PFI deals have recently been in the news, with headlines about disputes between public sector customers and private sector owners and operators as contracts near their expiry date. We look at the issues around PFI expiry and the risks and opportunities this presents for private sector involvement in this area.
1 What was PFI used for and why is expiry an issue?
The last Labour Government encouraged extensive use of partnerships with the private sector to build and then maintain new public infrastructure, ranging from hospitals, schools, further education colleges, prisons, courts, libraries and leisure centres through to parts of the road network, street lighting and waste management. These were known as Private Finance Initiative or PFI deals. The current Labour administration would appear to be less keen on this type of approach – but as many of the PFI contracts were very long term, it will still have to contend with the expiry of a significant number of PFI deals on its watch.
How many PFI deals are due to expire and when?
According to the Infrastructure and Projects Authority PFI Dashboard, there are over 650 PFI deals still in operation, with a total capital value of over £50 billion – and the majority are due to expire in the next 15 years. Whilst the timescales here may seem relatively long term, the Government is advising public authorities to start planning for expiry 5-7 years ahead of the actual end date.
What are the key issues ahead of expiry?
In the run-up to expiry, public authorities are likely to focus on two issues:
- ensuring that the assets are handed back in good condition
(unless they have reached the end of their useful life); and
- working out what will replace the current operation and maintenance arrangements e.g. whether to continue to outsource (but on different terms) or to take the relevant services back in-house.
2 Risks for PFI owners/operators
Historically, there has generally been a recognition that PFI deals only work if there is willingness on both sides to show a reasonable degree of goodwill and flexibility. As a result, many have relied heavily on cordial relationships between the parties coupled, in some cases, with a relatively relaxed approach to contract management. However, a 2023 report commissioned by the Infrastructure and Planning Authority (known as the White Fraiser report) notes that some public authorities are adopting a more rigorous and, at times, aggressive approach.
Feedback from consultees suggests that some public authorities have engaged in "overly draconian (if not forensic) enforcement of the terms of the PFI Contract accompanied by, on occasion, unprofessional behaviour. [....] [D]isputes have typically resulted, relationships have broken down and accompanying goodwill has been lost".
The White Fraiser report (2023)
Why the more rigorous/aggressive approach?
There would appear to be a number of factors driving this change in approach:
- a legitimate concern to ensure that the relevant assets are
handed back in as a good a condition as possible – the aim
being to ensure that the PFI owner/operator carries out all
specified maintenance/upgrades prior to expiry;
- a general desire to save money, against the background of
public spending cuts; for example, there have been suggestions that
in some cases, public authorities are complaining about failures to
comply with specifications that are no longer needed, primarily to
obtain deductions from the unitary fee payable to the PFI
owners/operators;
- the fact that in some cases, the fee decreases towards expiry,
which may undermine the commercial incentives for the PFI
owners/operators, leading in some cases to under-performance;
and
- a desire to make changes to the assets to meet the changing needs of service users or achieve net zero targets (although much depends on the drafting of the PFI contract and in many cases, changes of this type may be outside its scope).
Some PFI owners/operators have also expressed the view that they are being held to a higher standard than public authorities typically are for e.g. maintenance of their own infrastructure – and that this is unreasonable. However, the report notes that one of the original aims of PFI was to maintain assets to a higher standard than was normally the case in the public sector; as a result, it suggests that this is not a legitimate justification for failure to meet performance specifications.
3 Risks for PFI owners/operators
Given the trends noted in the White Fraiser report, PFI owners/operators need to be prepared for the following:
- More disputes over precisely what the contract means – in
particular, there is often room for argument about the precise
meaning of expiry-related issues, such as the condition that the
assets are required to be in when handed back to the public
authority; and
- More requests for information, to assist the public authority in planning for service provision following expiry – in particular, check what the contract says about the information the authority is contractually entitled to demand and ensure that relevant records are complete and up to date.
In addition, although most PFI contracts require a survey of the assets to be carried out 18-24 months before expiry, the Government guidance suggests that this is likely to be too late (because it does not allow sufficient time to address problems with the condition of the assets). The same guidance therefore recommends that public authorities should request a survey "at least five years before expiry". Unless managed appropriately, these trends have the potential to impose significant extra costs on PFI owners/operators. Meanwhile, the media interest in negative stories about the impact of PFI expiry on public services highlights the potential for reputational damage in this space.
4 Opportunities from PFI expiry
Although PFI expiry presents certain risks, there are also opportunities for private sector providers. In particular, public authorities may not have the appropriate knowledge or resources to take the entire PFI deal back in-house. PFI owners/operators may be able to leverage their existing knowledge and relationships with subcontractors to offer replacement deals. These could include the following:
Options on expiry
- Continuing to own and maintain the assets and provide related services, but on modified terms, possibly including obligations to upgrade infrastructure to meet net zero targets;
- Handing the assets back to the authority but continuing to provide functions such as facilities management, maintenance and helpdesk services on an outsourced basis; and/or
- As in point 2 but on a transitional basis, with a view to the authority taking on those functions itself in due course (but that transfer would take place some months or even years after PFI expiry, to give the authority longer to prepare).
In many instances, public authorities may decide to run a competitive tender process (and may often be required to do so under public procurement rules). This means that there are also likely to be opportunities for investors and operators which have not been involved in the relevant PFI deal before, particularly providers of outsourced services of the type needed to maintain buildings or infrastructure once current PFI deals have expired.
5 How we can help
Our commercial contracts team (ranked in Tier 1/Band 1 by both Chambers and Partners UK and the Legal 500) has considerable experience of advising on long term infrastructure contracts with a significant service element. We also recognise that giving clients the best possible advice on such deals often requires extensive coordination with other relevant practice areas, such as our highly regarded Real Estate, Construction and Dispute Resolution teams.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
