PFI contract expiry - what should we do?

PFI contract expiry - what should we do?

What happens at the end of a PFI contract? It’s a question many public sector contract managers ask themselves as the expiry date draws near. Thankfully, there are several steps you can take to make the process as seamless as possible. Seeking specialist advice early is key, with the National Audit Office (NAO) recommending that the process for managing the expiry of a PFI contract should begin seven years before the hand-back date. 

With that in mind, we cover the PFI contract basics, provide practical tips to prepare for the hand-back and outline the risks when a PFI contract expires.

What is a PFI contract?

Private finance initiative (PFI) contracts enable the public sector to avoid the upfront cost of financing, designing, building and maintaining public assets. Private companies meet the cost of building and maintaining the assets on behalf of central government, local authorities and other public sector bodies. They then lease the asset back to the public sector body in return for an annual payment. 

Many public sector projects have been financed this way, including assets such as hospitals, schools, leisure centres and civic offices. PFI contracts typically last 25-30 years, allowing the public sector to spread the cost of projects over time and transferring some of the risk of delivering and managing the asset to the private sector. 

What happens at the end of a PFI contract?

There are currently around 700 PFI contracts in the UK with a capital value of £57 billion and more than £160bn still to be paid. The government’s Infrastructure and Projects Authority (IPA), which provides expertise and advice on PFIs, expects the number of expiring contracts to increase sharply from 2024. 

The hand-back and expiry process with PFI contracts is often complex, with a report finding a big increase in disputes between public sector bodies and the private finance initiative providers that have financed, built and maintained the assets for many years. 

The IPA released official guidance in 2022 to help public sector bodies manage the expiry of PFI contracts. Yet despite the guidance, public sector contract managers are often inexperienced and enter into exit negotiations with PFI providers that have far more expertise in the area, potentially leading to unbalanced resolutions. That’s why it’s so beneficial to seek specialist advice.

Managing the expiry of a PFI contract

The guidance from the IPA recommends that the public sector prepares for the expiry of a PFI contract at least seven years before the hand-back. That gives the contracting authority time to review the expiry provisions and create a timeline for the remaining years. During that time, contract managers should pay special attention to the following.  

Understanding the condition of the asset

Although your private sector partner is responsible for maintaining the asset, you must track its physical condition closely throughout the contract’s lifecycle. That becomes more important as the contract reaches its expiry.  

Conducting an independent condition survey and a facilities management audit in the years before the contract expires will enable you to determine whether services have been delivered in line with the contract and what improvements the private sector partner is responsible for. If the survey finds the asset has not been maintained to the required standard, you still have time to ensure the private partner makes the improvements before the contract expires.

Clarifying the contractual provisions

Starting the process of managing the expiry early enables you to obtain advice if any of the provisions in the contract are unclear. Legal disputes in PFI hand-backs are common and expensive. Seeking specialist advice to clarify the terms of the contract ensures both parties comply with their duties so the contract can end smoothly without draining your financial resources.

What are the risks of PFI contract expiry?  

Running out of time

One of the main risks is not starting the process early enough and running out of time to identify or rectify the issues. That can lead to costly ongoing disputes about who is responsible for repairing the defects.  

Relationship breakdowns

The complexity of the hand-back process can lead to a deterioration in the relationship between the public sector body and private partner. The result can be service disruption and wasting time and money on legal disputes. 

Declining service levels

Without careful management, the quality of maintenance can decrease towards the end of the contract term as the incentive to comply diminishes. Gaining a clear understanding of an asset’s condition and taking an active role in enforcing performance will help to mitigate this risk. 

PFI contract expiry advice

Seeking specialist PFI contract expiry advice can ensure the continuity of service and prevent wasted time and money in the long run. At Eddisons, our private finance initiative consultants can review your PFI contract, provide recommendations to inform your negotiations and perform hand-over services such as condition surveys and FM services audits. Get in touch for a free consultation with our expert public sector consultants.