The end of private finance initiative – what are the options for public authorities?

As of summer 2021, there were over 550 private finance initiative (PFI) contracts in England providing or supporting essential public services  due to expire over the next 20 years, including more than 200 within the next 10 years. 

Concerns about historic under management of PFI contracts, the potential for disputes about the condition of PFI assets and ensuring continuity of public services, means that public authorities need to prepare well in advance of the expiry of PFI contracts. 

This article considers how public authorities should prepare for the end of PFI contracts, and the implications for public authorities.

How should public authorities prepare for the end of PFI contracts? 

The Infrastructure and Projects Authority recommends that public authorities should start preparing eight years in advance of expiry and carry out health checks at the seven years, five year and three years points . In Scotland, they recommend eight to ten years for complex projects.

As part of the preparation for expiry of PFI contracts, public bodies need to undertake a detailed appraisal of legal and financial options for managing assets, delivering services and providing best value.  

In broad terms, there are three potential legal options for public authorities managing the expiry of PFI contracts: 

1. Prepare for the PFI contract to expire. Prior to expiry, plan for the management of the asset and services delivery to be re-tendered, and appoint a new external contractor - this provides a public authority with the opportunity to design a competitive procurement process, tailored to the asset management and service delivery needs, and invite bids from a range of suppliers. However, procurement is a time consuming process and likely to require expert advice on compliance with the new procurement regime.
2. Prepare for the PFI contract to expire. Prior to expiry make arrangements for the asset to be managed and services delivered by the public authority - whilst this may give a public authority a greater level of control, they will need sufficient in-house resources to effectively manage assets and services.
3. Prior to expiry, vary the PFI contract and enable the existing supplier to continue managing assets and delivering services - this will potentially enable cost savings and a re-allocation of risk, however, all public authorities must comply with procurement rules. This is viewed by many as a short term solution however, to address the bottle-necks in adviser capacity anticipated by the forthcoming large scales waves of PFI expiries.

What does this mean for public authorities?

Many industry commentators have noted that due to the large number of PFI projects scheduled to expire in close proximity, there are two large waves of expiries anticipated, many authorities are likely to be left with little choice but to extend, given the lack of adviser capacity in the industry to cope with the volume of expiries. 

However, some central government sources have indicated that they would take a dim view of such a large scale approach and might not authorise it. The level of required central government authorisation will need to be considered on a case by case basis, however, given that presumably the PFI credits will not be extended hand in hand with any such extension.

The IPA has noted that the amount of work, in terms of advisers and preparation, needed for ‘just’ a PFI expiry will be almost as great as that required for putting the original transaction in place. So whichever option is chosen, there is undoubtedly a significant amount of work that authorities need to plan for.

As indicated above, there are benefits and drawbacks to each option and these will be considered in more detail in our further PFI articles.

For further information Ashfords’ PFI experience please see our page, or if you require any assistance please contact Clare Brewer.