Mark Poppy, CIPFA Property Training Manager
Private finance initiative (PFI) projects tend to be long-term, usually lasting for a period of 25 years or more. There is an active secondary market for equity interests in PFI projects: original project developers exit, and new longer-term investors hold projects to maturity. Notwithstanding this longer-term investment horizon, as time goes on, it is only natural that parties tend to focus more on day-to-day operations and portfolio management and less around the ultimate backstop of expiry.
However, contract expiry is becoming an increasingly pressing issue. There are over 550 current PFI contracts. Of those, 78 projects are due to expire before December 2027 and a further 91 projects will expire in 2028-2030. The nature of PFI contracts means that significant claims can arise in relation to hand-over of assets. Typical PFI contract structures employ limited equity and special purchase vehicles (SPVs). In addition, construction contractors have long since exited from their typical 12-year defects liability period in a 25+ year concession. This means that long-term investors can be exposed to contractual liabilities on expiry.
On 16 August 2021, the Infrastructure and Projects Authority (IPA) released a support plan for contracting authorities, Managing the Risks of PFI Contract Expiry. The support plan aims to prepare public authorities for the expiry of PFI contracts and the handover of PFI assets. The IPA’s plan emphasises the importance of early engagement with the private sector and aims to smooth the transition process by undertaking a structured process of engagement with private sector counterparties. This work was then supported by the Preparing for PFI contract expiry guidance which was published on the 28th of February 2022.
To respond to this CIPFA arranged for further introduction to PFI exit strategies webinar on the 26th of May 2022. We heard from speakers from the following organisations Infrastructure and Projects Authority the National Audit Office, Bevan Britain, Grant Thornton, Peopletoo and CIPFA.
The following are some key messages from the webinar which will be run again on the 22nd of November 2022.
The guidance is you need to start preparing early, most of the speakers stated you need to start planning seven years out. Need to ensure senior management buy in, determine what support will be required, how it will be resourced, governance arrangements plus a robust programme plan.
Your organisation needs to have a clear strategy of how it wants to exit and what will be in place post the PFI,and processes, having clear understood goals is vital.
Planning future services (asset requirement and people aspects) how will be delivered, inhouse, current contractor, out to the market. Option appraisal and business planning will be key.
Often forgotten is the detail within the actual contract, do you, have it? What has changed? Has this been documented, are their gaps? And the risks.
The Unitary Charge on your PFIs are RPI / CPI linked and therefore you are going to see some significant increases. This makes progressing operational efficiencies work (which will ultimately help when you get to expiry) so much more important.
Good contract management is as vital towards the end as it was at the start and during the intervening years. It will put you in the best position when the negotiation process to exit starts.
Over a twenty-five-year period the assets and their condition will have changed, knowing this, and having detailed surveys in place will be very important.
Engage with Special Purpose Vehicles and know the key stakeholders to build a collaborative approach to the exit is the better option.
Finally, support is around from a variety of public and private organisations. You need to think about this early as well as likely to be a rush for this if you have not started early.
CIPFA has a well-developed approach to op efficiencies, PFI amendments and PFI expiry, which members of our team have use across a wide portfolio of PFIs including some very high-profile projects. Our approach / offer includes to upskill your team, including through the upcoming CP3P courses. We believe two days of training of your team will provide a significant payback.
- CIPFA offers PPP and PFI qualfications,courses and events, search here