The Long Goodbye to the PFI

Rob Hann, Sharpe Pritchard’s Head of Local Government takes a look at the House of Common’s Public Account Committees’ recent report into the pending expiry of PFI contracts which contains some interesting recommendations….

Hot on the heels of last year’s NAO report into the expiry of PFI contracts, Managing the expiry of PFI contracts – National Audit Office (NAO) Report the House of Commons Public Accounts Committee have now published their report and findings (‘the PAC report’) into the same issue having taken evidence from a number of sources including HM Treasury, the Infrastructure Projects Authority (the IPA) several local authorities and Local Partnerships (the successor central body to 4ps/PUK which is now owned by the LGA and HMT and which has responsibility for local government PFI, amongst other things). In an earlier article I commented on the NAO recommendations.

The interest now being shown by central Government into the challenges faced by many diverse public bodies as these hugely complex PFI contracts head toward contract maturity, whilst heartening, merely scratches the surface of the problems ahead for public body parties to PFI contracts.

As the PAC have noted:

“Over the next 10 years, an estimated 200 PFI projects will come to an end, representing £10 billion of assets. In most cases, when a PFI contract expires, the assets will transfer to the public sector. The process is complex and requires the public body (the authority) that entered into the original contract to take several actions in advance of expiry. First, the authority has a duty to ensure the private company has completed any scheduled or reactive maintenance, including any rectification work required to bring the asset up to the condition stipulated in the contract. Second, the authority needs to decide if the assets and services are required after expiry and, if so, how the asset will be maintained, and the services provided.”

It is the second task identified above which is of particular concern and would need addressing as a priority, well in advance of expiry. Of course, it could be argued that inheritance of a fully maintained and paid for asset at the end of a long-term contract is a benefit to the public body and was always the outcome envisaged at contract signing? But whether, in reality, it is a benefit or else, becomes an expensive additional burden on public finances which the entity in question can ill-afford, will be something the authority will need to give serious consideration to.

When PFI was rolled out across local government, local authorities were incentivised to consider PFI because central government (through PFI credits and later PFI grant) provided much needed additional funding to help meet the cost of supply of those ‘asset intensive services’ for the contract term. However, once the PFI contract expires, the additional ring-fenced PFI funding support from central government to the authority (pretty much anyway) ceases. So local authorities will be faced with inheriting not just the assets (in whatever condition they arein at that stage) but also the liabilities which go with the upkeep of those assets, only this time, without extra central government grants to help meet those costs. Affordability is, therefore, a major issue.

One approach I was hoping the Government would take (post-Covid pandemic and to help with re-investment costs) would be to announce a new funding programme specifically aimed at refreshing legacy PFI estate and recognising the need for on-going maintenance and refresh. However, as yet, no such initiative appears to be on the horizon.

In the absence of any additional funding, the public body will need to undertake an options appraisal to explore which of several alternative courses of action open to it are most suitable. The options available will depend on the sector, the assets in questions and the needs of the public body going forward. If the public body doesn’t wish to bring the assets under direct local authority/public sector control, a decision will need to be made as to when and how to go out to the market, well in advance of contract expiry, to seek a new service provider.

Any such procurement exercise would need to be timed carefully so as to dovetail with expiry and enable the new provider to take over the responsibility for servicing the assets. But is there a market of new providers out there ready and willing to step into the shoes of existing PFI contractors who have been running the service for 20-25 years? What about the incumbent provider? – will they want to retender and if so, will that prove to be a disincentive to any other party taking the time, cost and effort to bid?

What about the procurement process itself? In the past, significant resources were provided by the central bodies in terms of standard form contacts, the development of standard contract terms (known as ‘SoPC’,) procurement guidance and templates but is such support likely to be forthcoming in future from the central bodies? A helpful step (not contemplates by the PAC) would be for the IPA/HMT to produce a fresh iteration of SoPC which would provide a strong starting point for commercial negotiations going forward in a post-pandemic, post Brexit environment. What approach would the market now take on existing SOPC 4 drafting for force majeure and insurance for example? These sorts of issues need to be addressed by the central bodies now (HMT, IPA, Local Partnerships etc) and for the benefit of all sectors.

