Fifty-First Report - Managing the expiry of PFI contracts

The IPA is not clear what support will be provided to authorities with expiring PFI contracts, and who will provide that support. Each individual authority is responsible for managing the expiry of its PFI contract. When an authority needs help, … Read more The IPA is not clear what support will be provided to authorities with expiring PFI contracts, and who will provide that support. Each individual authority is responsible for managing the expiry of its PFI contract. When an authority needs help, support is often lacking, or it is not always clear how to access it, with varying degrees of support available from multiple sources across central government. The IPA is building capacity and plans to provide support and advice via its contract management programme. Local Partnerships provide training courses and lessons- learned examples when requested, while the sponsoring department is responsible for drawing on the expertise at the IPA. Some smaller authorities with multiple PFI contracts are being managed by a single person and could benefit more from additional capacity rather than training courses or specialist advice. The IPA asserts that it is working on proposals on how to provide additional resources, on top of those already available at the centre, and whether this is done by departments or regionally. Decisions about this are still outstanding, exacerbating the lack of support for those local authorities most at risk. Recommendation: The Treasury and the IPA should set out, within 3 months, their plan for providing support to all PFI contracts, especially those owned outside of central government. This should cover: Show less

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The IPA has not set out a clear escalation process to avoid disputes between the public and private sector going through the courts. At expiry, all parties will want to maximise value from the PFI contract. Authorities will want to … Read more The IPA has not set out a clear escalation process to avoid disputes between the public and private sector going through the courts. At expiry, all parties will want to maximise value from the PFI contract. Authorities will want to ensure the assets are returned to the public sector in the condition stipulated in the contract, with all maintenance and rectification work completed before expiry. The PFI company will want to reduce expenditure in order to maximise payments to shareholders. These misaligned incentives can create disputes. The formal process for resolving disputes is outlined in the PFI contract and will usually require an expert panel to make a judgement. If this does not lead to an agreement a resolution is sought through arbitration or the courts. This process can be long, taking a minimum of 10 months in some cases, and prohibitively expensive for some authorities. This can lead to a situation with a small, under-resourced authority dealing with a large, well-resourced PFI company. There are some examples of good practice, such as Highways England agreeing an informal disputes resolution procedure with the PFI company, which is quicker and cheaper. Recommendation: The IPA should publish a disputes protocol, outlining how disputes can be escalated by authorities, and the steps that can be taken to ensure disputes only need to be resolved by the courts as a last resort. Where disputes do materialise, the IPA should conduct a review to determine whether it is a one-off disagreement or a wider problem that may impact other contracts. Show less

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Each PFI contract should set out a formal dispute handling procedure. The IPA told us that typically the process required a panel of experts, selected based on the nature of the dispute, to reach a judgement. If the panel cannot … Read more Each PFI contract should set out a formal dispute handling procedure. The IPA told us that typically the process required a panel of experts, selected based on the nature of the dispute, to reach a judgement. If the panel cannot reach a judgement, or either party challenges it, the dispute will go to either arbitration or the courts. It explained that, under most PFI contracts, the arbitration process has to be voluntary. Even before reaching the courts, the disputes process can be long, in some cases taking a minimum of 10 months. The NAO found that the process can be expensive, which can prohibit authorities from pursuing disputes, especially when success is not guaranteed. There are some examples of good practice in this area. Highways England has agreed an informal disputes resolution process with the PFI company. Designed to be quicker and cheaper, this informal approach takes place before the formal contractual disputes process and involves discussions between nominated individuals from both parties, first at an operational level and then at a project manager level.53 Protecting taxpayer interests Show less

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The IPA does not yet have the data it needs to fully understand the challenges of managing the expiry of PFI contracts. The PFI contract is central to understanding the potential expiry risks an authority may face. However, these are long, complex documents which have been subject to multiple revisions …

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Many authorities currently lack the skills, expertise and capabilities to successfully deliver PFI contract expiry, with locally managed contracts most at risk. The IPA recognises that there is a huge demand for skills, expertise and capabilities in contract management—all of which are currently in short supply. Contracts owned by local …

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What support will be made available, including how additional funding will be provided to authorities with limited resources or those with the most challenging contracts. Managing the expiry of PFI contracts 7

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We are concerned that the approach to managing the expiry of PFI contracts risks authorities working in silos rather than collectively securing value for the taxpayer. In the education sector, there are examples where the ownership of the PFI assets and the responsibility for managing the contract are not aligned. …

