Following on from the evidence session held on the 8th of February the UK Parliament's Public Accounts Committee (PAC) has published its initial findings and recommendations as to how the UK Government should address challenges arising from the expiry of contracts let under the Private Finance Initiative (PFI). In this article I take a look at the key themes and recommendations, and consider the extent to which these reflect what is happening in the marketplace, and what the next steps might be.
The PAC evidence session on 8 February 2021 saw possibly the most public examination to date of the legacy that the UK's 700+ PFI projects have left to be addressed by the UK public sector. As outlined in my previous article, with 377 PFI projects due to expire in the next 15 years, attention is starting to turn to the issues affecting the very early PFIs that are approaching expiry, and experiences on the PFI Projects that have expired to date.
Core conclusions and recommendations
1. The Infrastructure and Projects Authority (IPA) should publish a plan for how it will support all public bodies with expiring PFI contracts. The IPAs plan should address PFI's beyond those expiring in the short-term, identifying deliverables and timescales for the steps public bodies should take ahead of expiry.
The PAC has made these recommendations recognising the progress the IPA has already made in developing its PFI Contract Management Programme and development of a "PFI Healthcheck" tool, to be deployed on all projects due to expire over the next seven years. Any initial statement from the IPA about the findings from the initial 55 "Healthchecks" will be eagerly awaited, as will the anticipated publication by the IPA of further guidance linked to its "Contract Expiry" programme.
2. The IPA should produce a plan identifying how to address potential "skills shortages" in authorities with PFIs, in particular those with limited funds to recruit or procure external support.
3. The IPA should proactively publish guidance for authorities, and HM Treasury (HMT) should encourage key departments (i.e. the original sponsoring department or its successor) to develop sector specific PFI expiry guidance.
The concern identified by the PAC is that only 20% of PFIs are held by Central Government or Arms-length bodies, and that expertise concerning the management of PFI contracts may not have been retained by many local bodies, in particular they reference the 182 public sector organisations who have only one PFI Contract. Sector specific guidance may have a role to play in this (in the same way sector specific model contracts and "Procurement Packs" were developed in the later stages of the PFI programme) but the broader concern appears to be about the availability of resources and guidance to smaller authorities and what the IPA proposes to do to address this.
4. To follow up on the PFI "Healthchecks" it has already undertaken the IPA should provide a written update to the PAC on challenges and solutions that have been identified. The PAC also wants the IPA to compile a central list with the expiry date for all PFIs.
Also reflecting some of the debate during the 8th February hearing, this recommendation reflects some of the unease expressed by PAC members about the absence of a full, complete database of all PFI contracts.
5. That HMT and the IPA will, within three months, provide a plan to support all PFI contracts, to cover:
- the support that will be made available to Authorities with PFI Contracts, including how funding will be provided to Authorities with limited resources or "challenging" PFI contracts;
- who will have responsibility for providing this support (PAC references HMT, IPA sponsoring departments and local government generally, but indicates that there should be clarity on who holds this responsibility for each type of project); and
- the circumstances in which support will be available to Authorities and how they will be entitled to access it.
Notwithstanding the progress made by the IPA to date, these recommendations represent a fairly substantial step-up in both the detail of how the HMT and the IPA will support public sector organisations with PFI Expiry, but also the funding and resources that will be made available. The three month timescale for this is tight given the breadth of the issues to be covered, but the response to the PAC will sketch out the shape of how support for PFI Expiry will work, certainly for the next wave of PFIs to expire.
6. That HMT should outline the approach to be followed where there is a change in ownership of a facility on the expiry of a PFI.
This recommendation appears to be driven in particular by the position of academy trusts (as debated during the 8 February hearing). As Academy Trusts occupying PFI buildings had specific arrangements (under the relevant Schools Agreement) for how DFE funding was to be passed on to the relevant local authority (which remained the counterparty to the PFI contract) there is a potential concern about how in practice Academy Trusts will procure the support for the PFI handback process (so they are not disadvantaged by the separation between the Academy Trust and the Project Company).
7. The publication of a disputes protocol (i.e. a central dispute escalation process, aimed at ensuring disputes only result in litigation as a last resort). Alongside this there is the suggestion that the IPA should have a role in "policing" PFI Handback disputes (in order to consider whether disputes relate to "project specific" issues or potentially represent a broader issue that could affect several PFIs).
It is not clear how such a protocol would apply (recognising that there are detailed and well developed dispute resolution mechanisms in PFI Contracts, reflecting the construction-heavy upfront obligations) the suggestion made about a need for engagement with the wider PFI industry on this issue and the effectiveness of such a protocol will depend on the extent to which there is buy-in to the concept from the wider industry.
8. PAC also wants the IPA to identify steps that will be taken "to ensure PFI investors are being fully transparent and compliant with contracts, and what action, if any, it will take if an investor is found to be deliberately non-co-operative".
This is one area where it will be particularly interesting to see what approach the IPA advocates: the proposal appears to be that the experience/outcome for a public-sector organisation on one PFI should inform the approach taken by government to negotiations with/management of the expiry process on any other project that shares the same investor. Given the prescriptive nature of the obligations and rights of the parties to PFI contracts, and the limits on the resources available both to Authorities and government more widely to manage PFI Expiry, it is open to question whether there are reasonable or enforceable measures that could be taken.
In terms of next steps, many of the recommendations require a formal response to be provided within 3 months. The UK Government is also under an obligation to respond by the 19th May 2021. These responses and any guidance to be issued by the IPA in the intervening period will be of significant interest to the PFI industry and public sector organisations alike, as we start to see the message become clearer as to how the major challenges of PFI Expiry will be addressed.
For further details, or to discuss what this could mean for you and your business, speak to Dominic Richardson.