What the expiry of PFI contracts means for clients

Introduced in 1992 and active until 2018, the form of public–private partnership (PPP) known as the Private Finance Initiative (PFI) has always been controversial. Even so, over 550 PFI contracts were let in England alone, representing an initial capital expenditure of £46 billion. Now, though, with typical terms of 30 years, many of these contracts are coming to an end, and the prospect is demanding urgent attention from contracting authorities.

The rationale for PFI – private sector expertise for a predictable price

Promising nothing less than a revolution in public procurement, the PFI system was used to build schools, hospitals, prisons, and other public infrastructure.

It worked on a buy now, pay later model. The private sector assumed design, construction, capital works financing, and operational risks in return for guaranteed long-term financial returns from the public purse over the contract term. At the end of the term, the asset would be handed back.

Unsurprisingly, the resulting contracts were rather complex, inflexible, and costly – all negative characteristics that critics say have led to adversarial relationships.

The PFI's positive contributions shouldn't be overlooked, however. According to the Infrastructure and Projects Authority (IPA), most PFI projects have performed adequately in asset management and lifecycle funding.

So, while public-private partnerships (PPPs) have at times been criticised for inefficiencies, combining public needs with private capital remains a compelling vehicle to deliver improvements to public infrastructure.

PFI management – how contracts have been run to date

PFI contracts are intricate, dictating how money flows and who does what. In a bid to track the changes that inevitably affect operations over 30-year terms, updating the asset’s base data is a contractual obligation.

This is easier said than done, though. Over time, records often become incomplete, outdated, or disconnected from operational realities. The problem becomes acute as contract expiry looms and the window for rectifying problems shrinks. To make matters worse, some contracts – especially the early ones – lack clarity on the expiry and handback process.

This is now a pressing issue for contracting authorities as they anticipate a deluge of PFI expiries over the next few years. A 2020 National Audit Office survey revealed that many authorities felt unprepared. The report, Managing PFI assets and services as contracts end, highlighted risks of failing to secure value for money, increased costs, and service disruptions due to inadequate preparation. In particular, the report found that 55% of authorities had insufficient knowledge of asset condition.

PFI challenges and opportunities

Contracting authorities undoubtedly face challenges. The process requires specialist legal, financial, technical and surveying resources that, in the midst of budget constraints and staff shortages, they might struggle to assemble – particularly since they must continue to provide the public services affected.

The expertise required should not be underestimated. For example, navigating decades-old contracts that have been added to piecemeal over time is complex and loaded with the risk of disagreements and disputes. Understanding assets’ maintenance history and operational needs is likely to be difficult for the same reason. And avoiding service disruptions when assets are handed back takes careful planning.

Every challenge also presents an opportunity, of course. PFI contracts oblige contractors to hand back assets in a satisfactory condition. This is an opportunity to upgrade assets to meet contemporary user needs and current building regulations and sustainability standards. Surveying asset condition is an opportunity to organise asset data to modern information management standards, helping with future investment decisions. Working collaboratively on the handback process facilitates the transfer of knowledge and skills, leading to a more resilient public sector and innovative service delivery models.

How clients should prepare

The IPA has published a comprehensive toolkit to help clients to prepare for PFI expiry. It recommends that expiry and transition planning should commence at least seven years before the expiry date. In particular, clients should build in-house expertise and capacity, seek advice from independent advisors, and use the IPA’s expiry toolkit.

Key steps include:

• Early and open stakeholder engagement to foster transparency, build trust, and facilitate early issue resolution.
• Thorough asset condition surveys to identify defects and estimate repair costs.
• Detailed handover documentation that outlines asset history, maintenance records, and service level agreements.
• Clear service transition plans for service delivery, staffing, training, and communication
• Effective contract management to address contractual issues to avoid delays and cost overruns.

What happens following expiry

When the PFI contract expires, public sector clients have three broad options:

1. Re-tendering the services to the private sector under a new contract
2. Managing the assets and services in-house
3. Closing the asset

If pursuing option one, PFI is no longer available and so the client must adopt a different contract model. Alternatives have emerged that could retain the benefits of private sector involvement while addressing the shortcomings of PFI. These include:

• Mutual Investment Model (MIM): used in Wales, this allows the public sector to retain a stake, which aligns incentives.
• Infrastructure and Investment Partnerships (IIPs): these shift more risk to the private sector and sets annual payment levels before construction.
• Regulated Asset Base (RAB) model: this guarantees investors a return on investment.
• Direct Procurement for Customers (DPC) model: used in UK water projects, this promotes cost savings and private capital attraction.

Whatever replaces PFI, the contracts should be simpler and more flexible, with improved public-sector capacity to manage them. For example, they should allow renegotiation without punitive costs and should distribute risks fairly, with clear contingencies for unforeseen events. 

What lessons can clients learn from PFI expiry?

The challenge of PFI expiry provides valuable lessons for all asset managers. In particular, the IPA’s advice to start preparing for hand over fully seven years before expiry highlights just how important it is to forward plan.

Other lessons have generic relevance. For example, it’s clear that diligent contract surveillance through regular monitoring and active management is critical for identifying and addressing issues before they become a problem. Also, insisting on accurate and up-to-date documentation, including asset registers, maintenance records, and operational manuals, is essential for ongoing operation and future investment decisions. Having adequate in-house expertise and capacity makes you more resilient and able to cope with many challenges beyond asset handback.

Perhaps the biggest lesson is the need for flexibility and adaptability in contract design. Future PPP models should incorporate mechanisms that allow for renegotiation without punitive costs, enabling projects to adapt to changing circumstances and public needs. Getting these elements right protects service delivery, long-term value, and client reputations.

Conclusion

The expiry of PFI contracts presents immediate risks for clients. It also presents an opportunity to reassess and optimise their approach to public service delivery. By proactively preparing for the handback process, thoroughly understanding the inherent risks and potential benefits, and learning from past PFI arrangements, clients can navigate this complex transition successfully. A well-managed PFI expiry process can serve as a benchmark for future PPPs, fostering greater transparency, accountability, and value for money in the delivery of essential public services.

Anthony Walker FRICS FCIOB MIFireE is a chartered surveyor specialising in building surveying, fire safety and asset management. He is also a director at Sircle, a multi-disciplinary surveying consultancy.