In August 2021, the Infrastructure and Projects Authority (IPA) published a programme setting out how they plan to support and prepare contracting authorities for PFI contract expiry through the PFI Contract Management Programme in response to calls for the need for guidance and support through the complex handback process.
Public private partnerships (PPP) in the form of PFI and its brothers and sisters (for example LIFT, NPD and hub DBFM) are a major part of the infrastructure landscape in the UK. There are over 700 PFI projects currently operating across the UK and 200 of those projects will expire over the next 10 years, raising questions about how the handback of those projects will roll out .
PFI deals involve the public sector entering into long term contracts with a private sector company whose specific purpose is to finance a project with a combination of debt and equity and to design, build and maintain the asset over the life of the contract. In return, the public sector makes annual payments to the PFI company, those payments cover debt and interest payments, shareholder dividends, and can include maintenance costs (hard facilities management) and services costs (soft facilities management).
When the contracts expire, in most cases the assets will be handed back to contracting authorities. Some of the early projects contain options to extend and some oblige the public sector to buy back the asset at market or residual value.
The process of handing back the assets after 25 years of operation and maintenance by the private sector is governed by the PFI contract. Despite the relative standardisation of PFI contracts, many of the handback provisions differ in level of detail and process, meaning that a 'one size fits all' approach will not work.
The prospect of managing handback of PFI assets (the total value being in the region of £60 billion in the UK) has, rightly, been attracting growing focus from UK Government and other stakeholders and was the focus of the Public Accounts Committee's (PAC) report "Managing the Expiry of PFI Contracts" published in March this year. The Scottish Futures Trust (SFT) issued its own programme approach and guidance on PPP projects nearing the end of contract, published in April 2020, and has since been assisting the public sector in reviewing its PPP contracting arrangements and shaping expiry planning.
In response to the PAC's recommendations, the IPA propose a structured programme of review, guidance, training and support to contracting authorities to manage PFI expiry for projects that are due to expire within 7 years. The focus of the IPA's programme is to create continuity, promote relationship building, and implement structure to the expiry process by providing a central resource to contracting parties and setting an industry standard of behaviours that is expected of those involved in the handback process.
While most formal handback provisions in PPP contracts commence around 2 years prior to expiry, the IPA estimates that it takes around 7 years to prepare, meaning action is needed now. That action will take place on a playing field which is often uneven. It's easy to assume conditions will favour private sector investors which have largely sought to aggregate projects, allowing them to manage contracts on a portfolio basis. Contracting authorities may have only one PFI contract and the teams which put those contracts in place may have long since departed, leaving some contracting authorities exposed to potentially higher risks.
There are growing concerns at all levels about the resource that will be required, over a concentrated period, to manage handback, The IPA's programme aims to help manage the risks associated with PFI expiry identified in a reportpublished by the National Audit Office in June 2020 including: ensuring adequate management resource is available; the quality and condition of assets at handback; continuity of services and expensive and lengthy disputes.
Being successful in handback is essential for both parties. For contracting authorities, getting an asset back in a condition which is commensurate with the terms of the contract it signed (often more than two decades prior) is essential to avoid disruption to key public services such as schools and hospitals. Handback has to be seamless and it cannot result in the taxpayer footing the bill to bring assets up to the expected standard or for plugging gaps in service. For the private sector, successful handback could be the vindication that the PPP sector has been grasping for - smooth handover could fuel discussions about the next phase of PPPs in the UK and, given the private sector has the ability itself to take the heat out of discussions from an early stage, smooth handover could be the in the private sector's gift.
For more information on how to approach the PFI handback process, read our blogs on the three key themes: