PFI expiry: Act early to ensure a ‘smooth transition’

Mark Williams, Public Services Advisory, PFI expiry lead at Grant Thornton UK LLP, gives his advice on ensuring a smooth transition for public bodies and private sector contractors ahead of the PFI expiry.

There are currently around 700 PFI projects in operation in the public sector and there is a lot of interest in what will happen as they start to come to an end. The National Audit Office (NAO) recently published a report on PFI expiry in June last year, in which they made a series of recommendations on what public bodies, and by implication private sector contractors, should do as the contracts expire. It stressed the need to act early, recommending starting preparations around seven years before the end of the contract term.

Within the waste sector, there are 26 waste PFIs currently in play. Their total original capital cost was £2.7bn and annual running costs are circa £700m – representing a material part of the waste market, albeit there are many other broader partnering/contract arrangements.

The NAO stated that “public sector bodies risk underestimating the time, resources and complexity involved in managing the end of PFI contracts” and that “there is danger that important infrastructure could return to the public sector in an unsatisfactory condition and services could be disrupted unless a more consistent and strategic approach is taken.”

There are a number of steps that both public bodies and private sector contractors should take to ensure the best value for money, collaborative PFI expiry and to secure the best follow-on arrangements, avoiding any potential legal disputes along the way.

Supply chains

Given the complexity of a PFI and private sector supply chains, it is possible for different parties to benefit and suffer in the same PFI arrangement. It is often useful to break down a PFI into its component parts of design, build, finance, operate and maintain. Generally, once the design and build components are completed, these parties exit.

With a PFI that is expiring at the end of the expected term, the finance provider will have also completed their involvement a few years earlier. It is important for public bodies to map these supply chain relationships as they unfold so they have a clear understanding of who they are negotiating with.

Due diligence

A successful PFI exit requires due diligence. This will involve: technical asset management/condition surveys; finance – to understand the source and application of the funds in the PFI (including reconciling and interrogating financial models and accounts, benchmarking of costs, and consideration of the originally intended risk transfer versus the risk transfer actually secured); legal – what the contract and subsequent amendments say, and actually mean; and project/programme management to knit everything together.

Negotiation strategies

Due diligence will help to inform negotiation strategies for public bodies. When negotiating PFI amendments, efficiencies and expiries, these nuggets of information are helpful. Even though a public body may not be able to change anything about the situation, it is best to at least understand it. Financial models, accounts and budgets for PFIs are complex, and so early review to build understanding of the changes should help to avoid any surprises and support with successful negotiations.

Follow-on arrangements

Given the 25 years plus term of a PFI contract, sometimes the best value for money course of action may be distinctly different to what the contract originally envisaged. Careful consideration needs to be given as to who might deliver the follow-on arrangement. Will the assets and services now be delivered entirely by an in-house public-sector team or will, at least some, services need to be outsourced again?

Acting early

Any effective approach to PFI expiry should draw together the key factors of:

– best practice PFI contract management;
– PFI operational efficiency work;
– PFI amendments;
– upskilling of PFI teams and;
– HM Treasury’s better business case approach for decision making on amendments, efficiencies, expiry and follow on arrangements.

Acting early, and within a structured, well-developed approach, will help to ensure a smooth transition for public bodies and private sector contractors alike.

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