PFI Contract Expiry for Public Bodies

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What is PFI?

In the 1990s – early 2000s Private Finance Initiative (PFI) contracts between the private and public sector were a popular way to fund, build and maintain major infrastructure such as roads, bridges, waste management facilities, hospitals, schools, prisons and leisure centres over a 25 to 30 year period.

The broad principle is that the private sector would bear the risk of building and maintaining the infrastructure. This would be funded by way of a monthly fee (unitary charge) that includes costs to the private sector of construction, financing, lifecycle replacement expenditure, maintenance and services. At the end of the 25-30 year PFI contract, the assets would then be handed back to the public sector authorities.

In the 2000s there was controversy over whether the government was spending more on PFI than the infrastructure projects were worth, and in October 2018 the government announced it would no longer use PFI contracts.

The Infrastructure and Projects Authority reported that as of summer 2021, there were “over 550 PFI contracts operational in England providing or supporting essential public services” which were due to expire over the next two decades. This represented assets with an initial capital expenditure of £46 billion and total unitary charge payments of £244 billion, half of which were yet to be paid.

Why is the expiry of PFI important to the public sector? 

In theory, PFI assets should have been well maintained throughout the PFI contract life and in a good state of repair when handed over to public authority. However, there is a difference in the interests between the banks, who funded the assets under the PFI contracts and will seek maximum returns, and public authorities who require well maintained assets.  

The White Fraiser Report  published on 20 July 2023 considered, amongst other matters, the “status of behaviours, relationships and disputes across the PFI sector”. The report found there has been a “historic under management of PFI Contracts by both the public and private sectors and that this collective under management has been to the detriment of the performance of some PFI projects”. The report also considered the need for a dispute resolution forum that would hear “any type of PFI dispute”, including those relating to expiry.

Currently, there is no dispute forum for the expiry of PFI contracts, and there is a risk that PFI contracts have not been effectively managed, and the assets have not been properly maintained and renewed. On expiry of the PFI contracts, assets that have not been properly maintained and renewed will potentially leave public authorities out of pocket, and threaten the continuity of essential public services, therefore it is critical that public authorities plan ahead.

Planning for the expiry of PFI contracts 

The impending expiry of PFI contracts means that public authorities need to take the following steps as soon as possible:

  • consider whether the public authority requires support from the Infrastructure and Projects Authority in the form of PFI Expiry Health Checks to understand their readiness for the expiry of PFI contracts, issues and actions; 

  • review the status of PFI contracts, the expiry date and the public authority’s rights, including any deductions that may be made for under performance, or other forms of redress;

  • carefully review the parameters of the final survey, as set out in the PFI contract. The type, and level of detail of a survey, will inform whether maintenance and renewal obligations have been fulfilled. Therefore, it is a potential point source of dispute between the contractor and public authority;

  • bring forward the date of the final survey to ensure any rectification works are agreed, carried out and inspected before the expiry of the PFI contract;

  • cross check the final survey results and rectification costs with the unitary charge and the life cycle spend to establish whether the contractor has underspent on the PFI asset;

  • seek legal advice as soon as possible on any potential or ongoing disputes, such as failure to maintain and renew the PFI asset; and

  • instruct a legal advisor to record any variations to the PFI contract and arrangements with the contractor (e.g. rectification works) in a formal legal agreement. 

Whilst there is a lot of focus on ensuring contractors comply with PFI contracts, public authorities should be mindful that all follow-on services need to be setup before PFI contracts expire. Therefore, public authorities need to take pro-active steps to ensure future services can be scoped and procured.

Ashfords has extensive experience with PFI contracts, negotiating variations and procuring public services. If you have any queries in relation to PFI contracts, expiry or procuring future services, please do get in touch with our Public Sector Team

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