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PFI: time for a check-up

James Larmour looks at the key themes in the Infrastructure & Projects Authority’s (IPA’s) Phase 1 PFI Expiry Health Learnings Report.

Christmas came early to Larmour Towers in 2021 with the publication of the IPA’s Phase 1 Expiry Health Learnings Report.

The report details the IPA’s PFI Centre of Excellence’s (PFI CoE) analysis of the first 52 PFI Expiry Health Checks conducted over the course of 2021. Overall, there are a number of positives revealed by the report. While many of the findings might not be particularly eye-opening for seasoned practitioners, the core themes of collaboration, early preparation, resource planning and the need to avoid unnecessary disputes made very welcome reading.

Handback readiness

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The report is the product of the first phase of the PFI CoE’s programme of Expiry Health Checks (EHCs) to support PFI Contracting Authorities (CAs) in assessing their readiness for expiry. The EHC consists of a review of key project documentation and a structured interview with the CA, with a diagnostic tool used to assess handback readiness. Each project is awarded a colour coded assessment as follows:

  • Red – critical additional work is required to achieve target readiness
  • Red/Amber – major additional work is required to achieve target readiness
  • Amber – moderate additional work is required to achieve target readiness
  • Green/Amber – limited additional work additional work is required to achieve target readiness
  • Green – at target readiness given the time to expiry

The report notes that the overall view of expiry readiness is Amber. Specifically of the projects assessed:

  • 6% are Red
  • 19% are Red/Amber
  • 29% are Amber
  • 36% are Green/Amber
  • 10% Green

On that basis, 44% of projects surveyed are in reasonable shape for expiry, although that would appear to be a function of the timing of the expiry date relative to the date of the health check. Notably, 19 of the 21 projects expiring before the end of 2024 were rated Amber to Red which must be of real concern given that the clock is fast running down on those schemes. The report emphasises that there is an immediate need for action on these projects to minimise the loss of value and disruption to public services.

Specific findings

The report details some specific findings from the EHCs.

Expiry Project Management

  • 25% of projects have not started to prepare for expiry
  • Only 40% have a robust programme for expiry and future service provision
  • 25% of projects have no identified project lead

Resourcing

  • 65% of projects don’t have a sufficient team to manage expiry
  • Generally, CAs do not have sufficient people to manage (a) contract management (b) expiry and (c) future service provision
  • CAs cited a lack of people as limiting their ability to focus on expiry

Public/Private Relationships

  • 75-90% of CAs believe that have good relationships and communications with the private sector
  • 75% believe that relationships are collaborative
  • However, CAs sounded a note of caution that relationships might weaken as expiry approaches, with the 40% of CAs believing that there was a real risk of disputes
  • 75% of CAs are having insufficient discussions with the private sector

Asset condition

  • CAs believe current asset condition to be largely good and that it will largely be in the same position at expiry
  • 80% of contracts have asset condition requirements at expiry
  • However, 70% of CAs believe that these asset condition requirements are not clear
  • 70% of CAs believe that there is sufficient time between survey and expiry for asset rectification works to be completed
  • However, in the assessment of the PFI CoE the CA views on current asset condition may have been insufficiently informed by asset surveys and data and that CAs may be comparing asset condition with their typically poorer non-PFI estate, giving rise to an over-optimistic view of PFI asset condition

Future services

  • Generally, CAs have limited understanding of assets and services
  • A number of CA did not have a clear strategy for future service provision
  • Some CAs have insufficient resources or skills to manage the procurement of future services
  • Planning for life post-PFI is often too little too late (in one sector there was over reliance on extensions and interim contracts)

Overall, many of these findings are consistent with the points made by commentators to date and, in particular, the findings of the NAO Report from 2020 (please see my note here). However, what is significant is that the report by the PFI CoE provides some hard data to substantiate the previous findings – crucially, this will better define the task ahead and enable resources to be better targeted to support CAs.

Key themes

The report also highlights a number of themes and learnings identified by the review which the PFI CoE intends to incorporate into their ongoing work.

  • Effective operational contract management will support transition to expiry
  • Expiry provisions vary across sectors, particularly in the case of pre-SoPC contracts
  • Market based residual value payments for asset transfer will add to complexity to the handback process
  • Preparation should start 7 years before expiry
  • CAs need to ensure that they are set up for expiry with appropriate governance, leadership, people and plans
  • CAs should engage with the private sector to shift the relationship for expiry and to understand differing priorities
  • CAs need to improve their understanding of asset condition and data
  • CAs need to better understand and clarify the applicable contractual handback provisions
  • CAs need to plan for life post-expiry by developing commercial strategies for expiry and future service provision

Next steps

The report concludes by outlining the key elements of PFI CoE’s support package for PFI handback, which include:

  • Expiry Health Checks on all projects at 7, 5 and 3 years from expiry
  • Assurance of Action Reviews to assess whether actions taken in relation to Red or Red/Amber projects have improved their readiness for expiry
  • Expiry Guidance will be published in 2022 to reflect the practical lesson and learnings from the EBCS
  • Expiry Training
  • Expiry Protocol – to be issued for discussion in early 2022. The protocol will set out the behaviours expected of the public and private sector at expiry and will be built on the principles of collaborative working, transparency, effective resolution of disputes and sharing lessons and best practice.

The development of Expiry Guidance and the Expiry Protocol are to be welcomed – throughout the PFI story there has a been a consistent track record of adopting standardised positions rooted in consensus between the public and private sector. Standardisation has played a key role in reducing unnecessary debate and hopefully should streamline the handback process for all involved.

Conclusions

There are encouraging signs as to the overall state of handback preparedness on the part of the public sector. But digging into data in a little more detail, it is clear that those projects with imminent expiry dates have a lot of work to do. It is positive that the PFI CoE has grasped the nettle and that there is a clear plan as to how to support the public sector in exiting the PFI. The Expiry Guidance and Expiry Protocol will be eagerly awaited by both the private and public sector, however, it is vital that these are genuinely balanced and targeted at protecting the legitimate interests of CAs.

James Larmour is a partner at Freeths.

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