How do I manage the end of a PFI contract/PFI Handback?

PFI contracts, especially those contracts drawn-up in the early days of the industry in the mid- to late-1990’s, will typically contain some consideration for the processes to be undertaken at the end of the contract’s life, often suggesting a process over the final 1-3 years. However, as the industry starts to grapple with the first contracts coming to an end and increased thought is given by all sides to the realities of a post-PFI world, it is becoming apparent that this time period is not long enough and that the requirements set out in these early contracts are ill-defined and open to interpretation, a recipe for dispute which is in no one’s best interest.

Consensus is growing that preparation for PFI handback should start much earlier, typically 5-8 years before the end of the contract’s life, with all parties engaged to consider both the risks and opportunities presented at this juncture. Effort must be made by all sides to agree and define the required handback requirements, informed by the client’s long-term aspirations for the asset, with appropriate surveys commissioned in good time to facilitate identification and delivery of necessary work prior to handover. This will require additional, expert resource on all sides to ensure effective handback is delivered without disruption to day-to-day delivery.

Aura’s PFI Handback and Post Contract Facilities Management Team was formed to assist clients, service providers and SPVs to work together to ensure the best possible outcomes through collaborative engagement. Please CONTACT US for an initial conversation and further details.

Post-Contract Facilities Management – Who maintains the asset/building at the end of PFI?

At the end of a PFI/PPP contract the ownership and responsibility for the asset returns to the public sector client, unless they choose to exercise any lease termination provisions which may exist in the contract in which case the asset remains with the private sector consortium and funders.
If the public sector client wishes to retain the asset, they will need to consider what arrangements they need to put in place to ensure its ongoing maintenance and delivery of other services such as catering. They may consider in-sourcing and self-delivering such services, in which case a proportion of the existing staff employed by the incumbent PFI provider(s) may be eligible for TUPE transfer back to the public sector client. This will require HR expertise and due diligence and of course there will be a need to cover the resulting additional staff costs and pension liabilities.

Alternatively, there may be a preference to retain an out-sourced service, either from the existing service provider(s) or following a competitive tender with the wider market. Regardless of the preference the client will need to consider in advance the level of service(s) they require to receive post-PFI and the manner in which they would prefer these to be delivered, requiring an extensive options appraisal exercise to consider related procurement and HR matters. An open dialogue between the client and incumbent service providers will allow for a considered offer in response to the client’s aspirations, which will undoubtedly have changed since the original PFI service specification, and the service provider’s price in response will no longer be incumbered by debt repayment provisions

Aura’s Post Contract Facilities Management Service was specifically designed to help clients and service providers alike think-through the options for service delivery at the end of a PFI concession. Please CONTACT US for an initial discussion.

PFI Handback – What did the National Audit Office (NAO) say about managing the expiry of PFI Contracts?

On 5th June 2020, the UK’s National Audit Office (NAO) published their report ‘Managing PFI assets and services as contracts end’. This report provides information on managing PFI contracts as they come to an end and considers whether government is making appropriate preparations to manage the expiry of PFI contracts. The purpose of this report is to draw out the challenges and best practice that can most benefit those managing PFI contracts coming to an end. The report examines:

• the background to PFI, the contracts which are due to expire, and the roles and responsibilities of key stakeholders;
• the skills and capabilities of authorities for the expiry process and aspects of day-to-day management of the contracts relevant for the preparation process; and
• the preparation for and delivery of contract expiry.

The report’s key findings:

• The public sector does not take a strategic or consistent approach to managing PFI contracts as they end and risks failing to secure value for money during the expiry negotiations with the private sector.
• There is a risk of increased costs and service disruptions if authorities do not prepare for contract expiry adequately in advance.
• Some authorities have insufficient knowledge about the assets’ condition, which risks them being returned to the public sector in a worse quality than expected.
• Many authorities start preparing for contract expiry more than four years in advance but there is a risk this is not enough time.
• Authorities recognise that contract expiry will be resource intensive and require unique skills, and expect to fill gaps with consultants.
• A misalignment of investor and authority incentives at contract expiry creates a potential for disputes. Disputes can be costly for authorities and a positive outcome is not necessarily guaranteed.
• Early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at contract expiry.

