Navigating the complexities of a successful PFI handback
By Anthony Walker FRICS MIFireE
Press Release version of article in Construction Management on behalf of the CIOB, dated 22.02.24, to view click here.
With hundreds of PFI contracts due to expire within the next decade, Anthony Walker reviews the challenges and opportunities involved in the handback process.
The Private Finance Initiative (PFI) was introduced in 1992 and ran through to 2018. Overall, in England, there are more than 550 projects, with an initial capital expenditure of £46bn.
The projects encompass a broad range of public sector assets such as schools, hospitals, prisons and other critical infrastructure. The typical contract term for these projects is 30 years. When the contract expires, the asset is returned, essentially ‘handed back‘ to the public sector.
A 2020 survey by the National Audit Office identified that a significant proportion of authorities felt underprepared for PFI expiry. The report that followed, Managing PFI Assets and Services as Contracts End, set out a number of key findings, including:
- 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.
- Around 55% of authorities have insufficient knowledge about the condition of assets, which risks them being returned to the public sector in worse quality than expected.
One of the main recommendations in the report is that the Infrastructure Projects Authority (IPA) should proactively coordinate and develop a programme of support for authorities.
The looming wave of expiry
The IPA recommends that expiry and transition planning should commence at least seven years before the expiry date. Many of the PFI projects are now within this window, with around 78 projects expiring between April 2021 and December 2027, 91 projects in 2028-30, 288 projects in 2031-37, and the bulk reaching expiry by 2043. A small amount will run until 2054.
This will create a wave of handbacks, and construction professionals involved face a unique and significant set of challenges in managing this handback of assets to the public sector, requiring early preparation, careful planning, and collaboration to ensure a smooth transition and minimal disruption.
Challenges
A number of challenges may present themselves during handback, including:
- Operational challenges: transitioning service delivery and staff from a private operator to the public sector requires careful planning to avoid service disruptions and ensure continuity.
- Resource shortages: which will require specialist expertise and dedicated resources. The public sector, grappling with budget constraints and staff shortages, may struggle to assemble the necessary teams of legal, financial, and surveying professionals.
- The day job continues: there is a risk that the workload involved in PFI handback may stretch existing resources and adversely impact on the delivery of key services to the public, such as schools and hospitals.
- Contractual disputes: disagreements over asset conditions, financial settlements, and service transfer during handback have the potential to create a cost and time risk. Navigating the labyrinthine clauses of intricate contracts and complex technical details originally drafted over two decades ago will not be straightforward and adds another layer of uncertainty to the handback process.
- Documentation gaps: incomplete or inaccurate documentation and drawings hinder a comprehensive understanding of the asset’s history and maintenance requirements. Some projects will have hard copy documents, and uncertainty on which is the current version – so proactive early document and data gathering, verification, digitising of hard copies and updating drawings will be essential.
Not all is gloom and doom
While there are challenges associated with PFI handback, there are also opportunities within this complex process:
- Knowledge and skills transfer: the transition period allows the transfer of valuable knowledge and skills from the private sector to public sector staff, promoting long-term operational efficiency.
- An asset handed back in satisfactory condition: many new buildings suffer from insufficient maintenance from the day they opened. This results in an alarming rate of deterioration, and secondary failure of elements of the building well before life expectancy. However, PFI buildings handed back are required to be in a satisfactory condition.
- Modernisation and upgrade: handback presents a chance to assess and upgrade assets to meet current building regulations, sustainability standards, and user needs. This could involve energy-efficient technologies or improved accessibility features, for example.
- Data-driven decision-making: the asset data captured during the survey can be harnessed to inform future investment decisions, identify inefficiencies and opportunities for improvements positively impacting service delivery, and occupant comfort.
- Strategic partnerships: opportunities arise for collaboration between the public and private sector to develop innovative handback solutions and service delivery models.
Planning and collaboration
A successful handback requires meticulous planning and collaboration between all stakeholders. Key steps include:
- Effective contract management: proactively address contractual issues and potential disputes to avoid delays and cost overruns.
- Early and open stakeholder engagement: open communication and collaboration with all stakeholders – public sector, private sector, consultants and surveyors will be crucial. This fosters transparency, builds trust and facilitates early identification and resolution of potential issues.
- Thorough asset condition surveys: conduct comprehensive surveys to assess the asset’s condition, identify any defects, and estimate repair costs.
- Detailed handover documentation: prepare comprehensive documentation outlining the asset’s history, maintenance records, operational manuals and service level agreements.
- Clear service transition plans: develop detailed plans outlining the handover of service delivery, including staffing arrangements, training needs and communication strategies.
Resilience and support
The task of handing back PFI assets will be spread over many years and require dedicated resources. Steps should be taken in advance to:
- Make use of Government support and expiry toolkits: The government, via the IPA, will play a crucial role by providing advice to the public sector on managing PFI handback.
- Build in-house expertise and capacity: the public sector should plan ahead and invest in building internal expertise and capacity to manage PFI handback effectively. This includes training for key personnel and potentially considering joint ventures with other authorities facing similar challenges.
- Seek advice: engaging independent advisers with specialised knowledge of PFI contracts and surveying will provide invaluable guidance and support throughout the handback process.
Embracing the future
PFI handback presents both challenges and opportunities. By understanding the issues, utilising available resources, and collaborating effectively, construction professionals and CIOB members can play a crucial role in ensuring a smooth and successful transition, safeguarding public assets and service continuity.
By Anthony Walker
FRICS MIFireE, Director at Sircle
