Exit this way: preparing for upcoming PFI expiry


By Mark Williams, Senior Consultant, CIPFA

Much has been written on the issue of PFI exit, including the National Audit Office's (NAO) Managing PFI Assets and Services as Contracts End report (June 2020), Grant Thornton's PFI Value for Money Audit Reviews and the Infrastructure and Property Authority's (IPA) Phase 1 PFI Expiry Health Learnings Report.

CIPFA shares the NAO and IPA's views on the need to introduce PFI exit measures early, with the IPA recommending action seven years prior to the contract expiry. We believe the end goal should be collaborative and generate the best possible value for money exit and follow-on delivery arrangements. This goal is easier to achieve in environments that have strong day-to-day contract management, periodic operational efficiency reviews, experience of contract amendments, good supply chain relationships and best practice tools and techniques. In our experience, it is rare for an early termination of a PFI to be best value for money, but there are circumstances where this does make sense, including a contractor failure or a fundamental change in requirements.

Act proportionately

Although PFIs are complex, integrated long-term contracts that involve multiple stakeholders, the same financial, commercial and project management skills seen across the public sector are equally relevant to them. It is helpful to look at a PFI through its component parts: design, build, finance, operate and maintain (DBFOM) – to consider the sequence of activities and the counterparties in the supply chain that deliver them.

A Grant Thornton review (published in November 2021) of 150+ PFIs found that many public bodies had a good understanding of their PFI arrangements and had started to plan for exit. We would therefore encourage a risk-based, proportionate approach to PFIs, influenced by an assessment of the public bodies' wider commercial skills.

Leverage sector-wide insights

Utilising both the best practice tools and techniques and the experience of others is important. This includes the experience of the private sector counter-party and their supply chain, which should not be seen as one grouping. For example, HM Treasury's better business case approach provides a robust decision-making framework to consider material contract amendments, exit options and follow-on service delivery arrangements.

Likewise, the World Bank and other development banks' Certified PPP Professionals guidance provides a comprehensive roadmap through the life of a PFI (PFI being a particular form/subset of PPP). The CIPFA team has expertise in this approach and a range of others and offers training in the better business case and the World Bank's Certified PPP courses.

Due diligence

A successful PFI exit requires strong due diligence. This will involve:

  • technical asset management and condition surveys
  • finance, to understand the 'source and application of the funds in the PFI' including reconciling and interrogating financial models and accounts, benchmarking of costs and consideration of the originally intended risk transfer planned and secured
  • legal, to understand what the contract and subsequent amendments say
  • project management to bring these components together

These are all areas where CIPFA can support public bodies.

Remember it's a negotiation

Effective due diligence will help inform the public body's negotiation strategy. Financial models, accounts and budgets for PFIs are complex, and reviewing and understanding the changes in both public sector and private sector accounting early on should help to avoid any surprises and support with successful negotiations. In our experience, where incentives align between the public body and the private sector supply chain, you can often find good examples of change being delivered outside of existing contract terms.

We propose a negotiation approach covering:

  • initiate
  • prepare
  • negotiate
  • conclude

This could be a rolling or a multi-part negotiation process.

Follow-on arrangements and wider 'alternative service delivery arrangements'

We encourage the use of the business case approach to consider the post PFI exit, follow-on arrangements. This involves exploring a range of financing, commercial delivery and project management options from a value for money standpoint. Although PFIs (and PF2s) were 'retired' as a contracting model for new projects in 2018, wider PPPs (long-term/risk sharing contracts), outsourcing, alliancing, joint ventures, trading companies and more all remain options. Some of these will involve the use of private or voluntary sector alternate financing.

When discussing PFI exits with public bodies, it may be assumed that service delivery will automatically be brought back and then run in-house. Taking a more considered approach after the contract ends may result in a follow-on outsourced arrangement. This could even include the existing PFI partner.

Sometimes PPPs and outsourcing are described as 'alternative service delivery arrangements'. In reality, a significant volume of public services are delivered this way and so are not exactly 'alternative'. We acknowledge that given the retirement of PFI, all follow-on arrangements will then be on an alternative model. CIPFA has an alternative service delivery network (CASDN) and invites potential new members to join.

We expect the focus on these alternative arrangements to grow based on pressures to deliver on net zero and address levelling up and regeneration. Guidance has recently been published on how PPPs and/or joint venture models might be used to address this. CIPFA was involved with this guidance and is happy to discuss this with any interested parties.

Find out more

  • CIPFA is available to help public bodies with issues around PFI exit and has years of experience to offer — contact mark.williams@cipfa.org for more details
  • New intakes for our PFI-focussed, AMPG-accredited CP3P Foundation Level course have been announced for June and October 2022 — sign up now
  • Our upcoming webinars on PFI exit strategies are now open for booking on 26 May and 22 November

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