Prior to the expiry date of a private finance initiative (PFI) project agreement, it may be possible to extend that agreement and enable the existing supplier to continue managing assets and delivering services.
Consideration would need to be given to the extent to which central government consent is required, noting the likely cessation of PFI credits. However, many commentators have suggested that there will be insufficient industry capacity, given the forthcoming ‘waves’ of expiries, to follow any other option in many cases.
This guide explains what happens if PFI credits are removed when negotiating an extension and what public authorities will need to consider when negotiating and implementing variations.
If PFI credits are removed, then cost savings would need to be found at the same time as agreeing the extension, possibly through a renegotiation of specific risk allocations based on suggestions in PF2.
A balance will need to be found between the extent of negotiation needed, and finding a short term fix to allow more time in which to consider a longer term solution. The option of extending the project agreement is only viewed as a short term ‘sticking plaster’ solution by many commentators. It is not known to what extent central government would agree to an extension of PFI credits in order to give certain projects more time in which to consider longer term solutions. One assumes that poor planning would not be a good justification.
Against the backdrop of the above caveats, public authorities will first need to review their complete suite of documentation. This includes a thorough legal review of the project agreement, compiling the potentially extensive suite of variations which might have occurred over time, supplemental documents and sub contracts. They should pay particularly close attention to the following issues:
Public authorities will also need to ensure they have the necessary governance, internal approvals and officer capacity to effect a deed of variation, taking into account the complex nature of the work required to deliver such a variation.
The potential for cost savings and continuity of service may appear attractive, however, negotiating and implementing variations can be complex, expensive and will require full due diligence. Large value variations and the process of contract closure can almost be as involved and time consuming as the original financial close.
The potential for cost savings and continuity of service may appear attractive, however, negotiating and implementing variations can be complex, expensive and will require full due diligence. Large value variations and the process of contract closure can almost be as involved and time consuming as the original financial close.
Public authorities will need to carry out a financial appraisal and cost-benefit analysis to ensure varying a contract would deliver best value, compared to re-tendering, or managing the asset and services in-house.
As part of a cost-benefit analysis, public authorities should consider whether the asset is still required for service delivery, if the assets remain fit for purpose and compliance with modern regulatory standards for environmental and health and safety. Where significant capital investment is required to upgrade the asset, then this will need to be considered against the remaining lifecycle. PFI credits are unlikely to continue to be paid, and so the economics of the transaction will need to be re-assessed entirely.
Under the existing Public Contract Regulations 2015 , public contracts may be varied without re-tendering in limited circumstances, known as safe harbours. Unless the extension of a PFI contract falls within one of the safe harbours, then it will be necessary for the public authority to re-tender, or manage the asset and services in-house. Our article ‘PFI expiry: retender or manage in house’ considers the re-tender process in more detail.
For further information on preparing for PFI expiry and variations please see our page, or contact Clare Brewer.