The recent Green Paper on public procurement flagged the fact that procurement rules and processes are likely to change over the course of the next few years. Will a new generation of service providers be encouraged to bid if there is no certainty that public bodies will have the budget and funding to pay for such services? Will they be willing to bear the costs, time and effort involved in submitting bids in the brave new world of reformed UK public procurement processes?

One of the PAC observations is around the needs and demands public sector bodies have for assistance from external consultants. There are many consultants who have good and detailed knowledge and experience of PFIs and who could play a valuable role if they could be accessed easily and quickly by those who need them. The IPA says it is ‘building capability’ and is recruiting additional staff to develop a central pool of resources but so far this consists of just 17 people, – not enough resource to support all 700 contracts.

One alternative approach would be for the central bodies to pre-qualify a cadre of experts across the professional disciplines by establishing a framework with call-off arrangements. This would provide public bodies with choice whilst controlling costs and avoiding the need for each authority to go separately to the market.

As regards what sort of support is available from the central bodies to the public authorities involved the PAC noted that:

“Each individual authority is responsible for managing the expiry of its PFI contract. When an authority needs help, support is often lacking, or it is not always clear how to access it, with varying degrees of support available from multiple sources across central government. The IPA is building capacity and plans to provide support and advice via its contract management programme. Local Partnerships provide training courses and lessons learned examples when requested, while the sponsoring department is responsible for drawing on the expertise at the IPA.”

The PAC wanted more information from the IPA/HMT on who provides what support to whom.

One omission from the PAC report was the fact there was no mention of the Gateway review process which, in the past, was a common method employed by the central bodies to take the temperature of a project and to find out a lot of key information about a contract in a short intense review. Gateway reviews in the past were done at crucial stages of a project’s gestation to provide some comfort that they were ready to proceed to the next step (here – its journey towards expiry). Perhaps gateway reviews have fallen out of fashion? If so, that is an opportunity missed to get under the skin of some of these complex arrangements quickly.

Resolving disputes prior to contract expiry is mentioned by the PAC as a particular area of difficulty. Whilst the standardisation of PFI Contracts (SoPC) contained some model form drafting that developed and improved over time, DRP is inherently complex, relies on co-operation by both parties to set up a DRP panel, takes an awful long time and is prohibitively expensive for many authorities. The PAC tasked the IPA with publishing a disputes protocol, outlining how disputes can be escalated by authorities, and the steps that can be taken to ensure disputes only need to be resolved by the courts as a last resort.

Protocols have been used to good effect before in PFI (e.g. gain-share on refinancing and change protocols were introduced in later iterations of the SoPC contract templates). However, it is questionable what impact such a protocol will have on contractors who have their sights fixed on exiting without resolving such disputes (if that approach is in their financial interests).

One of the issues the PAC does recognise is the potential for some PFI investors’ ability to withhold crucial information about the contract from the public body. The PAC has tasked the IPA to provide (again within 3 months) the steps it is taking to ensure PFI investors are being fully transparent and compliant with contracts, and what action, if any, it will take if an investor if found to be deliberately non-co-operative. One recent development might assist here (and may give the IPA some ‘teeth’) is to look in detail at the proposals in the Government’s Green Paper on transforming procurement which included recording and permitting past poor performance of a public contract to be a discretionary exclusion ground for new contracts. Why not use the expiry of PFI and the conduct and performance of contractors, as a trigger for HMT to commission independent reviews of these contracts as they head towards termination with a view to recording outputs for this purpose?  Even the threat of this as a potential sanction might help bring the (hopefully few) unscrupulous parties back into line.

Rob Hann was head of legal at 4ps/Local Partnerships between 1996 and 2016 and (amongst other things) he helped develop and deliver the roll out of the PFI across local government including templates, model form sector specific contracts and the local government input to SoPC. He is now Head of Local Government at Sharpe Pritchard.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk

Posted in Latest news and blog, Local government, PFI.