PFI Expiry & Transition Process

To quote the House of Commons Public Accounts Committee report of 2021, “Vital public services such as schools and hospitals face serious disruptions should government fail to prepare for the expiry of its 700 PFI contracts. These PFI projects represent public infrastructure assets worth around £60 billion, and future costs of around £170 billion”. Much has been written about PFI expiry recently, some of it very useful but the fact remains that expert advice and a plan are needed.

Of the 700 plus PFI contracts in the UK, some early examples have already time expired which has resulted in problems and cost to public procuring authorities, typically schools, councils, and the NHS. A 2020 survey by the National Audit Office identified that a significant proportion of authorities felt underprepared for PFI expiry.

Over the next decade, a further 200 PFI contracts are due to expire and the Government, via the IPA, has issued guidance on how authorities should deal with their own PFI contracts. The key advice is to embark on a 7-year programme leading to the transition into public ownership.

In order to succeed with this hand-back process there is a significant amount of work to do, hence the recommended 7 years, and this is especially the case for large or complex buildings like hospitals.

The approach taken will depend in part on the current relationships between the contracting parties, namely the procuring authority, usually the occupier, and the SPV that operates the assets and not forgetting the funders. Either way, it is advisable to jointly appoint an independent building surveyor responsible to both parties to avoid accusations of partiality from one or other party. Below is a typical PFI contract relationship diagram which illustrates the potential complexity.

The IPA provides excellent guidance to PFI expiry, but the work still needs to be managed as a project with a team established for this purpose. There is no set template and strong leadership with a clear set of responsibilities is key to successful project delivery.

Working with both contracting parties and sometimes also the FM provider, the first task is to obtain all project documents, including schedules of accommodation and assets, maintenance, and lifecycle records and of course the contract “bible”. These are essential in order to understand the obligations of all parties as well as the details of the assets under management and any handover provisions.

Service level agreements usually set out the details of what standards should be achieved by the SPV and their FM provider, but other clauses may be found throughout the contract that influence this and can have a significant impact. Once a thorough understanding of matters like condition, compliance and other services are understood and agreed, we would recommend a pilot or partial survey is undertaken. This will inform any future comprehensive audit of assets as it will reveal the presence and condition of assets compared to the original project agreement terms.

At the same time an audit of compliance with contracted service level agreements, statutory requirements and codes of practice will be undertaken. This normally requires close cooperation with the FM provider’s site team and here the impartiality of the surveyor is important as the aim is to obtain information, not to expose the guilty or apportion blame.

A feature often overlooked is the compliance of building services with the original performance requirements. Ventilation is frequently found to be inadequate across large sites except in areas where regular testing is mandatory such as operating theatres. Another problem is electrical system design which doesn’t allow testing and replacement of circuits, whilst another is sound reduction targets that could never be achieved due to construction detailing.

Perhaps the most serious problem we typically find is lack of fire compartmentation, either due to poor original construction or damage by users. This can be very disruptive and costly to rectify to the extent that normally expensive alternatives such as sprinklers start to become a feasible option.

Expiry programme

Smaller local bodies, especially those with a single PFI contract, are exposed to greater risk as they often have limited resources to effectively manage expiry. Local bodies will need support to manage their expiry risks. It isn’t enough to commission a simple condition survey as this ignores the collation of essential documentation and can lead to the wrong result. It also isn’t enough to start using payment deductions under the contract to bring to heal the SPV as they will almost certainly be a sophisticated business, capable of reciprocating. By opening discussions with both parties using an independent surveyor experienced in PFI there is a better chance of constructive relationships and the ability to formulate a plan for the expiry period.

Consideration needs to be given to how the services provided by the SPV will be operated in the future when the asset is returned to public sector control. This will involve updating numerous contractual provisions as well as managing the interface between a disparate group of suppliers. There is also the option of taking some services back in-house which requires planning to establish a new team to undertake this, with possible TUPE implications. Multiple changes at one time will add to complexity and risk so consideration needs to be given to a phased handover.

At Airey Miller Surveys we would always commence with a document review to provide a gap analysis of missing details before agreeing a plan with all relevant parties. Inevitably a detailed survey would be required, starting with a partial survey to obtain an initial view of the extent of problems which will inform any following audit.

We are fortunate that we employ the necessary surveying skills in house, including building surveying, fire engineering and project managers. We have our supply chain partners who can provide the mechanical and electrical surveyors where testing of specialist services to British Standards is required, and compliance experts who understand how we need to collect and report on site-based data. We also have a building scanning team that can significantly reduce the time taken to produce updated record drawings where originals are missing, and we work with a supplier that can digitize and index records ready for transfer to the new building operators.

Key to all of this is commitment and collaboration between parties, along with experienced help to provide technical and organisational input to support the transition.

For further information, please contact mark.humphreys@aireymiller.com