NAO report on PFI Expiry

Is the government making appropriate preparations for PFI expiry?

The NAO have recently published a report that provides information on managing PFI contracts as they come to an end and considers whether government is making appropriate preparations to manage the expiry of PFI contracts.

In this blog post we provide commentary on the key findings based on our experience of leading DWP’s successful exit of the first large-scale UK PFI to expire. We will discuss the recommendations in a future blog.

What do we think of the report?

Overall we identify with the report’s findings - many of which are consistent with our services for contracting authorities, sponsor departments and the centre of government.

What jumped out?

We were struck by the proportion of respondents, 55%, who recognise they need more knowledge of the condition of their assets. This raises questions around what’s currently available and what this means as expiry approaches, with the potential for assets to be handed back in poor condition. It also raises questions around the levels of statutory compliance that can be evidenced and the extent to which this is currently assured by Contracting Authorities.

We were also surprised by the finding that 30% of survey respondents are not monitoring annual maintenance spending and 50% do not maintain an asset register. It is essential that Contracting Authorities have good asset data and very clear visibility of lifecycle maintenance plans in the run up to expiry to ensure that condition is being addressed in a way that confers long term value to the government. Asset registers are also integral to procuring future service providers.

A surprisingly high proportion, over 33%, of respondents expect to use the formal disputes process. Formal dispute can be very resource intensive and in our view should only be used as a last resort for the seemingly irreconcilable commercial differences. We think it is very important for government to understand why so many respondents expect to have to use formal dispute resolution and take action to reduce this. 

What’s missing?

The report mentions collaboration and partnership working but does not say why it is important or how to achieve it. Curshaw’s approach is to help our clients work collaboratively and in partnership with their counterparties. Our experience is that PFI providers need Contracting Authorities and vice versa in order to deliver an expiry plan and hand back assets in the right way. The expiry and handback process can be fraught with complexity and may involve time pressure, and even where the need for dispute arises, it is essential that good relationships are maintained. The operational, commercial and ultimately financial risks to both sides of not maintaining them are sizeable.

The report says nothing about how PFI expiry projects and programmes will be assured by central government and whether the existing approach could or should be adapted for PFI expiry given the value of the contracts and the operational drop-dead dates. In addition, the assurance process may require input and active management from the following separate central government functions: Infrastructure Projects Authority, HMT and Cabinet Office Controls, and Office for Government Property amongst others, increasing the complexity. This is a gap.

What do we agree with?

We agree with the NAO finding that early preparation is key. The later preparation is left the more likely it is that there will be disputes, contract-end liabilities relating to asset condition and disruption to business continuity. The time it takes to assess asset condition, determine the scope and scale of rectification works and deliver these works should not be underestimated. Of equal importance is an understanding of the time it takes to design, procure and mobilise a future services operating model. 

We also think the NAO is right to identify that resourcing may be a challenge. We are not surprised that 30% of their survey respondents envisage not having enough staff to deliver the expiry process. Putting skills and expertise to one side, there’s a risk that if existing teams who are responsible for day to day contract and operational management are diverted to managing the expiry process then levels of service up until expiry could be compromised. In our experience it is prudent to ring fence the contract and operational management resource and add to it to ensure there is no drop off in service towards expiry. 

Nor were we surprised that 25% of survey respondents lack the necessary skills required to deliver the expiry process. Managing commercial and operational change is very different from day to day operational and commercial management of contracts so it would be unreasonable to expect Contracting Authorities to be carrying spare personnel with the specialist skills required.