Managing the expiry of PFI contracts Contents

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1Government’s response to the expiry of PFI contracts

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Treasury (the Treasury), the Infrastructure and Projects Authority (IPA) and Local Partnerships about managing the expiry of PFI contracts.1

2.The Private Finance Initiative (PFI) is a way of engaging the private sector to deliver public infrastructure such as roads, schools and hospitals. The government has used PFI, and its successor Private Finance 2, for over 25 years.2 There are currently more than 700 operational PFI contracts in place across the UK worth around £60 billion. PFI involves the government entering into a long-term contract with a private sector company which then designs, finances, builds, maintains and operates the assets over a period of 25 to 30 years. During this period the government makes annual payments to the PFI company covering debt repayment, financing costs, maintenance and any other services provided.3

3.In 2018, the government announced it would no longer use PFI.4 We examined the PFI model in 2018 as part of our “Private Finance Initiatives” inquiry. We concluded that after more than 25 years the Treasury still had no data on benefits to show whether the PFI model provides value for money.5 Existing PFI contracts, however, remain in place and the oldest ones are now starting to expire. Over the next 10 years more than 200 PFI contracts will end, covering assets worth in excess of £10 billion.6 On expiry, in most cases, asset ownership will transfer to the public sector which will then be responsible for ensuring they are run as before, and well maintained. The public body (the authority) that entered into the original contract therefore needs to closely monitor the performance of the PFI company to ensure maintenance is carried out and the assets are returned in the agreed condition. The authority must also decide whether services, such as running a hospital, are either provided in-house, by a new contractor or by the current provider. Failure to prepare sufficiently far in advance may result in the taxpayer becoming liable for expensive rectification work or disruptions to important public services.7

Preparedness for PFI contract expiry

4.In 2020, the Treasury awarded the IPA an additional £2 million budget to develop a programme to help manage the expiry of PFI contracts.8 The IPA subsequently launched its PFI contract management programme.9 The IPA told us that this programme consisted of four pillars, with the first relating to contract expiry. As part of this, the IPA explained that it had developed a health check tool to evaluate the expiry risk for all PFI contracts ending the next seven years—the amount of time the IPA estimated is needed to adequately prepare for expiry. It also told us that it had undertaken 23 health checks so far using this tool and aimed to complete 55 by 31 March 2021. The IPA expected that the programme will continue beyond these 55 contracts, and it would automatically review any contract that will expire within seven years.10

5.The second pillar of the IPA’s contract management programme involves improving general contract management. The IPA committed to conducting several detailed contract reviews to “formulate solutions and ideas” around what training and capabilities authorities require to better manage their PFI contacts. It explained that pillar three was about building this capability and it was working across government to develop training programmes. Lastly, the IPA described pillar four as providing expert support and advice to where there are disputes, problems or major events such as the need to amend existing contracts.11

Understanding the challenges

6.Authorities face a range of challenges in managing the expiry of PFI contracts, such as ambiguous hand back clauses, restricted access rights to information and limited recourse options.12 The PFI contract itself is central to understanding the challenges an authority may face. However, these contracts are long, complex documents and will have been revised over time to change service requirements or to deliver savings. Local Partnerships highlighted one contract where there had been seven major variations and 75 smaller ones, none of which had been gathered together into a complete document. The NAO similarly highlighted that the authority should hold a complete and up-to-date copy of the PFI contract, but found examples where part, or all of the contract had been lost.13 We were surprised to hear that these contracts are not always easily accessible as they can be held on older technology. Local Partnerships told us of an instance where a copy of a contract was held on a CD-ROM.14 A lack of standardisation in earlier PFI contracts means the clarity of expiry clauses may vary, depending on when the contracts were entered into. The Treasury first published standardised PFI contract guidance in 1999, and since then there has been more than four iterations, each one building on the experiences of past PFI projects.15

7.The NAO report recommended that the IPA should assess the costs and benefits of developing an electronic repository of PFI contracts.16 We asked the IPA why it did not hold a central registry of contracts and whether it thought that this would be a useful addition. The IPA told us that it did not hold a central registry of all contracts even though the data on PFI contracts is “not great”. It explained that it did not consider creating a registry to be value for money given the complexity of the contracts and the size of the recording that would be required. The IPA added that it has started to collect key parts of contracts, on a small scale, as part of its health check tool, and that it had discussed with “key departments” about them holding registries of their contracts.17 We received written evidence from Affinitext, which told us that the Ministry of Defence had implemented a central electronic repository for 18 of its PFI contracts, and that this was also common practice for investors across the portfolio of PFI projects they own.18 Affinitext added that a central repository would allow sponsor departments, the IPA and Local Partnerships to identify high-risk projects and enable a more consistent approach across government, allowing the public sector to catch-up with the best practice of the private sector.19

8.The IPA maintains a publicly available PFI database, which includes information on each of the 700 contracts, such as the value of the project, annual payments, date the contract was signed and contract length. The database does not, however, include the date each contract will expire.20 The IPA told us that this was something it could look to include in future versions of the public database. The IPA aimed to update the database annually, but noted that it relied on returns provided by each department to create the database. It admitted it was not 100% confident that all PFI contracts were actually reported, especially those owed by local bodies.21