Funding for PFI expiry support

In good news for stakeholders involved in managing PFI contracts, the Infrastructure and Projects Authority (IPA) has announced that a Local Government Budget has been set up to provide specialist support in managing PFI contracts.

The Local Government Budget will be funded by the Department for Levelling Up, Housing and Communities. The IPA has stated that the purpose of the budget is so that there is ring-fenced funding to assist contracting authorities in managing the PFI expiry process, to assist in improving operational performance, building capability, and obtaining project specific advice and support (including contractual disputes and refinancing).

The IPA has stated that applications for support are welcome from local government/authorities (including police and fire authorities, in addition to applications from Central Government). No details of the application process, or what sums have been ring-fenced, have been released at this stage.

NAO Guidance

Approximately 350 local authorities currently manage PFI projects across a range of underlying assets, including schools, housing, office accommodation, waste (including energy from waste plants), highways, street lighting and leisure facilities. A 2020 survey by the National Audit Office (NAO) found that a significant proportion of local authorities felt unprepared for PFI expiry and anticipated significant issues in managing the expiry process. 

The 2020 NAO survey also identified that external consultants may be required to address skills shortages in local authorities when it comes to managing PFI assets, including legal expertise to draft new or amend existing contracts; technical skills to assess asset conditions and validate dilapidation surveys; and financial expertise, including in managing the Payment Mechanism, with the ability to levy deductions typically being the “sole remedy” available to contracting authorities.

The IPA’s 2021 response to issues and recommendations detailed within the NAO and PAC reports and the IPA’s subsequent February 2022 guidance (which was published with supporting “Expiry Toolkit” documents) included the recommendation that contracting authorities should start preparing for expiry and handback at least seven years in advance. The reasons for this include:

• The time required to understand the asset condition. The NAO survey identified that 55% of public sector respondents felt they needed more knowledge of the asset condition. Failing to monitor asset condition increases the risks of assets being returned to the public sector below the contract’s stipulated quality
• The need to assess compliance with the PFI contract
• Time to develop a plan for the reverting asset, including any requirements around net zero and any future services requirements
• The risk of ambiguity around the roles and responsibilities of the parties at PFI expiry. Many “first wave” PFIs are light on detail as to what is required, and do not build enough time into the process for pre-expiry surveys
• The challenges of managing expiry alongside daily operations (including “business as usual” under the ongoing PFI project itself). The IPA recommends that PFI should be treated not as a point in time, but as a separate project to contract management, and resourced accordingly
• Building in time to engage with the PFI Special Purpose Vehicle (SPV), and where possible to build an effective team to collaborate on the project
• In the event of any disputes, ensuring that there is time to resolve the dispute before the PFI expires. This is important as the SPV delivering the PFI will typically not hold any assets. What this means is that, if the local authority obtains a judgment against the SPV, it may not be able to enforce it post-expiry.

It is also recommended that local authorities should be aware as to when the debt will be repaid, as the influence of lenders/ funders can be helpful in projects which face critical performance issues. 

Managing expiry

Our experience of working with local authority clients is that resourcing PFI expiry preparations has been a major challenge, with lack of capacity, resources and also challenges with funding.

The Local Government Budget should therefore provide some comfort to local authorities. Having access to funds to build capacity should benefit all stakeholders, with the private sector having also expressed concerns about lack of preparedness from the public sector.

Our key message to clients is to start the process as early as possible. Robust contract management is also key to an effective and efficient expiry process.

Judith Hopper is a Partner at Bevan Brittan.

Bevan Brittan are experts in PFI, having advised on over 600 operational PFI and PPP contracts over the last 25 years. The firm can assist with contract management, negotiating variations, and dispute resolution, as well as managing the expiry process.