PAC: Vital public services including schools and hospitals “face serious disruptions” as Private Finance Initiative ends

• PAC report: “What is certain is that action needs to be taken now to avoid this becoming a huge payday for consultants”

Since the 1990s successive governments have used the Private Finance Initiative (PFI) to build and run more than 700 public infrastructure assets including roads, schools and hospitals. These contracts between the private sector and public bodies are now coming to an end. In a report published today the Public Accounts Committee warns that government’s lack of preparation for this massive transfer of public assets, combined with insufficient data and skills, could lead to the contracts ending in disruption to vital public services, and added costs.

Typically, PFI contracts last 25-30 years. Around 700 such contracts exist, representing public infrastructure assets worth around £60 billion and future costs of around £170 billion. The earliest contracts have expired and some 200 will expire in the next 10 years, accelerating from 2025 onwards.

By minimising expenditure on maintenance in the final years of the contract, PFI investors can pay out higher dividends and walk away with limited threat of recourse. The Infrastructure Projects Authority (IPA) is aware of ‘difficult’ investors who are not sharing important information that authorities need to successfully manage the expiry process. It plans to engage with investors but has not yet set out what this will entail, or how this will help authorities when disputes arise.

The high concentration of PFI ownership among private investors allows the private sector to take a portfolio approach to managing the expiry process, which risks putting the public sector at a disadvantage. A lack of contractual tools to hold non-cooperative investors to account further disadvantages authorities in securing value for money from the expiry process.

Any mismanagement of the expiry process could result in large sums of taxpayer’s money being wasted. A lack of attention from the public authorities running these contracts could also leave the public sector footing large bills for rectification work which the PFI company has already been paid to do. The Committee says “What is certain is that action needs to be taken now to avoid this becoming a huge payday for consultants.”

Meg Hillier MP, Chair of the Public Accounts Committee said: “We are about to see a wave of PFI contracts come to an end. These require careful and advance challenge to ensure that the asset is handed to its public sector owner in good order. These include schools and hospitals.

“The taxpayer could end up with a huge bill if PFI companies are not challenged and held to account.

“These PFI contracts cover £60 billion of public infrastructure assets, carrying £170 billion of associated costs. Crunch time is approaching and taxpayers need to be alert to the risk. Public bodies and the Treasury need to be on top of this issue now.”

PAC report conclusions and recommendations

1. Government has started to deal with the expiry of PFI contracts, but there remains a lack of urgency and overall plan. Over the next 10 years, more than 200 PFI projects, representing assets worth over £10 billion, are set to expire. The IPA estimates it takes seven years to adequately prepare for expiry, meaning that work should have already started on those that will be expiring soon. Transferring the responsibility for maintaining the assets and running the service to the public sector after contracts expire represents a significant risk to government as a failure to prepare sufficiently far in advance could leave the public sector exposed to major disruptions to vital public services. The government has acknowledged the seriousness of this challenge and has taken some action to address the risked posed. The Treasury gave the IPA an additional £2 million in the 2020 budget which it has used to develop a PFI contract management programme. This includes a health check tool designed to evaluate the expiry risk of all individual contracts ending in the next seven years. The IPA aims to review 55 contracts by 31 March 2021 using this tool. The IPA has also been developing PFI expiry guidance since 2019, which remains unpublished. The Treasury and IPA are discussing what additional support is to be provided, and by what level of government, but no decisions have yet been made.

Recommendation: Within 3 months, the IPA should publish a plan for how it will support all public bodies with expiring PFI contracts, beyond those expiring in the immediate short-term, including what they will deliver and by when. It should also proactively publish guidance for authorities. HM Treasury should write to key departments encouraging them to develop sector specific PFI expiry guidance.

2. The IPA does not yet have the data it needs to fully understand the challenges of managing the expiry of PFI contracts. The PFI contract is central to understanding the potential expiry risks an authority may face. However, these are long, complex documents which have been subject to multiple revisions over time, as many as 75 variations in one example. An authority may not hold a complete version of the contract, with either part or all of it lost. The contracts are not always easily accessible, sometimes being held on older technology such as CD-ROMs. A lack of standardisation in the early PFI contracts means that the clarity of each contract’s expiry clauses can vary, exposing authorities to different challenges depending on the contract’s age. The IPA does not hold a central registry of all PFI contracts as it does not consider creating this to be value for money. It has held discussions with key departments about introducing registries, but these are not yet widely in place. Instead, the IPA collects and publishes limited information on each of the 700 contracts, covering the capital value of the project, annual payments, the date the contract was signed and contract length. This does not include the date the contracts will expire. The IPA has started to collect contracts via its health check tool, but this is on a small scale.

Recommendation: The IPA should write to the Committee within 3 months with an update on the thematic PFI expiry challenges that it has identified following its review of 55 contracts and how it proposes to address them. In addition to this, the IPA should compile a central list of all PFI expiry dates to help authorities prepare for their conclusion.

3. Many authorities currently lack the skills, expertise and capabilities to successfully deliver PFI contract expiry, with locally managed contracts most at risk. The IPA recognises that there is a huge demand for skills, expertise and capabilities in contract management—all of which are currently in short supply. Contracts owned by local bodies, which represent over 80% of the total portfolio, are the most concerning because expertise has dwindled as resources are prioritised elsewhere. Local Partnerships consider the best prepared authorities to be those with multiple contracts, as they will more likely have maintained a PFI team throughout the life of the contract. However, 182 authorities own just one contract. The IPA accepts that filling the skills gap with consultants could be expensive and not the best value for money option. Part of its PFI contract management programme is therefore focused on building capability and recruiting additional staff to develop a central pool of resources. This so far consists of just 17 people, although more people are expected. This is not enough resource to support all 700 contracts. Local Partnerships also has a small team of experts working on PFI and provide training on a reactive basis if an authority requests support.

