Can PFI contracts ever end ‘happily ever after’?
Chris Horsley says the expiry phase of such deals comes with various risks
The end for most of the existing private finance initiative (PFI) projects in the UK is approaching, with the peak of contract expiries due through the late 2020s and 2030s. Recent tales from the industry have demonstrated how the expiry phase of PFI contracts presents various risks to the contracting parties, prompting consideration of how positive outcomes can be achieved.
PFI enabled private consortia to design, build, finance, and operate public infrastructure, transferring certain key risks to the private sector and spreading public investment over the lifetime of the arrangement. Much of the focus was understandably devoted to initial delivery of much-needed infrastructure projects. How arrangements would conclude was naturally less of a priority but, as many an author has found, it can be crucial to effectively plan the ending when writing the beginning.
Most PFI deals are drafted to expire after 20-25 years. As the heyday of project signings stretched throughout the noughties, expiry and handover of many contracts is imminent. PFI contracts will contain provisions governing that process, but greater detail and clarity will often be seen in later PFI deals, drafted once standard form arrangements had been developed and deployed.
The initial tranche of PFIs coming to expiry are those forms developed by authorities with limited external input and standardisation. Given that background, there is likely to be a greater extent of drafting and approach issues for the parties to tackle, which will require advice to mitigate effectively.
Take the example of Trentham Academy in Stoke-on-Trent, one of 88 schools covered by a 25-year PFI maintenance contract which ended in 2025. The school cited numerous issues with its heating system, and other maintenance problems, closing off areas including its swimming pool for many months. These problems stemmed from the PFI service provider failing to complete the pre-handback works contractually required before the contract ended.
Despite the local council’s efforts to manage the end of the PFI contract and withhold funds where possible, feedback from the public sector was that the contract was too weighted towards the private sector to enable an effective resolution. Soon after a negotiated variation was signed to extend the PFI deal whilst implementing steps to remedy the situation, the special purpose vehicle holding the contract entered insolvency, terminating the arrangements and leaving the council to pick up the pieces.
Positive outcomes can be achieved with consistent monitoring, early attention, openness to alternative solutions and effective collaboration between the parties. Official guidance has previously recommended the public sector authority should begin preparing for handover at least seven years prior to the expiry date, with an emphasis on gathering as much evidence as possible about the state of the facilities and the required works.
Better still is an approach which works to consistently check, benchmark and improve upon the service delivery throughout the PFI arrangements, pausing to review and refresh the relationship between the key parties and their mutual objectives during the latter half of the contract period in particular.
Long before the usual 18 months of survey and expiry provisions of the arrangements kick-in, parties may well benefit from considering whether a collaborative approach to vary the contractual handback provisions, and perhaps make a change to the drafted process and targeted outcomes for the asset, might lead to a better result for all.
Chris Horsley is a director, Burness Paull