A copy of the NAO’s full report and supporting documents can be found here.

PFI Handback – What did the Scottish Futures Trust say about PPP Projects nearing the end of contract?

On 15th April 2020 The Scottish Futures Trust (SFT) published their report ‘PPP Projects nearing the end of contract: a programme approach’. The report notes that there are around 120 Scottish PPP projects across the education, health, office and prison sectors and over 20 projects that will reach the end of contract in the next twelve years, including major health facilities as well as multiple schools projects. As a number of the early PPP contracts are approaching their end of contract, SFT has developed a programme approach to the issues for consideration in relation to the Handback of the Facilities.

In particular, the report notes ‘While the formal Handback provisions in most contracts do not commence until eighteen months or two years before the end of contract, our view is that preparation for Handback needs to commence at least five years out and, in case of more complex Facilities such as acute hospital contracts, between eight and ten years before the end of contract to allow sufficient time to plan and complete often complex lifecycle replacement works’.

The report’s Key Recommendations coming from the SFT’s experience to date are that each Authority should:

• be well prepared and plan early; as indicated we think that planning must start a minimum of five years out and eight to ten years for more complex projects;
• be clear as to what it is wanting to achieve and plan for that outcome to ensure the continuity of the underlying services, whether this is at the Facility or not: this will allow constructive planning so reducing risk and ensuring any financial consequences are managed;
• engage early and constructively with the private sector (i.e. ProjectCos and FM providers);
• note that within the contract provisions there are incentive mechanisms, particularly the payment mechanisms, and these should be used as required to avoid or reduce risk and ongoing liability for Authorities;
• treat the process as a project and ensure that appropriate governance and sufficient resources are in place: both internally and with external advisers, as appropriate;
• be aware that, in the early projects, each contract is different and the individual circumstances of each project are likely to vary and issues other than those covered in this paper might arise or have a different impact; and
• take advantage of the support that is available from SFT, the NHS specialist support team and other Authorities that are, or have gone through, a similar process and be willing to share the Authority’s own experiences with others.

A copy of the SFT’s full report can be found here.

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Frequently Asked Questions:

PFI Handback – What happens at the end of a PFI contract?

PFI contracts originated in the 1990’s and were typically drawn-up with 25-35 year lifespans. As such, many of the early PFIs are now rapidly approaching the end of their terms, at which point the ownership and responsibility for the asset returns to the public sector. The public sector body will no longer receive financial support from central government to pay for the asset and will need to make alternative arrangements to ensure it continues to be maintained which they will need to fund.

Post-Contract Facilities Management – Who maintains the asset/building at the end of PFI?

At the end of a PFI/PPP contract the ownership and responsibility for the asset returns to the public sector client, unless they choose to exercise any lease termination provisions which may exist in the contract in which case the asset remains with the private sector consortium and funders.

PFI Handback – How do I manage the end of a PFI contract?

Consensus is growing that preparation for PFI handback should start early, typically 5-8 years before the end of the contract’s life, with all parties engaged to consider both the risks and opportunities presented by this juncture.

PFI Handback – When should I start preparing for the end of PFI?

The Scottish Futures Trust, in their April 2020 publication ‘PPP Projects Nearing the End of Contract: A Programme Approach’ recommend that “While the formal Handback provisions in most contracts do not commence until eighteen months or two years before the end of contract, our view is that preparation for Handback needs to commence at least five years out and, in case of more complex Facilities such as acute hospital contracts, between eight and ten years before the end of contract to allow sufficient time to plan and complete often complex lifecycle replacement works”

PFI Handback – What did the National Audit Office (NAO) say about managing the expiry of PFI Contracts?

A copy of the NAO’s full report and supporting documents can be found here.

PFI Handback – What did the Scottish Futures Trust say about PPP Projects nearing the end of contract?

A copy of the SFT’s full report can be found here.