There are approximately 700 PFI Contracts in operation across the UK. Typically, PFI Contracts provide for a Contract period of 25 to 30 years from contract signing. Whilst at the time of negotiating these contracts that appeared to be a very long time away, more than 150 of these contracts will reach their expiry date within the next 8 years.
To fulfil its obligations under the PFI Contract, the PFI Contractor will have engaged a number of sub-contractors. In this note, we consider the effect of PFI Contract Expiry on PFI Sub-Contractors.
When to Start Expiry Planning
The Infrastructure and Projects Authority (IPA) have published guidance to PFI procuring authorities recommending that they start planning for PFI Expiry approximately seven years prior to the Expiry Date. For those PFI Sub-contractors with a handback responsibility (such as the FM Contractor), it makes sense for their PFI expiry planning to start at the same time. During this period the procuring authority is likely to require information that is held by such PFI Sub- Contractors, so the relevant PFI Sub-Contractors need to be in a position to satisfy these requests.
In many (but not all) PFI Contracts there will be an obligation on Expiry to handback to the procuring authority, Assets that were the subject of the PFI Contract. Where this is the case, the PFI Contract will typically include obligations for those Assets to be returned in a specified condition and these obligations may in turn be sub-contracted to PFI Sub-Contractors. However, the handback obligations placed on both PFI Contractors and PFI Sub-Contractors do vary considerably from contract to contract.
In many PFI Contracts, the condition criteria for handback are expressed ambiguously and often offer no guidance as to the how their condition will be established. In many cases, the condition to be achieved is the standard that the Asset would have been in had the Asset been maintained in accordance with the PFI Output Specification. Such a test is difficult to apply and consequently there may be disputes over whether the relevant condition has been achieved. Even handback criteria based on the return of assets with a specified residual life may be difficult to apply in practice, particularly if the contract includes no guidance as to how residual life is to be determined.
To understand their handback obligations, PFI Sub- Contractors should gather together all the various documents that make up their sub-contract, including all variations. They should then undertake a legal review of this contract documentation to understand:
- the Assets which are required to be returned to the procuring authority/PFI Contractor
- the required handback condition for those Assets (including taking account of Variations);
- the extent to which the PFI Contractor is responsible for the handback condition of those Assets (again taking account of Variations);
- the inspection regime leading up to the Expiry Date (including who undertakes the inspection) and the process for identifying and then programming any handback works required prior to Expiry;
- any security required to be provided in support of the handback obligations (the establishment of a retention account is typically required and is usually funded by way of deductions from the Service Charge up to the estimated cost of the anticipated handback works required); and
- the handback certification requirements applicable on Expiry.
Those PFI Sub-contractors with a handback
responsibility should also take steps to ensure that:
- its Asset register is up-to date and comprehensive;
- it has evidence of its implementation and review of maintenance plans and (where within its responsibility) lifecycle plans;
- it has records of the statutory tests and inspections that it has carried out;
- it has records of any Asset surveys it has undertaken;
- its maintenance manuals are complete and up-to date; and
- it develops its own proposals on how practically to apply the handback criteria.
The IPA guidance recommends that procuring authorities engage with PFI Contractors to initiate joint Expiry planning. The above steps will enable the PFI Sub-Contractor to assist the PFI Contractor in such engagement and will also enable information to be provided to the procuring authority as requested. This in turn may result in the parties agreeing processes and contract interpretations for the practical application of the handback conditions. Contract variations may be required where the return of Assets does not reflect the future needs of the procuring authority.
The Expiry requirements usually include the provision of information required to enable the continued performance of services to the Assets following Expiry. PFI Sub-Contractors should undertake a legal review of their service contract to understand the documents
that they will be required to deliver of termination. These documents may include things such as the health and safety plan, maintenance manuals, maintenance records, inspection reports, asset databases and other know how records.
TUPE and Staff
PFI Sub-Contractors will need to take legal advice as to whether the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will apply to their staff on Expiry. Even where TUPE does not apply, it may be
the case that the Service Contract provides contractually for a similar process to apply.
Where TUPE (or equivalent) provisions apply, PFI Sub-Contractors should review their sub-contracts carefully to understand the information requirements and staffing restrictions placed on it during the lead up to Expiry. This is likely to include providing full and accurate information regarding employees, including remuneration and terms and conditions. Restrictions are also likely to be placed on the PFI Sub-Contractor’s ability to materially increase or decrease the number of staff employed on the Sub-Contract, to transfer its staff to other projects from the PFI Project and on changing terms and conditions or remuneration.
Well in advance of expiry of a PFI Project the PFI Sub- Contractors should engage a legal review of contract documents to aid their understanding of their obligations and the extent of any potential rights, liabilities and remedies that may be exercisable and enforceable.
This will enable the Sub-Contractor to engage with the Contractor and others in advance of expiry to plan ahead for expiry and where necessary avert any challenges regarding compliance.
For more information, please contact Robert Turner, Caroline Mostowfi, or Jamie Leonard.
This article is part of our PFI Expiry series, to read more from this series please click here.