Effectively Managing PFI Contracts through the Expiry Process - The Portfolio Approach
The need to ensure consistency, coherence and aligned strategy across a number of PFIs going requires a portfolio management approach
For Contracting Authorities with a number of PFI contracts, it is likely that they will shortly be embarking on an undulating process of consecutive expiries. There are increased risks that arise as a result of this fact, but CURSHAW considers that there are also significant potential opportunities. In any event, the need to ensure consistency, coherence and aligned strategy across a number of PFIs going through the ‘RPD’ process in quick succession requires a portfolio management approach, for which this section outlines our recommended strategy.
While individual projects are going through the stages outlined in our previous blog post ‘Effectively Managing PFI Contracts through the Expiry Process - Individual Level’, a Central Strategic Coordinating Team (PFI CSCT) should be established. The scale of this team will depend on the capacity and capability within the individual PFI project teams with direct responsibility for day to day operational and contract management and delivery of the expiry process, as well as the volume and complexity of the PFIs across the portfolio. The CSCT should also have endorsement and sponsorship from top-level senior leadership within the organisation.
This is a critical but often missed step; senior endorsement and sponsorship provides a mandate to more effectively coordinate multiple project teams, and also means that senior officials have visibility over dependencies and links to policies and programmes beyond the PFI portfolio, but nevertheless have a significant impact on the optimal commercial strategy for delivering expiry.
The purpose of the CSCT is to enable complete central oversight of all PFI contract expiry activities across the portfolio. The CSCT will ensure best practice is shared between the individual projects, provide assurance and oversight that PFI expiries are well managed and commercially sound replacement solutions are procured.
The CSCT should have three major areas of responsibility:
A Programme Coordination Function to provide overall stewardship of all the contracting authority PFI project expiries. This should form the nucleus of the CSCT and would act as the main interface with any external parties such as the IPA & National Audit Office (NAO). This function would establish a full contracting authority PFI data library, track key PFI SRO & Stakeholders and develop a common PFI reporting regime. They would be able to demonstrate exactly what is happening within each individual PFI expiry thus reducing the need for IPA to undertake extensive reviews on an individual basis. The benefit to the contracting authority’s PFI project teams is that the IPA reviews should then become light touch.
A Best Practice Hub to provide technical support, training and guidance to the individual PFI projects. They will provide best practice guides and materials and act as the conduit for the dissemination of learnings from experience to the wider contacting authority PFI community. This element of the CSCT should establish a Community of Practice networking group in order to share experiences. They would develop framework agreements for external technical advisers and legal support that the PFI projects can utilise with pre-agreed advantageous rates, and minimised timeframes from requirement identification to contract award.
Holistic Advisory supports the overall contracting authority PFI picture demonstrating where there are opportunities and risks with the investor landscape, the effects of debt restructuring and potential future financial solutions to be considered. The benefit of introducing this functionality into the CSCT is to identify where there may be more senior stakeholder engagement with investors who have multiple interests across several MOD/Government wide PFIs.
Accordingly, a PFI CSCT of any size and scale should have achieved the following aims within a short period of establishment:
To have developed a detailed knowledge of the PFI landscape, including internal and external factors that may impact on successful management, expiry and transition of PFI contracts in the portfolio, as well as the dominant investors and suppliers, and visibility of the potential impact of any likely Government policy changes (for example, Net Zero-related policies or revisions to taxation policy);
To have identified the key and most material overarching risks associated with the contracts in the portfolio;
To have quantified the exposure potentially arising from the most material overarching risks and issues within the portfolio, and have adequate mitigation plans in place to reduce this;
To have prioritised the longer-term tasks as they relate to individual PFIs, which can inform the movement of relevant resources and best practice across project teams, and maximise leverage, in a process of optimal sequencing.
To this end, a PFI CSCT should group their activities in the following ways (with each explained in detail in the next section):
Horizon Scanning
Standardisation
Opportunity Identification
Horizon Scanning
Horizon scanning entails activities targeted at acquiring portfolio-level, rather than individual, intelligence and understanding of the PFIs the relevant Contracting Authority is party to.
The Horizon Scanning component of the Portfolio Approach is a vital component of understanding how best to prioritise longer term tasks across the portfolio, in developing a programme plan for the consistent wave of expiry processes. The CSCT should be given a mandate by senior leadership to undertake a comprehensive risk review of all projects in the portfolio. This should look at myriad factors (indeed the CURSHAW Risk Assessment model includes over 30, with bespoke weightings) and prioritise those projects in most urgent need of specific expiry-centric attention.
Mapping the sequence of contract expiry dates is a key task as part of this phase of work. Given the recommended 7-9 year lead time, mapping these expiries can help inform the projects most in need of attention and focus. This will inform resourcing requirements and constraints, help identify key risks and the materiality of those risks, and inform options for the post-PFI landscape for the in-scope requirements, including alignment of Target Operating Models (i.e the manner of ongoing delivery of the requirements following expiry of the PFI) that potentially aggregate or disaggregate existing scopes of service provision.
