IPA PFI expiry support plan for contracting authorities
The Infrastructure Project Authority (IPA) have now published their support plan for Contracting Authorities, an encouraging and direct response to the Public Accounts Committee (PAC) call to action back in March 2021 to avoid the risk of vital public services facing disruption at expiry.
The IPA’s published plan comprises eight elements:
Expiry Health Checks to determine readiness for expiry;
Assurance of Action Reviews to follow on from the expiry Health Check to see if significant remedial action plans have been delivered;
Expiry guidance and a toolkit, including checklists for contracting authorities;
Expiry training for contracting authorities;
Private sector engagement to ensure that the IPA can share knowledge and build relationships on behalf of individual contracting authorities and their projects;
Expiry protocol to foster collaborative working, ensure transparency by investors, promote effective dispute resolution and share best practice;
Expiry advice and expert practical support to contracting authorities; and
Systems Learning and Improvement to assist departments and formulate departmental action plans.
What struck us...
From our CURSHAW position as independent expiry advisors, this is an important and welcome first indication from the IPA of its clear recognition of the forthcoming challenges of, and indeed opportunities from, these expiries for the individual contracting authorities. Yet, overall, we are immediately struck by the surprisingly limited role for the private sector that is currently envisaged by the IPA.
Whilst the IPA’s document is acknowledged as being principally a support plan for contracting authorities and is therefore rightly public-sector focussed, the absence of any role for the Private Sector in, for example, supporting Expiry Health Checks and in developing Expiry Guidance risks masking the stark challenge that the UK is faced with in managing the successful unwinding of £290bn of state critical infrastructure contracts and their seamless replacement with future operating models.
This expiry challenge is therefore one that every element of the PFI industry and ecosystem - including central government, sponsor departments, contracting authorities, Project Cos, SPV Managers, Equity Investors, FM Cos, etc - all need to rise to. UK taxpayers risk being worse off if this huge programme isn’t delivered efficiently, effectively and equitably by engaging with every stakeholder, resulting in an absolute minimum of dispute or disruption.
Our CURSHAW perspective and experience firmly suggests that it is the fifth listed element of the IPA’s support plan, the structured Private Sector Engagement, that is the most crucial to effectively initiating this whole expiry process. It is perhaps even likely to prove to be a prerequisite to the success of the other seven elements of the IPA’s plan.
The approaching expiries are some of the largest, most expensive, longest-running and complex commercial and operational arrangements ever entered into between the UK government and the private sector. Unravelling - and indeed then replacing - these critical asset arrangements will require the public and private sectors to work together, openly and effectively. If the IPA is not yet able or quite ready to engage in that level of debate, then that initiative will need to be taken in parallel by the private sector.
Detailed commentary
The IPA’s stated objectives are to ensure that:
Private sector counterparties meet their contractual obligations through to the expiry of the PFI project; and
There is an efficient and effective hand-back and take-forward process allowing continuity of all required services on PFI expiry.
Curiously there is no mention in these objectives of the role of the contracting authorities, contract management and management of authority obligations. This conspicuous absence is a concerning portent, which risks establishing a certain “client and supplier” (...even “master and servant”..) belief system, which does not feel like a constructive basis on which to establish the ground rules for this approaching 30-year expiry programme. However it may also simply represent that this is the IPA’s “first call to action” to the contracting authorities, with their focus on what they initially need to be considering. So this opening tone will hopefully not endure and go against one of our guiding CURSHAW principles which is that contracting authorities and providers have accountabilities to one another and should work together. A failure to exemplify this spirit of mutual accountability and collaboration at the beginning of the expiry programme, in our view, could lead to early relationship breakdowns and an acrimonious dispute-ridden handback, in turn fuelling the risks to the public sector of contract-end financial liabilities and/or operational discontinuity.
In our first published CURSHAW PFI Perspectives paper back in March 2021 we stated that the objective for every stakeholder should be the delivery of an “efficient, equitable and effective handback – ‘E3’. Which seems not to have escaped the notice of the IPA who have adopted two of our three E’s in their second objective; however they have (currently) dropped the third, ‘equitable’. We don’t know why and can only speculate.
Inherent risk - a valuable CURSHAW concept written about here alongside our risk rating of every project - has now been recognised, adopted and referenced by the IPA in the context of Expiry Health Checks. This is welcome news on the grounds that the risk arising from preparedness is only part of the problem, with some PFI projects being inherently riskier than others owing to scale, complexity and other measures. We hope that our CURSHAW risk mindset, apportionment, measurement and understanding will perhaps influence the IPA’s own day-to-day approach such that Expiry Health Checks are not based only on time to expiry, as currently. This approach means that some inherently risky “sleeping giants” will only be assessed when they fall into the IPA’s current 7-year horizon by which time it might be too late to bring about meaningful change.
