Preparing for PFI Contract Expiry

The Infrastructure and Projects Authority, which is a Governmental body, has issued guidance for contracting authorities on managing the expiry of PFI contracts and the necessary service transition.

It is imperative that all parties engaged in the private finance initiative (PFI) are aware of the issues presented in this document, as they will guide contracting authorities through the complex processes that they will be required to undertake in the lead up to and upon the expiry of PFI contracts. In particular the guidance advises contracting authorities to carry out the following:

  • Establish a clear plan for expiry. If the PFI contract is due to expire within seven years contracting authorities should be developing a plan both for the lead up to expiry and service delivery after expiry.
  • Engage with the service provider to initiate joint expiry planning. It is highly likely that service providers will have a better idea as to the practical issues that will arise upon and in the lead up to expiry and therefore the earlier the contracting authority can engage with the service provider on this issue the better. Service providers should also be reaching out to contracting authorities to discuss expiry options as this may assist in services retention post-expiry.
  • Understand their rights in relation to asset conditioning and handover requirements. Typically, PFI contracts require a final asset survey prior to expiry but there also tend to be increased inspection and monitoring rights in the years before expiry. It is important that contracting authorities understand their rights in this regard so that they are not left with an asset that fails to meet the requirements of the PFI agreement. Service providers also need to have an understanding of their obligations so that they can ensure they are not in breach of the terms of the agreement and have sufficient time to carry out any necessary remedial works.
  • Consider TUPE and pensions requirements for any assets and/or services that are to be brought back in-house and/or retendered. In relation to TUPE, key personnel (including statutory duty holders and those employees that hold specific permits and certifications) may transfer to the contracting authority upon expiry but this should not be assumed.
  • Ensure full integration with future procurement plans. Contracting authorities need to be considering how they will procure the relevant services going forwards and if they intend to re-procure the services from the private sector after expiry, contracting authorities should be commencing the necessary tender processes in the three-year window leading up to expiry.

Devonshires can assist in providing both contracting authorities and service providers with a clear understanding of their obligations and rights in relation to expiry, including advice relating to key milestones, additional services obligations in the years prior to expiry, any relevant handover requirements and all issues relating to TUPE, pensions and data protection.

There are various options available to contracting authorities upon the expiry of PFI contracts, which may include the handing back of assets. In the majority of cases, those assets will require ongoing management and the continued delivery of services for the foreseeable future so new project agreements may need to be tendered and negotiated. In particular:

  • Contracting authorities will want to ensure that project companies and service providers are held to account as this will be their last opportunity to seek “cashback”.
  • Service providers will want to exit as smoothly as possible, limiting financial exposure, and where possible (and subject to compliance with procurement rules) renegotiating the terms of the PFI agreements to ensure continued provision of the services.

The vital public services that PFI supports will continue to be required and service providers will be looking to enter into new contracts, where contracting authorities are not taking the services in-house.

Devonshires have been heavily involved in PFI since its inception in 1992, and have gained unrivalled experience in managing the complex legal duties and processes which govern these arrangements.

We have extensive experience in advising on all aspects of project finance, which is often vital in the procurement of major infrastructure projects, including a market leading Capital Markets team. We have acted for the full spectrum of clients involved in such projects, including procurers, sponsors, asset management companies, contractors and facilities management contractors.

Importantly, we have been involved in the termination of services within PFI contracts and have first-hand experience in dealing with the culmination of legal obligations, which is relevant in managing expiry.

We provide legal services to participants in public/private sector projects across a wide range of sectors, including:

  • Education
  • Housing
  • Healthcare and Hospitals
  • Infrastructure
  • Leisure
  • Prison and Custodial Services
  • Transport
  • Waste and Energy

In short, the expiry of PFI contracts could represent a complete paradigm shift in the sector. It will be interesting to see how contracting authorities manage this process going forwards and whether, despite recent government rhetoric, contracting authorities do in fact continue to adopt traditional PFI or PPP approaches to public services procurement. Watch this space…

For further information and/or advice on the guidance, please contact our team leaders, Paul Buckland, Kris Kelliher, or Philip Barden.

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