Another core component of this phase is to identify which entities are involved in multiple PFIs in the portfolio. This approach needs to focus on mapping investors, Managed Service Providers, Facilities Management Providers, lenders, and other key stakeholders, across all PFIs. This information, to the extent it is not already known on an individual basis by the project team, can be gathered from:
involved parties’ websites;
published accounts of the Special Purpose Vehicle (SPV), the prime contractor under the PFI;
News and trade press articles;
Utilising information rights given to the Contracting Authority under the relevant PFI’s contractual documentation;
This will help Contracting Authorities identify opportunities to resolve any issues and agree refinements to expiry processes, which in many contracts are not always explicitly laid out, on a multilateral basis. It also enables a consistent approach to third parties with multiple touch points into the organisation, and this consistency can be managed and led by the CSCT.
Standardisation
Another key role for the CSCT in achieving the four aims set out above is standardisation across the PFI portfolio. In order to achieve successful outcomes in projects across the portfolio, project teams need to be following the same strategic approach, which is not only informed by guidance, policies and materials from the IPA, the Government Commercial Function and the Government Project Delivery profession, but by Contracting Authority-authored PFI-specific methodologies, processes and strategies.
CURSHAW advises Contracting Authorities’ CSCTs to lead the development of, in conjunction with stakeholders across the organisation, the following:
An overarching PFI Policy, covering operational and commercial in-flight contract management, as well as exit preparation work, which defines roles and responsibilities of individuals, the required structure of a PFI project team in both operation and exit phases, how the project team fits into the wider organisational structure, including the role of the CSCT and senior commercial and non-commercial leadership teams. In addition, governance structures and processes should also be defined and unequivocal in the Policy document;’
A ‘PFI Exit Approach’ Modus Operandi, which, when complete, provides project teams with a clear, thorough and sequenced approach to key activities (to be tweaked as and when necessary in consideration of the specifics of the PFI in question), including specifics on typical expiry processes under standard PFI contract forms, and typical timelines for successfully managing an expiry. This should be built on the ‘RPD’ approach, and be tailored to the specifics of the contracting authority, particularly in relation to governance and other processes an expiry process will interact with, and aligned to wider strategic goals and risk appetites. It should also taken into account themes that emerge from individual projects’ commercial and financial reviews;
A Data and Information Strategy, which should set out the required data and information project teams should collect, hold and maintain in relation to their projects, and the standardised format and method in which this should be done. The first stage is conducting an assessment of data and information currently held, identifying risks, issues and gaps, and forming the strategy on the basis of these findings. This should also be drafted in conjunction with the PFI Policy and the PFI Exit Approach Modus Operandi.
Training and External Advisory Needs Assessment, which is a piece of work to develop thorough understanding of capability gaps and training or external resources needed to address these; and
Reporting approach, which would seek to implement a standardised structure, cadence and format in order to more effectively understand the status of and key information regarding individual PFI projects, such that governance could be made more efficient wherever possible and the burden on project teams in meeting briefing and other reporting requirements could be minimised, with the necessary resource centralised into the CSCT.
Opportunity Identification
Of course, transition from a number of PFIs over a period of time presents opportunities as well as risks, or issues to deal with. However, the approach does tend to be very risk-centric; in the NAO’s 9 page summary of their ‘Managing PFI Assets and Services as Contracts End’ summary document, the word ‘opportunity’ features once, while ‘risk’ features 14 times.
Opportunities are present, though. For example, there is potential for significant savings to be achieved through the Target Operating Model post-PFI expiry. Part of the CSCT’s role should be to assist project teams with identifying opportunities to realise value from the change that PFI expiries necessitate. The CSCT should also highlight such opportunities at a cross-portfolio level. For example, economies of scale may be realised by identifying and aggregating requirements like Facilities Management across multiple sites that were previously governed by separate PFIs.
Other opportunities that may be present and the CSCT can capitalise on, and support project teams with, include structuring and strategizing for negotiations with providers in PFI supply chains that have a role in more than one PFI. This will need to be informed by the Horizon Scanning work described above, before a commercial negotiation strategy, encompassing all the matters requiring resolution or agreement across all PFIs that the party in question has some involvement in, can be drafted, agreed and then implemented.
This would have the significant benefit of preventing any commercially aggressive counter-parties from opting for a ‘divide and conquer’ approach to exit negotiations, as well as not confining any concessions to within the parameters of just one PFI.
Another area of significant opportunity that the CSCT should take the lead in exploring and developing, in conjunction with any project teams that this is an option for, is assessing the viability and business case for disposal of assets which at the end of a PFI are handed back, but for which there is no ongoing business requirement. Where this is the case, there may be substantial opportunity for revenue to be raised, particularly where the asset has been well managed and maintained under the PFI term.
Such an option would require a different kind of expertise to a more typical exit and handback process, and skills that are unlikely to exist solely within the Contracting Authority. Exploration of the possibility should take place at as early a stage as possible, in order to ensure that time running down does not unduly limit possible options.
Often, opportunities will be specific to the PFIs and the portfolio a particular Contracting Authority is managing. The CURSHAW team would be happy to have an introductory conversation about the specifics of your situation.
What’s next?
If you would like to have a further conversation on any aspects discussed in this blogpost with our expert team, who have lived and breathed this work and the complexities and nuances involved, please get in touch at hello@curshaw.com. You can read about the team and their experience here.