There are still over 550 operational Private Finance Initiative ('PFI') schemes in the UK spread across different sectors. The majority of those schemes are due to reach expiry within the next 15 years – with the number expiring per year peaking between 2035 and 2037 at around 50. Handback of PFI projects has, therefore, fast become the hot topic for the PFI/PPP industry. This note is intended to be of relevance to any and all parties involved in a PFI scheme to provide insight based on our experiences of advising on the legal and contractual issues of preparing for expiry.
Background
The relationship between the relevant public sector body ('Authority') and its private sector partner ('ProjectCo') is a long-term one - PFI agreements typically have an operational phase of 25 to 30 years – and they will have to work together throughout that period. Some of these relationships have been successful; others less so. We know this both from our own experience and anecdotally such as documented in the recent 'White Fraiser Report'. Nonetheless, the Authority and ProjectCo are going to have to work together to ensure that the assets are handed back at the end of the project term in accordance with the requirements set out in the contract.
The Authority will expect to take back an asset which has, in accordance with the specific provisions of the contract, been properly maintained with core elements appropriately replaced as part of a comprehensive lifecycle programme. There may, however, be some tension arising from the respective interpretation of the Authority and ProjectCo (and its supply chain) of particular contractual obligations - especially if the working relationship between the parties has previously broken down.
Guidance
Last year the Infrastructure and Projects Authority ('IPA') published 'Preparing for contract expiry' – its "practical guidance for contracting authorities on managing expiry and service transition". A key message to Authorities was that they should commence planning for expiry at least seven years prior to the contract end. In Scotland the Scottish Futures Trust's 'PPP Projects Nearing The End Of Contract: A Programme Approach' provided similar guidance.
The IPA also now offers 'expiry health checks' to help Authorities assess their readiness for expiry, and recently (June 2023) published 'A Guide to PFI Expiry Health Checks'.
This guidance will undoubtably be of much use to each Authority - its senior leadership team as well as its contract managers - as it prepares for expiry. Each ProjectCo and its supply chain (notably, the FM provider) will also want to be cognisant of the guidance as they make their own preparations for working with the Authority towards expiry.
Key issues
We are advising clients who are currently engaged in preparing for the handback of some of the earliest PFI schemes, and below we highlight some of the key recurring issues we have encountered to date and practical tips to deal with those issues.
- When does the contract actually expire?
This is the obvious starting point (how else will you know when you are at the IPA's-suggested seven years out?), and to which the answer should be readily available…or so you would think…
The expiry date (however defined) is often not expressly set out in the Project Agreement ('PA'). Instead it might be determined as e.g. X number of years from the 'Services Commencement Date'. So what is the date when the Services commenced? Again, that is often not hard-coded either, but instead will refer to e.g. a period from the date of the actual completion of the building works. Which in turn might lead to another defined term or event – such as the issue of a completion certificate; but do you have a copy of that certificate…?
Ultimately, whether straightforward or otherwise, it would be a good start point for the conversation about handback for the parties to ensure they are in agreement about the date of expiry. From there they can work back to calculate timescales for satisfying the relevant handback obligations set out in the contract.
- Do you have the correct and up-to-date version of the contract?
In addition to a register of the various minor 'notices of change', do you have all of the deeds of variation, supplemental agreements and the like - at least one or more of which will likely have been made during the term of the contract so far? Latterly we are seeing an increase in statements about any impact on the risk profile pertaining to handback in such variations.
To avoid confusion, delay and potentially even dispute later, as an early action look to agree with the other party what makes up the complete PA. Also, think about the benefits of setting up a centralised repository (dataroom) for the PA and other project documents. That could even be in a shared workspace accessible by all parties and their respective advisers.
Also consider whether there are any documents which were to be agreed after the contract was signed. For example, plant and equipment lists might have been finalised after signature, or there may be a requirement to keep a register of assets updated. These would all be relevant to what gets handed back – but do you have them?
- What are the specific requirements around handback condition?
Are you clear about the contractual requirements for handback? Earlier PFI schemes in particular are likely to have more bespoke provisions, unlike the standardised drafting which e.g. Building Schools for the Future (BSF) schemes or schemes based on the various versions of SOPC will benefit from.
How is handback condition, and the process for determining whether that has been achieved, actually defined in the PA? This may be by e.g. reference to certain of the Services schedules in the PA, but we have also seen this being more widely defined by reference to compliance with all obligations under the PA. Our experience is that what is meant by handback condition is not always straightforward to determine. Nonetheless that has to be your starting point, and so it is important that the parties spend time understanding the contract and where there is room for interpretation seeking a consensus.
One way or another, this process of determining the handback condition will involve a survey of the assets being carried out. The PA may or may not provide much detail about this. However, key considerations will be around (including what provisions there are in the PA prescribing): how is the identity of the surveyor arrived at; what is the scope of the surveyor's appointment; who undertakes the appointing; and, who is a party to that appointment (and benefits from a duty of care)?
For ProjectCo and its supply chain there will also be an important assessment to be carried out around where risks and liabilities arising from the handback process sit between those parties.
- Have the parties adhered to the contract terms to date?
During the term of a PFI contract the ProjectCo typically 'self-monitors' delivery of the Services. However there may be other provisions in the PA which will are relevant, the proper and punctual application of which can assist with the handback process.
An example of this could be the Authority's right to undertake surveys during the term. In some instances the Authority has an obligation to undertake surveys at specified intervals, in others the Authority has a right to request a survey in specified circumstances. If you have such a provision, has it been implemented? Such interim surveys can give a valuable snapshot of the state of the asset and hence be of assistance - to all parties.
What will happen to the Services following expiry?
As well as preparing for handback, each Authority will also have to plan for its future use of the relevant assets following expiry including the provision of those services currently provided by ProjectCo – including how those might be procured. This process will need to be undertaken in parallel with handback planning to ensure a seamless transition – whether that involves transfer to a new service provider or services being brought back in-house. ProjectCo and its supply chain will also have a contractual obligation to co-operate with the Authority in that process.
How can we help?
DAC Beachcroft’s Infrastructure & Projects lawyers advise a range of Authorities, ProjectCos, FM contractors and investors on operational PFI projects. We are currently advising clients on preparing for contract expiry and managing service transition.
If you require advice on implementing the recommendations of the Report, please contact our PFI experts Alison Martin and Ioan Davies.