No data strategy - Data is mentioned in the context of the IPA’s underpinning vision as part of the support plan and the value of good quality data identified as being to support planning, training and commercial engagement; however there is no data strategy, begging the questions; what, how, when to what specific end? Much has previously been made of the data deficit in the public sector by the NAO whose survey found that a 50% of respondents in contracting authorities do not maintain an asset register. More fundamentally the PAC hearing revealed that there is a problem with the base data held by the IPA on the number of contracts with the IPA stating that they are, “unsure that all contracts are actually reported,” with talk of, “having to crawl through an Excel spreadsheet.” In our view getting the base data right on the number of projects, the expiry date and crucially the equity investors should come before identifying and obtaining the more detailed operational data that is integral to each project agreement.
The Expiry Training and Expiry Guidance outlined is welcome news but is no substitute for expertise and experience and, ultimately, resources. It is therefore encouraging that point seven of the eight-point plan references expert practical support. In our experience supplementary resources are essential alongside BAU contract management resources. Putting skills and expertise to one side, there is the clear risk that if existing BAU teams who are responsible for crucial day-to-day contract and operational management are diverted to managing the complex expiry process then levels of service up until expiry could be compromised - a risk already acknowledged by the NAO report on Managing PFI. In our CURSHAW experience it is prudent to ring fence the contract and operational management resource and supplement it with point expert resources to ensure there is no drop off in service towards, through and immediately beyond expiry.
Is there a role for the private sector in supporting Health Checks and creation of guidance?
We understand, and have evidenced, the importance and value of maintaining strong relationships and effective collaboration throughout the life of a PFI contract.
In our CURSHAW view a true understanding of contractual compliance and performance, substantiated with complete and quality data, demands working with both the contracting authorities and the PFI providers, not least because PFI providers own and control the source data that sits behind the summary monthly performance reports and generally have a far greater understanding of asset condition and lifecycle maintenance - as you would expect given the intended risk transfer and the provider’s responsibility for design, build, finance and operate.
An Expiry Health Check that looks at relationships without, however effectively, involving the key counterparties runs the risk of being neither fulsome nor balanced. In the same vein, how a Health Check involving only contracting authorities can determine asset condition without involving the people responsible for maintaining asset condition, exacerbated by the well-documented lack of meaningful asset data residing in the hands of contracting authorities, is a worrying assumption. We would suggest that any exercise designed to achieve genuine preparedness with an evidence base rather than interview responses should involve contracting authorities and their PFI providers to avoid becoming a narrowly focussed, parochial and partial view of true readiness and what is required. Anything less is not a “diagnosis.”
If there should be an opening position of concern or even suspicion within the contracting authority as to whether their private sector “partner” is actually delivering what it is obligated to, then this process of open and transparent engagement will surely serve to quickly highlight any issues where they exist.
Similarly Expiry Guidance that is generated by the IPA for contracting authorities without the involvement of the PFI providers runs the risk of failing to include a comprehensive and exhaustive list of all the systems, data, knowledge and experience integral to current operations that need to be transferred. Acknowledging the insight that could be provided by PFI providers and actively engaging them in the development of the guidance might just enrich it.
Private sector engagement
We are very supportive of the tenet of the IPA’s stated intent of opening a structured engagement with the private sector. In our independent view, engaging with market counterparties will be crucial to achieving an ‘E3’ handback and it is very positive that this first step is being proposed by the IPA.
It has long been clear to us that “the centre” is in the unique position of being able to leverage scale by speaking to providers on behalf of all government departments and to have structured engagement with PFI providers. This is something that the Cabinet Office, separately from the IPA, does rigorously and routinely with its ‘Strategic Suppliers’. In the words of the Cabinet Office, “Strategic suppliers bring many benefits to the delivery of public services, but serious and/or persistent underperformance by strategic suppliers, and/or financial risk to strategic suppliers, are bad for the delivery of public services and the taxpayer.” These relationships with Strategic Suppliers are managed by Crown Representatives who act as a single customer. They work across departments to:
ensure that a single and strategic view of the government’s needs is communicated to the market;
identify areas for cost savings; and
act as a point of focus for cross-cutting supplier-related issues.
The market of PFI providers has become relatively concentrated and they should be considered no less strategic in our view. Structured engagement that is appropriately facilitated has the potential to positively enable and support the handback process by opening clear channels of communication and commercial escalation routes that could be critical to preserving collaborative working relationships. This strategic-type engagement could also be used to co-develop the IPA’s constructive goal of an Expiry Protocol. Given that the IPA’s stated aims of this protocol are to “foster collaborative working, ensure transparency by investors, promote the effective resolution of disputes and achieve the sharing of lessons learned,” perhaps the act of developing it ought to also be a collaborative one.
The development of this protocol should be a collective effort by the industry and all counterparties as a whole, and not by one side or the other, and with alignment around a common purpose. Work in the open. Share and iterate. Own the shared outcome and be measured by it.
What more is to come?
The IPA have committed to publishing, with or without the counterparties to a set of complex commercial bilateral agreements, the following:
Expiry Guidance - Autumn 2021
Expiry Training - Autumn 2021.
Expiry Protocol - shared for discussion in Autumn 2021
Publication of detailed analysis of the first 52 expiry Health Checks - Late summer.
This should be read as a clear “call to action” for the Private Sector who potentially have a lot to offer and should in parallel be developing their own positive and constructive response to the IPA’s opening agenda in readiness for when a wholly aligned and collaborative approach to expiry becomes the evident way forward.