PFI deals have recently been in the news, with headlines about disputes between public sector customers and private sector owners and operators as contracts near their expiry date. We look at the issues around PFI expiry and the risks and opportunities this presents for private sector involvement in this area.
The last Labour Government encouraged extensive use of partnerships with the private sector to build and then maintain new public infrastructure, ranging from hospitals, schools, further education colleges, prisons, courts, libraries and leisure centres through to parts of the road network, street lighting and waste management. These were known as Private Finance Initiative or PFI deals. The current Labour administration would appear to be less keen on this type of approach – but as many of the PFI contracts were very long term, it will still have to contend with the expiry of a significant number of PFI deals on its watch.
According to the Infrastructure and Projects Authority PFI Dashboard, there are over 650 PFI deals still in operation, with a total capital value of over £50 billion – and the majority are due to expire in the next 15 years. Whilst the timescales here may seem relatively long term, the Government is advising public authorities to start planning for expiry 5-7 years ahead of the actual end date.
In the run-up to expiry, public authorities are likely to focus on two issues:
Historically, there has generally been a recognition that PFI deals only work if there is willingness on both sides to show a reasonable degree of goodwill and flexibility. As a result, many have relied heavily on cordial relationships between the parties coupled, in some cases, with a relatively relaxed approach to contract management. However, a 2023 report commissioned by the Infrastructure and Planning Authority (known as the White Fraiser report) notes that some public authorities are adopting a more rigorous and, at times, aggressive approach.
Feedback from consultees suggests that some public authorities have engaged in "overly draconian (if not forensic) enforcement of the terms of the PFI Contract accompanied by, on occasion, unprofessional behaviour. [….] [D]isputes have typically resulted, relationships have broken down and accompanying goodwill has been lost".
There would appear to be a number of factors driving this change in approach:
Some PFI owners/operators have also expressed the view that they are being held to a higher standard than public authorities typically are for e.g. maintenance of their own infrastructure – and that this is unreasonable. However, the report notes that one of the original aims of PFI was to maintain assets to a higher standard than was normally the case in the public sector; as a result, it suggests that this is not a legitimate justification for failure to meet performance specifications.
Given the trends noted in the White Fraiser report, PFI owners/operators need to be prepared for the following:
In addition, although most PFI contracts require a survey of the assets to be carried out 18-24 months before expiry, the Government guidance suggests that this is likely to be too late (because it does not allow sufficient time to address problems with the condition of the assets). The same guidance therefore recommends that public authorities should request a survey "at least five years before expiry". Unless managed appropriately, these trends have the potential to impose significant extra costs on PFI owners/operators. Meanwhile, the media interest in negative stories about the impact of PFI expiry on public services highlights the potential for reputational damage in this space.
Although PFI expiry presents certain risks, there are also opportunities for private sector providers. In particular, public authorities may not have the appropriate knowledge or resources to take the entire PFI deal back in-house. PFI owners/operators may be able to leverage their existing knowledge and relationships with subcontractors to offer replacement deals. These could include the following:
In many instances, public authorities may decide to run a competitive tender process (and may often be required to do so under public procurement rules). This means that there are also likely to be opportunities for investors and operators which have not been involved in the relevant PFI deal before, particularly providers of outsourced services of the type needed to maintain buildings or infrastructure once current PFI deals have expired.
Our commercial contracts team (ranked in Tier 1/Band 1 by both Chambers and Partners UK and the Legal 500) has considerable experience of advising on long term infrastructure contracts with a significant service element. We also recognise that giving clients the best possible advice on such deals often requires extensive coordination with other relevant practice areas, such as our highly regarded Real Estate, Construction and Dispute Resolution teams.
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