access to lower cost finance)
  • Flexibility to adapt
  • Risk appetite (including reputational risk)
What is the ideal length of contract?
  • Too short can offer poor value for money (ie, recovery of set up costs)
  • Too long can be inflexible to market and technology developments  
Should the services be packaged or considered separately?
  • Services to consider: residual, recyclates, food, green, bring sites, street scene
  • Efficiencies in procurement and contract management for a single contract
  • Separate contracts allow greater flexibility but may result in interface issues
What is the optimal balance of risk sharing to get best value for money within the risk appetite?
  • Key risks to consider: waste composition, energy prices, recyclate values, insurance costs
  • Party best-placed to manage the risk should own the risk for best value for money (ie, reduce risk premiums)  
Could there be a benefit in partnering with neighbouring authorities?
  • Economies of scale and buying power
  • Practical and political complexity of partnering
  • Inter-authority agreements  

Footnote 1: Consistency in household and business recycling in England consultation feedback (from 896 respondents) currently being analysed with government response expected in 2023

 

How Grant Thornton can help

We have worked on many of the original waste PFI contracts and are currently advising on the expiry and next steps for one which is due to expire before 2030. This deep understanding of the waste sector, our insight into government, and innovative approaches, will support you to bring ideas into reality.

Our waste specialists can draw upon expertise from across our firm (eg, financial modelling, tax, accounting, place-based analytics, economic consulting) as well as a network of partners to tailor our services to your needs. Our national reach ensures that we’re always local to your project. 

For more insight and guidance, get in touch with Jennifer Brown.

Get the latest insights, events and guidance about the public sector and local government, straight to your inbox.