Recommendation: The Treasury and the IPA should write to Committee within 3 months outlining how they plan to fill the current skill shortages, focusing particularly on those authorities with limited funds to recruit or buy-in external support.

4. The IPA is not clear what support will be provided to authorities with expiring PFI contracts, and who will provide that support. Each individual authority is responsible for managing the expiry of its PFI contract. When an authority needs help, support is often lacking, or it is not always clear how to access it, with varying degrees of support available from multiple sources across central government. The IPA is building capacity and plans to provide support and advice via its contract management programme. Local Partnerships provide training courses and lessons-learned examples when requested, while the sponsoring department is responsible for drawing on the expertise at the IPA. Some smaller authorities with multiple PFI contracts are being managed by a single person and could benefit more from additional capacity rather than training courses or specialist advice. The IPA asserts that it is working on proposals on how to provide additional resources, on top of those already available at the centre, and whether this is done by departments or regionally. Decisions about this are still outstanding, exacerbating the lack of support for those local authorities most at risk.

Recommendation: The Treasury and the IPA should set out, within 3 months, their plan for providing support to all PFI contracts, especially those owned outside of central government. This should cover:

1. What support will be made available, including how additional funding will be provided to authorities with limited resources or those with the most challenging contracts.

2. Who is responsible, between the Treasury, the IPA, departments, and local government, for providing support.

3. The circumstances under which authorities can access different types of support and the process they need to go through to obtain it.

5. We are concerned that the approach to managing the expiry of PFI contracts risks authorities working in silos rather than collectively securing value for the taxpayer. In the education sector, there are examples where the ownership of the PFI assets and the responsibility for managing the contract are not aligned. When a school is converted to an academy, it is no longer the responsibility of the authority, but is instead run by an independent academy trust and receives funding directly from the Department of Education. The authority, however, remains responsible for administering the PFI contract until it ends, despite not inheriting the assets. This can create perverse incentives to protect budgets and limit expenditure on managing the contract, especially during the expiry phase, potentially putting taxpayer interests at risk. The academy trust acquiring the assets may inherit a ‘liability’ – the cost of bringing the assets back up to usable condition. The potential risk to the Department for Education is significant with around 300 PFI schools already converted to academy status. This is a very complex issue and further clarification is needed.

Recommendation: Within 3 months, the Treasury should outline how it is ensuring taxpayer interests are being protected when the expiry of PFI contracts creates a change of asset ownership between public bodies.

6. The IPA has not set out a clear escalation process to avoid disputes between the public and private sector going through the courts. At expiry, all parties will want to maximise value from the PFI contract. Authorities will want to ensure the assets are returned to the public sector in the condition stipulated in the contract, with all maintenance and rectification work completed before expiry. The PFI company will want to reduce expenditure in order to maximise payments to shareholders. These misaligned incentives can create disputes. The formal process for resolving disputes is outlined in the PFI contract and will usually require an expert panel to make a judgement. If this does not lead to an agreement a resolution is sought through arbitration or the courts. This process can be long, taking a minimum of 10 months in some cases, and prohibitively expensive for some authorities. This can lead to a situation with a small, under-resourced authority dealing with a large, well-resourced PFI company. There are some examples of good practice, such as Highways England agreeing an informal disputes resolution procedure with the PFI company, which is quicker and cheaper.

Recommendation: The IPA should publish a disputes protocol, outlining how disputes can be escalated by authorities, and the steps that can be taken to ensure disputes only need to be resolved by the courts as a last resort. Where disputes do materialise, the IPA should conduct a review to determine whether it is a one-off disagreement or a wider problem that may impact other contracts.

7. The IPA has not outlined clearly how it plans to engage with investors to ensure that authorities have access to all information needed to manage the expiry process. Authorities need to monitor the performance of the PFI company to ensure it is delivering the services that taxpayers are paying for. Transparency can be a problem and the IPA recognises that there are some difficult investors which adopt an approach of ‘asymmetric information’ where the PFI company holds much more information on the performance of the contract compared to the authority. The IPA plans to engage directly with investors to hold them to account, ensuring that information critical to managing PFI expiry is shared with the authorities, but has not yet set out what this will look like in practice. The IPA is also looking to develop a protocol outlining how investors should operate during the expiry process, but this is not yet available. Authorities can withhold a proportion of their annual payments to encourage non-cooperative PFI companies to carry out maintenance, but this is not always an option. Some authorities can also build up retention funds to pay for any identified rectification work but there is a risk that these are not sufficiently large and as these are contractual arrangements they cannot be unilaterally increased later in the process. IPA does not yet have a solution to these scenarios or the actions it would take in response.

Recommendation: The IPA should write to the Committee within 3 months outlining the steps it is taking to ensure PFI investors are being fully transparent and compliant with contracts, and what action, if any, it will take if an investor if found to be deliberately non-co-operative./ENDS

Notes to eds:

1. Full inquiry information including written and oral evidence: https://committees.parliament.uk/work/921/managing-the-expiry-of-pfi-contracts/

2. The NAO report underlying this inquiry: https://www.nao.org.uk/report/managing-pfi-assets-and-services-as-contracts-end/