A Curate's Egg: The NAO Report on PFI Handback

Ten minutes in to the National Audit Office (NAO) report on Private Finance Initiative (PFI) Handback and I'm ready to pen a note that it's sailing perilously close to stating the obvious.  The sceptic in me is astonished that having surveyed 107 PFI contracts, the NAO could reach conclusions that anyone with a basic understanding of PFI could have come up with (and if you don't believe me take a look at my note here).Despite my rush to be critical, once you dive into the detail there are a few interesting points raised by the report (or to give the report its full title 'Managing PFI assets and services as contracts end' which you can download here). Although I'm not persuaded that it delivers any earth shattering news.First off, what are the conclusions of the report that are seemingly so obvious?

• The public sector does not take a strategic/consistent approach to managing expiry - well that's probably consistent with the approach to the management of PFI contracts as a whole. The report also makes the case for support from central Government
• The public sector needs to start planning for life after the PFI contract - how will a procuring authority procure the services post handback? Will these be delivered in-house or outsourced?  If the assets don't return to the public sector (and there are some projects where that is the case), does it have a continued need for those assets?
• Some authorities don't have a clear view as to the condition of the PFI assets - the report suggests that if the asset condition isn't monitored regularly, there is a greater risk of non-compliance on handover. Whilst on the face of it there is nothing stopping an authority conducting condition surveys (although the NAO cites contractual restrictions in early contracts), I'd gently make the point that this risk should be mitigated through the operation of the payment mechanism and the safety valve of the handback process
• The public sector will need more time than it thinks to prepare for expiry - the NAO has found that many authorities start to plan more than four years in advance of the expiry date, but recommends that planning should start seven years out. Now I'm all for early planning, but that does seem a bit keen.  But I do accept that planning for service delivery after expiry needs advance planning - after all the original project would have had a long gestation period and any replacement will require similar consideration
• Authorities are going to need to resource up - many of them recognise that they may be lacking the necessary in house skills and are planning to engage consultants
• There is potential for disputes - apparently authorities will want to receive an asset in the best possible condition, whereas contractors will want to minimise expenditure. I almost fell off my chair
• Handover provisions in early PFI contracts can be a bit messy - there is a high degree of familiarity with the SoPC handback arrangements, but early contracts can vary considerably and might not always fully protect the public sector

In fairness the report does deliver a few interesting thoughts and insights.

• Collaboration - a collaborative approach between the public and private sectors should be adopted in order to ensure a successful handover. Given the scope for disputes, it would seem sensible to avoid an adversarial approach which will be both time consuming and costly
• Managing the relationship on a stakeholder wide basis - the NAO notes that whilst 328 authorities have PFI contracts, private sector ownership is concentrated in the hands of a small number of investors and therefore it makes sense to adopt a portfolio approach. If conducted in the spirit of collaboration this could deliver efficiencies for everyone and should be encouraged.  However, the report suggests that there should be a degree of horse trading across contracts involving the same investor which are reaching expiry within the same time frame in order to strengthen the public sector's negotiating hand.  That doesn't seem particularly collaborative to me.
• Some authorities don't have a complete suite of contracts ­- the original contract may be missing and/or there may be an incomplete picture of the variations over the years. My own view is the parties will need to reach a common understanding as to the status of the contract before embarking on handback - without an agreed starting point discussions will get bogged down in arguments
• Improving handback provisions - some authorities are negotiating improvements to handover provisions where they are lacking in detail or unclear, either by way of amendments to the contract or by agreeing methodologies (eg: on the valuation of certain assets). This approach could well assist in avoiding needless disputes and could be addressed as part of the contract collation exercise
• Lifecycle - many authorities have no visibility over the size of the lifecycle fund and the associated lifecycle programme. In some instances authorities have been able to identify gaps between amounts paid into the lifecycle fund and lifecycle expenditure.  This gives rise to concerns around asset sweating and how that could impact on the condition of assets on expiry
• Asset management - 50% of respondents to the survey did not maintain an asset register - they do not have an accurate record of the assets being managed under the PFI contract. How can you operate a handback process if you don't know what's being handed back?
• A vindication of PFI? The NAO notes that as PFI contracts expire there is an opportunity to examine whether they are in better condition and have been better maintained than public sector equivalents.  It has always seemed to me that handback presents an opportunity to demonstrate the advantages of the PFI model.  And who knows, if handback delivers well maintained assets back to the public sector, perhaps new life can be breathed into PFI?

Overall, I remain unconvinced that the report sheds much light on PFI handback.  However, the key message that the public sector needs to start planning now is inescapable.  But we should not lose sight of the fact that the handback challenge also needs to be met by Project Companies and FM contractors.  The private sector needs to give consideration to many of the issues raised by the report and this point seems to have been missed by the NAO.