Come survey with me: The importance of surveys in PFI handback

"Don't worry about the handback provisions - we'll all be retired by then". This was a constant refrain when I was advising on PFI projects during the noughties. And yet, many of us are some years off from retirement and as this decade advances, there will be a surge in the number of PFI projects reaching expiry.

In the vast majority of cases the facilities will revert to the procuring authority, which means that we need to dust down those often ignored handback provisions. One of the key features of the handback process is the need to conduct condition surveys. However, there is a fair amount of ground work that needs to be carried out before the surveys can be implemented successfully.

The Handback process

We all know how the handback provisions work, but to recap for those in need of a refresh:

• 24 months or so before the expiry date, the procuring Authority carries out a survey to assess whether the facility meets the handback requirements;
• if the survey shows that the facility does not meet the handback requirements, the project company is required to carry out the relevant rectification works;
• the authority is entitled to deduct the costs of the rectification works from the unitary charge for the remainder of the project and place those funds in a retention account as security for the rectification works;
• once the works are complete, the retained funds are released to the project company; and
• if the project company does not complete the works, the Authority can carry out the works and make withdrawals from the retention account to pay for the works.

However, before the surveys can be carried out, the parties will need to understand the scope of the PFI project and the precise nature of the handback requirements. This will require both parties to undertake a number of activities in advance of the survey.

What assets are being handed back?

Firstly, the parties will need to assess which assets are subject to the handback process. The position may be complicated by a number of factors, such as:

• retained estate
• post completion construction works completed by the project company where the project company is not responsible for ongoing maintenance
• post completion construction works completed by the procuring Authority or a third party which don't form part of the PFI project
• descoping variations (for example, the transfer of general change in law risk back to the procuring authority, the removal of services or a relaxation of service standards)
• retrofitting of energy generation assets or energy efficiency measures
• changes to the PFI site (ie. the 'red line' plan)
• changes to the responsibility for the provision of furniture, fixtures and fittings
• bespoke equipment provision arrangements (for example, the provision of managed equipment services on NHS projects or ICT services on schools projects)

The key task here will be to gather together all of the contractual documentation in order to have a holistic view of scope of the project. This will include the original project 'bible' together with any variations. It should be borne in mind that variations could range from formal deeds of variation and authority change notices to informal email correspondence or even working practices which have developed over time.

What is the required condition on expiry?

Once the parties have established what assets are subject to the handback requirements, the required handback condition will need to be agreed. There are two approaches to the handback requirements - either a specific standard (eg. Estate Condition B in relation to NHS projects) or more generic standards, where the requirement is that facilities must be in a condition which is consistent with the project company having complied with its obligations under the Project Agreement.Typically we see generic handback standards on local government PFI projects. Whilst a generic standard looks like quite a bland statement, don't be lulled into a false sense of security. In order to translate that bland statement into a tangible set of hand back requirements which can then be used to assess the condition of the facilities, detailed legal and technical analysis will be required. In addition, these standards will need to be agreed between the parties before the surveys are implemented. As a result, the parties need to be considering the scope of the handback survey well in advance of the contractual date for the commencement of the surveys. 

How long will the survey take?

It is also worth considering how long the condition survey will take to complete. Anecdotally, we are aware of an acute hospital where the condition surveys will take around year to complete. In the context of a two year handback process, that doesn't leave a huge amount of time to agree a programme for remedial works and to have them carried out. There is a risk that the remedial works might be completed at the expiry date or (even worse) that there will still be ongoing discussions around the required remedial works. This would seem to be a bad outcome for both parties who should have a shared interest in ensuring and orderly handover of the facilities. As a result, we would suggest that consideration be given as to whether accelerating the condition surveys would be beneficial for the parties.Another aspect to consider is the use of the condition survey when procuring a replacement service provider post expiry. Depending on the level of risk transfer that an Authority is seeking to achieve, the condition survey will be a key tool in delineating the responsibilities of the incoming services provider. Additionally, delays in completing the remedial works may impact on the ability of an authority to procure a replacement FM solution - ideally there would be a smooth transition to the incoming provider at the expiry date with all remedial works completed. 

Partnership and Collaboration

Overall, we would suggest that procuring Authorities (local authorities in this instance) will be keen to ensure that facilities are returned to them in the required condition without a litigious process. In that respect, we believe that the interests of the parties should be aligned. From a reputational perspective, private sector investors will want to comply with their contractual obligations. From a practical perspective a protracted process will not suit their interests; they will wish to avoid wasting valuable management time on a dispute and they be keen to deploy their capital elsewhere. In all of this, collaboration between the private and the public sector will be essential to ensuring the success of handback process. Let's not forget that PFI projects were initially entered into in the spirit of partnership and, in the context of handback, that ethos is needed more than ever before. Please get in touch with James Larmour to discuss the topics covered in this article.