PFI exit – the seven-year itch

There are around 200 PFI contracts currently managed by local authorities in England, and a good number of these will be within seven years of completion. Amardeep Gill and Lucy Doran explain how to achieve an amicable separation.

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The “seven-year itch” has traditionally been known as the point after which interest wanes in a marriage and the parties start to look elsewhere. On the contrary, in the world of Private Finance Initiative (PFI) contracts, the Infrastructure and Projects Authority (IPA) has recommended that seven years prior to exit is the very point at which contracting authorities should become increasingly interested in their PFI contracts and start planning carefully for expiry and continuation of services. Bearing in mind the number of years that it has taken to establish some PFI contracts and the number of parties involved, it is no surprise that exit will need a similar level of dedication.

Public sector bodies were put on notice to prepare seven-year plans for the run-up to the expiry of their PFI contracts by the IPA when it published a guidance note “Managing the risks of PFI contract expiry” in August 2021. A number of these bodies had already been addressing the issue of PFI expiry when the IPA’s guidance was issued, with many realising that some basic foundations of the seven-year plan were hard to put in place (starting with complete and up-to-date PFI contracts) while others found themselves struggling with the resource and expertise required to execute such plans in the first instance.

In February 2022, the IPA issued further practical guidance for public sector bodies called “Preparing for PFI contract expiry – practical guidance for contracting authorities on managing expiring service transitions“. This is a more detailed guidance based on the work that the IPA has been undertaking for some months involving desktop reviews and detailed examinations of PFIs across a range of sectors (including those most common for local authorities such as schools, housing, social care and waste) that are close to expiry.

Local authority PFIs

For context, as of summer 2021 there were 550 operational PFI contracts in England (over 700 if you include those in devolved regions). Some 78 projects have or will expire between April 2021 and December 2027 and a further 91 projects in 2028-30. The number of PFI projects expiring is on an upward trend until the peak in 2037 when nearly 50 projects will expire.

In 2018, 82% of the existing PFI contracts were managed by local authorities or local NHS bodies (fairly evenly split between them). This could equate to around 200 PFI contracts currently managed by local authorities. The most common PFIs are for schools, followed by social care, housing (HRA or non-HRA), waste, leisure facilities, libraries and offices.

In 2018, 82% of the existing PFI contracts were managed by local authorities or local NHS bodies. This could equate to around 200 PFI contracts currently managed by local authorities.

Risk management

Given the complexity of the contractual arrangements, there are significant commercial, financial, practical and strategic issues that need to be addressed so that both parties are sufficiently protected at the end of the term and that risk is appropriately managed without any detrimental impact on the asset and/or service provision. There are a number of risks that need to be addressed and catered for in sufficient time before expiry in order to avoid undue costs for either party and/or complex and lengthy disputes.

The IPA urges public sector bodies to start deploying the requisite resources and skill sets early on and to concentrate on three core activities:

• Business as usual – ensuring that the PFI assets are managed in line with contractual obligations and services are delivered to the required standard;
• Exit/transition – focusing on the exit process to ensure that contractual commitments are adhered to and there is a smooth handover; and
• Future delivery – managing the future delivery of those services and management of assets including any procurement activity required.

From a legal perspective, there is a temptation to say that the PFI contract should be self-explanatory. But, for those of us involved in PFI deals, we know that many were not straightforward and often those who understood the contract best and the reasoning behind the contractual provisions have retired or moved organisations. Finding complete sets of the original PFI documents can be tricky and so can the process of working out any variations to those documents over the years, particularly where changes were agreed without legal input.

For these reasons, there are some basic steps that the parties can undertake early on to better understand their positions including:

• a document register with all PFI documentation;
• a contract review looking at the relevant exit/transfer provisions of the project agreement;
• an expiry gaps list;
• a risk register setting out all necessary risks and their mitigation strategy; and
• expiry summary setting out the issues which can be used to brief stakeholders.

We know that many PFI deals were not straightforward and often those who understood the contract best and the reasoning behind the contractual provisions have retired or moved organisations.

Managing relationships

One of the themes that emerges from the IPA note but perhaps could be built upon further is the management of relationships between the parties. Some sensible steps are set out by the IPA including early and pragmatic discussions, open and collaborative communication and the avoidance of any ambiguities. We would always advocate such an approach and although it is important for the parties to ascertain their own positions so that they can best be protected, experience demonstrates that early collaboration can reduce time and costs for all involved and reduces the likelihood of acrimonious relations.

Another aspect that cannot be ignored on termination is future service delivery. A PFI project may have already been delivered or built, but what aspects will need to continue beyond expiry (for instance, maintenance or service delivery)? There are many options for authorities to consider including the procurement of another service provider, taking services in-house (or through a company) or even shared service delivery with another authority. Needless to say, any one of these options will take time to design and implement, but planning this ahead will help drive decision making throughout the PFI expiry process.

Amardeep Gill and Lucy Doran are partners at Trowers & Hamlins LLP.

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