Preparing for PFI Handback - learning from the Scottish approach

Scottish Futures Trust encourages public authorities to prepare for PPP (PFI) contract expiries

In the current pandemic, it has probably not escaped your attention that the approach of the Scottish Government to the removal of lockdown measures, has been rather more cautious and measured than that of England. In just the same way, a cautious and measured approach is being advocated through the Scottish Futures Trust (SFT) to the forthcoming end of PFI project relationships between public and private sector parties. Scotland has always referred to PFI (private finance initiative) as PPP (public private partnership) and we use that terminology when referring to the Scottish position. PFI Handback is beginning to receive the attention that it very definitely deserves. We previously highlighted the recent National Audit Office report based upon surveys of public authorities with PFI projects and the degree to which these authorities were preparing for the expiry of contracts (a number of contracts expire imminently and increasing numbers going forward from there). A link to our previous briefing can be found here. The SFT is a government sponsored body. Unlike the position in England, SFT has been positioned by the Scottish Government to have a more influential oversight of all projects within Scotland regardless of whether the project owner is involved in health, education, prisons or other functions. In England, health, local government, the Home Office and Ministry of Justice are more likely to work independently. In the SFT's recently published report “PPP Projects Nearing the End of Contract: A Programme Approach” it provides a very compressive road map for project owners. It will be essential reading for PPP providers, their investors and funders who will also want to anticipate and prepare for contract expiry. The National Audit Office approached the issue of handback of English PFI assets only with the intention of raising the profile of the issue - drawing attention to areas in which public authorities needed to identify potential weaknesses in their current project position - such as knowledge of the condition of PFI facilities. It is, after all, a watchdog for public expenditure, and not in any way a decision-making or guidance giving body in areas such as PFI. The report was founded upon research including interviews with personnel from a number of public authorities with PFI projects.

The SFT report in overview

There are approximately 120 Scottish operational PPP projects. SFT has established over 20 projects will reach the end of the contract term in the next 12 years.The timeframe selected is interesting and an example of the more cautious approach being taken. The National Audit Office considered it only necessary to encourage preparation for handback to commence eight years out from expiry, not 12.The report has been developed on a multidisciplinary basis. It encourages project owners to respond in similar fashion, developing a project team to oversee handback of the project asset from multiple perspectives, including asset condition, procurement of future support services, employment including TUPE implications and contract management through to the project end date.Authorities are, effectively, exhorted to be well-organised ahead of the point in time at which they will need to engage with the PPP provider over matters of detail.In order to encourage public authorities to think of PPP expiry as a project in its own right, SFT is advocating a programme approach including considering having a project board with oversight responsibility. Condition surveys of the PPP facility will be an important consideration in the run-up to expiry. SFT has provided authorities with a fully developed template to facilitate the development of an initial survey document.

What are the key messages delivered through this report?

There are a number of key points - notably the following: The importance of budgeting for the resource requirements involved in preparing for, and securing a smooth handover of the PPP facilities. Authorities should prepare to devote the time of personnel to the handover and also budget for external professional advice. The importance of establishing and ensuring that outstanding life-cycle and other building condition works should be identified early in the process. Project owners are to be encouraged to secure building condition surveys well ahead of expiry. While the contract will usually provide for a final condition survey towards the end of the life of the contract, authorities are being encouraged to secure a survey perhaps five years prior to an expiry in order to ensure there is a realistic timeframe for carrying out any complex remediation work. Given FM services will be provided as part of the PPP, TUPE considerations necessarily come in to play. Clearly, an employee and pensions related work stream will be required. The report identifies ownership and the future maintenance of furniture, fixtures and equipment as a significant consideration. For example, are there specialist parts and accessories held in stock by the PPP Provider for mission-critical equipment and, if so, what happens to the ownership of that at expiry? Authorities are even reminded there are issues arising from assumption of full ownership of the facility by the authority in areas such as legislative requirements including fire, electrical and water testing, all of which will fall back upon the authority where previously provided by the PPP provider The PPP contract will need to be assembled in a manner which allows the authority to have a complete understanding of its position at termination. Given the long-term nature of contracts of this kind, it would be rare for the contract not to have been amended from time to time. Achieving an agreed position with the PPP provider through, for example, an updated copy of the Project Agreement (known as a restatement) would be a good early exercise to be undertaken. And as the contract is reviewed, it may be found that the detail around expiry is lacking in particular areas and this may affect not just the authority but also the PPP provider. On that final point, authorities are, perhaps controversially, encouraged to look at the position of both parties under the contract as matters will be at the expiry date - taking into account the extent to which contract rights and obligations have been specified to apply in the run up to expiry. It is suggested that authorities take the position set out in the project agreement as just a benchmark against which to negotiate any particular commercial position that has, perhaps, not been covered off in the most effective way so many years ago when the contract was agreed with the PPP provider. In other words, if there are weaknesses identified in the PPP provider's position and the authority itself needs to gain something of advantage then it may be worthwhile developing a negotiation strategy which could lead to varying the detail of the contract expiry arrangements.

Conclusion

The report is particularly comprehensive, addressing issues of significance for not just the authorities, but also the PPP providers and their investors and funders. These private sector participants can expect to see the handover process for Scottish PPP assets well organised.We commend the report to all participants, not just in relation to Scottish PPP projects but, also, equivalent projects south of the border. The report presents a thoughtful way of understanding how the public sector should be preparing for PPP expiry.Click here to see the SFT report.