It is widely acknowledged that PFI (Private Finance Initiative) contract expiry will be resource intensive and require unique skills. A misalignment of interests and authority incentives creates potential for disputes.

In this insight we set out some “top tips” and considerations for local government organisations preparing for PFI contract expiry.

Contract awareness is key

A key first step is to familiarise yourself with the contract documents. Do you hold the full suite of documents, including those documenting any variations? Check the project bible and internal records, and contact external advisors to ensure there are no gaps.

Undertake a clause-by-clause review of all expiry-related provisions:

• Establish the expiry date – a crucial detail.
• What is the contractual process for handover and timings? What obligations does the PFI company need to meet on handover and exit, including around asset condition and compliance? Early contracts may contain significant ambiguity around each party’s roles and responsibilities at expiry.
• Projects from 1999 use the Standardisation of PFI Contracts (SoPC) terms which require the PFI contractor to transfer well-maintained assets to the contracting authority on expiry. Building Schools for the Future (BSF) projects used SoPC standard documents as a base, but the terms applying to waste projects do vary.
• Consider the projected lifecycle spend for the remaining term. Lifecycle spend should be carefully managed to minimise efficiencies - to the extent permitted by the project agreement.
• What assets and equipment will be handed over? Equipment lists under the project agreement may well be out of date. • What provisions are there around disclosing and transferring information relevant to the continuity of services?
• What continuing obligations will bind each party after expiry?
• What are the yielding up provisions in any leases?

Exit strategies

The National Audit Office’s (NAO) report from 2020 highlights that a lack of adequate preparation for expiry risks an increase in costs and service disruptions for public sector bodies. Both the NAO report and Infrastructure Project Authority guidance (issued in 2022) identify the importance of early preparation for expiry (at least seven years before expiry) and taking a collaborative approach. Three key issues to be considered and documented in a contract expiry plan are:

• Assets: poor management of the expiry of PFI contracts risks buildings being returned to authorities in a worse condition than was agreed in the PFI contracts, resulting in extra costs for the authorities in repairs and maintenance of the buildings. Authorities must manage their PFI contracts properly and robustly to ensure assets comply with contractual conditions and defects are identified and corrected before expiry.
• Services: a failure to plan the provision of FM services, such as maintenance and cleaning, following expiry of PFI contracts, will result in service disruption. Will services be provided in-house? By a new contractor? By the current contractor?
• People: what are the arrangements for staff performing the PFI services? Will those staff transfer to the authority or will they remain with the PFI services provider?

Good governance

The IPA’s guidance is clear that senior level buy-in is required from an early stage, to provide decision-making and governance and to allocate budgets, staff and access to external experts.

When preparing for expiry, authorities must ensure:

• risk awareness and management informs every decision
• appropriate financial, commercial and legal expertise is obtained
• due diligence is completed on any key or novel decision
• committees and individuals dealing with governance have appropriate experience, skills and expertise
• meaningful risks registers are maintained
• decisions are made having sought appropriate advice.

Conclusion

The work involved in preparing for PFI expiry should not be underestimated. According to the NAO at least four out of nine local authorities who have so far retaken ownership are dissatisfied with the PFI asset’s condition. Expiry may seem as an issue to deal with in the distant future, given the many competing priorities for authorities and stretched resources. However, authorities must address upcoming expiries in good time in line with the best value duty and to ensure value for money is obtained from the PFI arrangements.

How Capsticks can help

Our national team of public sector infrastructure project experts provide market-leading expertise on dealing with the full spectrum of issues relating to PFI matters, including:

• advice on operational issues, payment mechanisms and deductions regimes and cost saving strategies
• dealing with PFI variations
• advice on PFI disputes – from early stages through to litigation
• PFI termination – both during the construction phase and the operational phase
• advice on expiry and preparation for expiry.

If you have any queries around what's discussed in this article, and the impact on your organisation, please speak to Tiffany Cloynes, Stephen Tainsh and Vicki Moore to find out more about how Capsticks can help.