Hundreds of the UKs operational PFI/PPP projects are set to expire soon – schools, health facilities and more. With the first wave of PFI/PPP projects now handed back, there are some clear pointers for the hundreds more soon due to expire. Our specialists have been speaking to key players at a series of events around the UK to find out what is keeping them awake at night as contracts run out. In a series of articles, we use the intelligence gathered to shine a light on the key issues that 'Handback' is likely to throw up … and what to do about them. The first of these articles gives an overview of what we have learned so far.
PFI Handback - What have we learned so far?
Over the course of the next decade, more than 200 operational PFI/PPP projects, with a combined portfolio value in excess of £160bn, are due to expire and be handed back to the public sector.
Central government, in the form of the Infrastructure and Projects Authority and the National Audit Office, has issued guidance recommending that parties prepare for expiry at least seven years in advance. The value and complexity of these projects means that the industry is increasingly focused on what handback means – for both the public and the private sector.
Given the scale of the handback task, the finite pool of skilled personnel and the varied grounds on which disputes may materialise, the road ahead is still uphill. Nevertheless, if parties take the time to get to know their contracts and assets, and invest in their people and relationships, their projects will be more likely to be a handback success story than a cautionary tale.
What is keeping PFI players awake?
Now that we have experienced the first wave of project expiries in the health and defence sectors, the practical realities of the handback process are coming into focus. Key concerns raised by PFI operators include: how do we know to what standard assets should be handed back in; what happens to the services post handback; how does the introduction of legislation such as the Building Safety Act impact parties’ liabilities; and how do we manage an orderly exit and operational transition to the satisfaction of all parties?
The starting point for most parties is understanding their contractual position. Early PFI agreements often contain limited guidance around handback which means the relationships between the parties comes to the fore as parties look to successfully navigate this challenging process. When this is coupled with, in the majority of projects, contracts being varied over the preceding 20-25 years of operation, the seemingly simple proposition “know your contract” is not so straightforward.
Notwithstanding these (not insignificant) practical issues, project stakeholders need to come together to reach agreement on the endpoint they are striving for and the parameters they will work within. Acknowledging and being open to each other’s perspectives is key.
Parties’ existing relationship – itself often dependent on the historic performance of a project – and their willingness to address any behavioural obstacles is a significant indicator of future success. Indeed, the importance of goodwill and flexibility on the handback journey was recognised in the recent White Fraiser report, and seeing improved relationships will be just one benefit of the report’s recommendation that parties jointly develop and follow a reset approach.
As described in the White Fraiser report, this reset would typically involve:
- Carrying out a systematic review of assets and services, in order to assess current conditions against agreed standards
- Agreeing a rectification plan to address any shortfalls in performance
- A period of relief from sanctions for poor performance, to allow agreed rectification to take place without fear of the usual contractual consequences, and also to incentivise the private sector to declare issues and benefit from an amnesty.
Adopting this option would go a long way towards providing certainty that the public sector is handed back a contractually compliant asset. It would also give the private sector a degree of comfort that unexpected liability issues post handback are less likely to arise.
Start of the journey
The overarching objective for handback is to maintain essential continuity of services allowing the public sector to take back (or reprocure services for) a PFI asset that has a good lifespan left to it. From the private sector perspective there is the desire for a clean exit with defined liabilities, as well as potential opportunities for future work.
What will happen in practice does of course remain to be seen, and while there are early indications that soft services such as portering and catering may be taken back in-house by the public sector, there are still opportunities for the private sector to demonstrate their capabilities and the advantages of outsourcing hard, maintenance activities.
We are at the start of the handback journey and the PFI community is finding its feet. Parties are learning from the experiences of earlier projects and developing a greater understanding of their own projects through the reset approach. With time, the process is likely to become more sophisticated, easier to manage and less contentious.
This article was first published in Building magazine.
If you have any queries, do not hesitate to get in touch with one of our specialists or visit our PFI/PPP webpage.
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