Preparing for PFI contract expiry? The handback guidance has now been issued by the UK government

United Kingdom

The Infrastructure and Projects Authority (part of HM Treasury) issued its much anticipated Preparing for PFI Contract Expiry guidance this week. The detailed guidance is aimed at supporting PFI contracting authorities through the handback process but is also intended to be of use to the private sector investors, funders, asset managers and market suppliers.

With over 700 projects operating across the UK having a total value of £160 billion, and over 170 of these projects expiring in the next 8 years, this is a significant programme for the public sector to manage.  The transition phase of handing the assets back to the public sector and the transition to future services provision will need to be managed effectively to protect these critical public services and assets and avoid potential operational disruption, lack of service continuity, financial loss and reputational damage.

The Preparing for PFI Contract Expiry guidance has been produced as part of the PFI Contract Management Programme set up by the PFI Centre of Excellence within the IPA. It is in response to the National Audit Office’s June 2020 report on PFI contract expiry which found that public sector bodies risk underestimating the time, resources and complexity involved in managing the end of PFI contracts.  It also follows on from the PFI Expiry Health Checks Learning Report issued by the IPA in December 2021 which found that of the 52 projects it looked at which are due to expire in the next 5 years, over half of them would need significant work ranging from moderate to critical if they are to be ready for expiry.

What does the guidance cover?

The guidance looks at the why, when and how of implementation.  The core objectives for the public sector from the contract expiry process should be to:

  • ensure that the PFI project company meets its contractual obligations so that value for money is achieved; and

  • ensure that the expiry process supports the public sector’s plans for the asset following expiry, with the ultimate aim that ensuring service continuity is achieved. 

It gives an overview as to why effective contract management will be vital in ensuring that the exit process is as smooth as possible and these core objectives are achieved.

The guidance poses a number of questions for the contracting authorities to consider in order to shape the handback and future delivery.  It then covers recommendations and guidance on implementation but leaves it for each project to work out how exactly to do this. It is likely that technologies will have advanced during the lifetime of the PFI and new strategic policies, such as carbon net zero, will have emerged. Contract expiry provides the opportunity for contracting authorities to reconsider what the future of its assets might look like.  The guidance considers the possibility and options of contract variations to adapt lifecycle and service requirements in the last years of the PFI contract.     

7 years countdown and challenges ahead

The key challenges which may be encountered are flagged by the IPA and top tips from expired projects provided.  The underlying theme of the guidance is that early preparation and engagement from all stakeholders will be vital and that expiry planning should commence at least 7 years before expiry.  This includes the instructing and carrying out of early asset condition surveys which can take considerable time.  The public sector side will be switching from having no direct involvement in managing the assets to needing to have all the necessary information to take over the asset and procure follow on services ready and in place before the cliff edge expiry date. 

The guidance recognises that the complexity of PFI creates some inherent challenges which is particularly true of contracts signed before the introduction of Standardisation of PFI Contracts (SoPC) in 1999.  Handback provisions can be vague, full of gaps and open to interpretation therefore increasing the potential for disputes.  Early projects may also have market based residual value payments for asset transfer which add another layer of complexity.

It recommends approaching PFI contract expiry as a project in itself with different separate workflows and more and different senior management support than is already on any given project.  The requirement to have a Senior Responsible Owner is also expected.  There will be challenges for the public sector in resourcing this and obtaining additional budgets for such specialist resource from somewhere. 

The guidance is supported by a toolkit which provides additional tools aimed at managing the expiry process.  The toolkit and guidance will evolve over time to take account of experiences in the market and to ensure that it stays relevant and will be complemented by sector specific guidance.      

The IPA acknowledges that the handback process will vary considerably across PFI projects based on the nature of the asset, the form of contract and future needs.  The guidance however gives a framework for how contracting authorities may wish to approach and plan for contract expiry and is a good starting point (inclusive of examples of what good looks like) for a process where there is a lot at stake.