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The IPA has not outlined clearly how it plans to engage with investors to ensure that authorities have access to all information needed to manage the expiry 8 Managing the expiry of PFI contracts process. Authorities need to monitor the performance of the PFI company to ensure it is delivering …

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The IPA maintains a publicly available PFI database, which includes information on each of the 700 contracts, such as the value of the project, annual payments, date the contract was signed and contract length. The database does not, however, include the date each contract will expire.20 The IPA told us …

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Each individual authority is primarily responsible for managing its PFI contract, including the expiry process. However, when an authority needs help, varying degrees of support are available from multiple sources across government. In the first instance, each authority will be supported by its sponsoring department which acts in an advisory …

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The IPA recognised that more support was needed to address the “huge demand” for expertise, skills and capability in contract management—all of which were currently insufficient. It explained that contracts owned by local bodies, which made up more than 80% of all PFI contracts, were “the most concerning area” as …

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The IPA estimated it takes seven years to adequately prepare for the expiry of PFI contracts.28 The Treasury recognised the importance of starting preparations early, both to ensure maximum value is extracted from the contracts in their final years and to plan for the transition to new ownership arrangements.29 We …

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We asked the IPA what assurance it could give that local authorities would be properly supported and resourced to manage the expiry of their PFI contracts without having to fill gaps with potentially expensive consultants. The IPA accepted that procuring expertise from the private sectors was not the best value …

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The IPA acknowledged that its existing team of experts was not enough resource to provide support to all 700 PFI contracts in a complex environment. Across the UK, 328 authorities are responsible for PFI contracts, with 182 authorities responsible for only one contract. In contrast, the 10 largest private investors …

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In light of its recent £2 million budget increase, we questioned the IPA on whether it was adequately funded to support the expiry of assets worth around £60 billion. The IPA told us that the resource requirement for PFI expiry was a big and complex subject, and it was considering …

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Local Partnerships recognised that in order to prepare for the expiry of PFI contracts, authorities needed both to start early, but also to know what they need to do through each stage of the process.37 The IPA started developing guidance on managing PFI expiry in 2019, and we asked when …

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Once a PFI contract has expired, any cash remaining in the PFI company is distributed to shareholders and the company is closed. If any maintenance or rectification work is outstanding at this point, it will be almost impossible for the authority to recover any money owed. It is therefore vital …

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A PFI contract should grant an authority access to any information reasonably required to monitor the PFI company’s performance. The NAO found that of the survey respondents who monitor the maintenance programme, 35% reported they had insufficient access rights to allow them to do so. In one PFI hospital, the …

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Local Partnerships explained that asset condition surveys are the most critical aspect of the expiry process as they tell the authority whether or not the assets are in a fit state. These surveys should identify the amount and cost of any rectification work required before expiry. Local Partnerships highlighted that …

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Authorities have tools to encourage non-cooperative PFI companies to act but they vary from contract to contract. As a minimum, all PFI contracts allow authorities to withhold a portion of their annual payments in the event of poor performance. Local Partnerships told us that authorities will be better positioned if …

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In its written evidence to us, Affinitext told us that the primary objective of withholding annual payments was to ensure contractual compliance rather than maximising cash savings for the authority through imposing high penalties. It explained that if the process of withholding payments, which can take place many years before …

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Any rectification work required should be completed before the expiry of the contract. Once the PFI company has closed, authorities have limited options to reclaim any money owed. One option for protecting against this is to build a retention fund, whereby a portion of the authority’s annual payment is set …

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In managing the expiry of a PFI contract, all parties will want to maximise value from the PFI contract. Authorities will want to inherit an asset in the best possible condition, as this will minimise any future maintenance costs and the risk that services are interrupted. Meanwhile, PFI companies have …

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The authority is responsible for managing the PFI contract until expiry, at which point it inherits the assets.54 In some instances, ownership of the PFI assets can transfer between different public bodies before the contract expires, creating a potential conflict between those who will own the assets in the future, …

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Over 300 PFI schools have been converted to academies. We asked whether local authorities might be incentivised to protect their budgets by limiting expenditure on managing the contract rather than maintaining the assets as they would not own them at 52 C&AG’s Report, para 13, 3.22 53 Q 82; C&AG’s …

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