Focusing on PFI expiry

A new report has highlighted how London boroughs are struggling to prepare for the expiry of their private finance initiative (PFI) contracts. This is a situation likely to be mirrored across local authorities nationwide, underscoring the need for greater attention to the issue from officers and lawyers alike, writes Caroline Mostowfi.

According to a recently commissioned report, at least 20 London boroughs are parties to PFI contracts that will expire before 2033. This amounts to around three-quarters of all PFI contracts in the capital. Whilst the research behind the report is limited to London, the expectation is that the report’s findings have far wider application and will be relevant to the majority of PFI projects throughout the United Kingdom.

The report (“PFI Expiry: How London boroughs can get ahead” ) has been produced following research by Future of London in collaboration with Devonshires Solicitors and Airey Miller. Its overriding message is that failure by councils to prepare in time for contract expiry is likely to adversely impact the essential public services and facilities of the future.

The report supports the general theme that has emerged from work undertaken by the Infrastructure and Projects Authority. Namely that local authorities should, well in advance of the date that their PFI contracts are due to expire, be focussing on and preparing not only for expiry of the contract itself, but also for what comes next.

The research has though identified that such preparation is not without its challenges. For example, a roundtable discussion held as part of the research, heard from senior finance and resource directors from the London boroughs. They identified a number of factors that pose significant challenges to preparing for and managing the expiry process and also if, how and by whom the assets and services will be operated once the contract has expired. These factors include a lack of operational and management capacity; a loss of relevant expertise and knowledge; and a lack of financial resources.

It is not just operational and management capacity, expertise and knowledge that are in short supply.  With the deep cuts to in-house local authority legal teams that have occurred over the years, very few councils have the luxury of employing lawyers who are well versed in the unique and complex contractual arrangements that govern PFI projects. Particularly where PFI is not seen to be core business for the legal team. Most PFI projects are governed by over 100 separate but interrelated contracts involving numerous parties. As if that is not enough, much of the terminology adopted by these contracts is alien to those who have not worked within the parallel universe in which, many argue, PFI exists. Requiring an already over stretched in-house legal team to pick up PFI contract expiry on top of their daily workload seems ambitious to say the least.

However, choosing to ignore PFI expiry until close to the contract end date is not a viable option. This is because, in the majority of cases, a council whose PFI contract has expired will (at least initially) assume responsibility for maintaining those assets and services that are currently being managed, maintained and delivered by the PFI contractor. Without adequate preparation and application (including the proper understanding and timely exercise of its contractual rights and remedies), a council could inherit unforeseen and costly risks and liabilities associated with these assets and services immediately upon expiry – not something to be welcomed by the presiding S151 officer.

As these contracts typically include detailed provisions for planned maintenance, preventative measures, asset surveys and lifecycle management throughout the contract term, neglecting or failing to enforce these provisions during the contract’s life will only make the expiry process more challenging.

For those councils that now have academies included within their PFI projects, the need for operating the contracts properly in the run up to expiry is perhaps even more important. This is because in connection with those arrangements by which the PFI school became an academy, the council will almost certainly have become obliged to enforce the terms of the PFI contract against the PFI contractor. Failure to do so is likely to give the academy legal recourse against the council.

However, despite challenges such as those referred to above, the report does identify and expand upon some aspects of PFI expiry best practice, together with factors for success. These include early visioning of future services; building positive relationships with counterparties and stakeholders; creating the right team; and learning from others.

The report also emphasises the importance of getting support. For those local government legal teams who are increasingly being asked to do more with less, this may well be the most important message emerging from the report.

Caroline Mostowfi is a Partner and Head of Projects at Devonshires Solicitors.