Article:

PFI exit readiness: Time is of the essence to successfully prepare for PFI contract exit across the public sector

16 June 2020

PFI exit readiness

Public bodies and authorities with Public Finance Initiative (PFI) contracts need to take a proactive approach to preparing for exit. That is the central message coming from the National Audit Office’s latest review into PFI exit and the public sector’s readiness.

PFI contracts currently account for some £57bn of capital assets across the UK public infrastructure portfolio. These contracts typically have a lifespan of 25-30 years, meaning large swathes will be approaching their end date in the not-too-distant future. In fact, over 10% of those still live are due to end within the next 7 years.

Given the size and complex nature of PFI contracts, taking a timely, strategic approach to contract exit will be key. The handover of these substantial assets will require thorough analysis and meticulous planning well ahead of time.

The NAO’s latest review found that whilst many authorities start preparing for the expiry more than four years before exit date, there is a significant risk that even this is not enough time. Indeed the IPA’s guidance suggests that planning should begin 7 years ahead of the exit date.

Action needed on PFI contract exit

The challenges of contract exit readiness are commonly underestimated across all categories and sectors. For PFI contracts, this is compounded by the small number of exit cases to learn from to date and because ownership of these contracts is so disparate across the public sector. The NAO have highlighted a number of areas for action including:

  • Protecting the public sector’s commercial position in the final stages of the contract life, by being aware of contractual obligations/exposures and any potential misalignment of incentives as an exit date approaches
  • Ensuring that maintenance work and repairs are delivered as required in the remaining years of a contract so the asset is in the right condition at handover
  • Ensuring that the public sector has the additional capacity and capability to execute a successful exit. This may require large scale coordination to be effective
  • Use a commercial mind-set to identify and manage contractual ambiguities around exit planning and transition obligations to reduce potential risks and costs of exit
  • Plan for service continuity by articulating a future operating model for the asset; Will services be brought in-house or retendered? How will usage of the asset change and what does that mean for ongoing management and associated costs? What is the position on future asset ownership, where do future responsibilities lie and what implications may this have?

The NAO is clear that public sector bodies which fail to take a strategic approach to PFI contracts risk value loss during the exit negotiations and are less likely to deliver a sustainable operating model for infrastructure assets beyond PFI exit.

The author, Oli Back, is the lead partner in BDO’s Contract & Commercial Risk team. The team can support authorities with their upfront PFI exit planning through to the delivery of their contract exit programmes, helping provide greater transparency over their options, obligations and risks as they navigate this process. Please get in touch if you have any queries or concerns over your own PFI contracts as they move towards the later stages of their lifecycle.