On 5th June, the National Audit Office published its report on 'Managing PFI assets and services as contracts end'. Whilst there is a limited resource of 'lessons learned' from PFI contracts that have already expired, an estimated £3.9 billion of capital value PFI assets are due to revert to public sector ownership over the next seven years. This poses significant challenges and risks for the public sector at both national and local level, whilst also creating opportunities for knowledge sharing, capacity building, and streamlining processes.
In its key findings, the report flags that:
the public sector does not take a strategic or consistent approach to managing the expiry of PFI contracts and risks failing to secure VFM during negotiations with private sector parties;
there is a risk of increased costs and service disruptions if authorities do not adequately prepare for the expiry of contracts in advance;
some authorities have insufficient knowledge about the condition of assets, with the risk of such assets being returned to the public sector in an unexpectedly poor condition;
preparation time for expiry of contracts is often underestimated, and may require longer than four years;
authorities recognise that contract expiry will be resource intensive and require specialist skills, with 60% intending to hire external consultants but without standardised procurement documents and/or processes currently in place;
a misalignment of investor and authority incentives at contract expiry creates the potential for disputes between public and private parties, which can be costly and drain resources; and
early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at contract expiry.
In looking forward, there is a focus on early preparations, a collaborative approach between public and private stakeholders, and knowledge sharing across authorities, to help ensure a successful exit from PFI contracts. Specific recommendations include:
encouraging authorities to start preparing early, ensure expiry provisions are understood, develop a contract expiry plan, and for sponsor departments to provide direct financial support to fund dispute resolution and hire additional resources where required;
the IPA and sponsor departments: (a) proactively co-ordinating and developing a programme of support to be made available to authorities, including sector specific expertise and training; (b) developing an approach to identify high risk projects; and (c) assessing the costs and benefits of developing an electronic repository of PFI contracts to support authorities in managing their contracts;
the IPA carrying out an assessment of whether any areas of the contract expiry processes would benefit from a more co-ordinated and centralised approach, including assessing VFM of a centralised pool of internal resources, publishing contract expiry guidance, developing a consistent approach to resolving legal disputes, and developing an investor strategy to manage the relationship with private sector stakeholders; and
HM Treasury providing funding to departments which assist financially constrained authorities in formal disputes where it is VFM and practical to do so.
The issues raised by the National Audit Office will likely resonate with those who have gone through or are preparing for the handback of PFI projects. The recommendations offer the opportunity for a consistent, coherent public sector approach to PFI contract expiry that is both well-resourced and well-financed. As with many aspects of PFI projects, a collaborative partnership approach between public and private stakeholders will be key to a smooth transition, and in avoiding protracted and expensive disputes at the end of project terms.
To read our previous article on handback of PFI projects, please click here