Risk of extra cost from failure to end PFI contracts properly

11 June 2020

Public Finance Initiative (PFI) contracts could fail to secure value for money because the public sector risks underestimating the time, resources and complexity involved in managing the end of them, according to a report.

A study by the National Audit Office (NAO) into the ending of PFI contracts, most of which will start to expire in 2025, warned that unless a more strategic approach is taken, important infrastructure could return to the public sector in an unsatisfactory condition and services could be disrupted.

There are around 700 PFI contracts, which are long-term agreements between the public and private sector to deliver infrastructure such as roads, hospitals and schools that are transferred to public sector ownership when the agreements expire.

The report surveyed public authorities managing PFI contracts, mostly bodies such as local authorities and NHS trusts. It warned that there was a risk authorities were not preparing for the expiry of contracts in enough time. This could lead to assets being returned in a worse condition than agreed, creating extra costs to the authority for repairs and maintenance, and failing to provide value for money.

The NAO surveyed 107 of the 571 English PFI contracts that have expired or will expire over the next seven years, and received 75 responses.

More than half of respondents to the survey said they needed more knowledge of assets’ condition. However, many agreements contain contractual limitations about what information can be given. The survey found that 35% of respondents said that they did not have enough rights to monitor asset maintenance, with a fifth saying that requests for information had either been ignored or denied. Of the nine survey respondents whose contracts had expired, four said they were unsatisfied with the condition of the assets when they took ownership.

The threat is exacerbated by what the report highlighted as a “misalignment of investor and authority incentives” towards the end of contracts. Whereas authorities want to receive assets in the best possible condition, PFI providers have an incentive to limit spending on maintenance towards the ends of the agreement to maximise returns to investors. More than a third of survey respondents said they expected to have formal disputes, according to the report.

Most authorities said they were confident they had started preparing for contract expiry early enough, with 57% starting four years in advance. However, the NAO said experience from expired contracts suggested that preparation time was often underestimated. Decisions about whether services such as maintenance and cleaning will be provided in-house, by a new contractor or by the current provider would have to be considered. Failing to prepare in enough time risked extra costs, disruption to services, or even being forced to extend contracts, the NAO concluded.

Authorities also risked underestimating the resourcing and complexity involved in the expiry process, which required different skills to those needed to manage the day-to-day running of the contract. This will create extra pressure on resources, and around 30% of respondents anticipated not having enough staff. Around 25%, said they lacked the necessary in-house skills to deliver the expiry process and 60% were planning to hire consultants.

The reported also said that early PFI contracts sometimes contained poorly drafted clauses and could be ambiguous about the responsibilities of the various parties at the end of the contract, resulting in different interpretations.

In 2018 PFI came under heavy criticism from watchdogs for failing to provide value for money.

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