Rob Hann, former Head of Legal at 4ps/Local Partnerships, gives his unique insight into the pending expiry of many PFI contracts in the local government sector and asks who will take responsibility for the next generation of local government assets and services, an issue that is becoming ever more urgent…..
In a previous article I took a look at the National Audit Office (‘NAO’) Guidance which identified the fact that many major PFI contracts across the public sector, are reaching the end of their respective contract terms over the next five-ten years. That guidance can be accessed here.
For my own sector, local government, these projects range across the wide spectrum of local authority service areas including: group schools PFI projects (some schools will be built under the later building schools for the future programme), multi-purpose joint service centres, leisure centres and swimming pools, roads, transport and street lighting projects, waste management facilities, housing and extra care schemes, care homes, fire, police and other blue light services and much more will all be coming to a close at various points over the next decade. The need to engage well in advance of the term end date cannot be over-stated.
These projects were always complex but at least when they were conceived the local authorities had a significant amount of centrally based support, set up specifically to assist with the huge challenges they faced as the programme of investment that was to last for 25 years was rolled out. Bodies like 4ps, PUK, BSF etc, were established to help promote and develop a pipeline of good quality projects and to ‘warm up’ the market ready to bid for contracts following advert in the OJEU. Many of the central government departments set up private finance units where authorities who were part of the PFI programme could seek help with specific sector and project specific issues. Whilst the names, personnel and remits of such organisations have changed, some of that support remains but it is more fragmented than in the early days of PFI and is rarely free at the point of use. Experienced, available transactors are scarce and come at a premium.
However, what is also terminating (along with PFI contracts) is the additional finance made available by central government to fund asset-based services over a 25 year term. PFI credits (as the funding was known originally) and PFI grant (as it became known in the latter stages of the local government programme when budgets were devolved to individual PFI central government sponsoring departments) - hereinafter ‘PFI Funding’- provided individual authorities with the lion’s share of additional funding needed to pay for capital investment and partly meet operational costs over the respective contract terms.
This was ‘extra’ money provided by central government to local government following (in essence) a series of competitive pre-procurement competitions whereby local authorities bid against each other and within sectors to secure millions of pounds each and with an HM Treasury backed guarantee of payment to local authorities of up to 70% of the total costs involved in such schemes. This extra PFI Funding was the glue that held the PFI together in local government. No local authority in its right mind would have contemplated PFI and all its complexities and costs, without such copper-bottomed funding support.
The former Labour Government to its credit, also realised how important these funding promises were to contractors seeking to enter the PFI market and who would be ‘at risk’ during what could often be protracted and costly 2-3 year procurement processes. The then Government fully recognised that those contractors would need to be provided with some degree of confidence that, if a scheme with an HMT ‘tick in the box’ for funding, reached financial closure a few years down the line following procurement, the individual authority would be ‘bankrolled’ for the majority of the lifecycle costs involved. True the individual authority also had to feel some financial ‘pain’ but generally (each scheme has its own specifics) this was around 30% of the total capex/operational costs.
Come the end of the PFI contract term all of that funding (pretty much) will also terminate. True, many local authorities will have rights in the majority of PFI standardised contracts to secure the transfer of assets to the authority which have been provided and maintained by the PFI contractor. Much of the NAO advice (and advice from the myriad of professional service firms which now see an opportunity to offer their services to local government) to date has been around checking the condition of assets, securing information about service provision and checking handover provisions. All of that is absolutely necessary of course, but what this misses is the fact that the authority will need to continue, in most cases, to deliver services going forward and to do that, many will be looking to go out to the market to seek new service providers. This process will need to start well in advance of any PFI termination. Sitting in the middle will be an incumbent PFI service provider who will, no doubt, also wish to secure the best opportunity for it to win another term following that competitive process. This may act as a disincentive to that incumbent to fully co-operate with the authority who will want specific information about the costs of such services to ensure a transparent process. Alternative bidders may well be put off from bidding in any case given the depth of knowledge the incumbent will have about the service it has delivered for two-plus decades.
However, of perhaps greater concern is what the state of the market is at the relevant time? Are there sufficient bidders out there who see these possible opportunities as a benefit? Will they look at local government, now without PFI Funding, coupled with its rather unfortunate historic problems with vires issues and see local government as a bad risk, not worth the cost and anxiety of a long risky procurement exercise, especially if there is no certainty now over the local authority’s ability to afford to pay for services?
And where is the incentive for the authority to invest scarce resources in developing proper and well-argued business plans and business cases? Who is going to scrutinise a business case for re-investment in each of the sectors which now will require re-procurement? All of this at the time of greatest need and coming at the same time as the biggest economic recession the World has ever known?
Nobody to date appears to be arguing for substantial new investment to help local authorities to meet at least some of the costs of procuring and paying for the next generation of local authority led asset-based services which will be needed as each of these projects reaches the end of their respective contract terms.
Who now is developing the procurement packs and standardised processes which were provided back in the day by the likes of 4ps/PUK? What procurement route do we even use post Brexit – competitive dialogue, competitive procedure with negotiation or some post Brexit UK process yet to be devised and understood by those who have to stump up the money to bid for contracts?
Who, now, has the remit to tow the public sector commercial line? Who is developing the much needed new version of standardised of contract terms (SoPC) in the light of (not least) the double whammy of the COVID-19 health pandemic and Brexit? Any ideas on standard form drafting for Force Majeure, relief events, change of law, business interruption insurance? Anyone?
So whilst the NAO guidance provides a timely reminder of the need to engage early on PFI contract termination issues it also provides a potential golden opportunity for HM Treasury and the Boris Johnson Government to step up to the mark and put its hand in its pocket to properly assist and help fund new investment in fast disappearing PFI infrastructure. Local councils must be given a new opportunity to pitch for a new tranche of funding.
Think big Boris! £1bn for starters?
Local authorities need the money to pay for services for the schooling of the next generation of children, for road users, for those in need of housing or social care and much, much more.
Sadly, For now it looks like local councils are, pretty much, being left to their own devices as to what comes next (post PFI), subject to a bit of support around hand-back of some assets (which may or may not be fit for purpose after 25 or so years). If this is the extent of Government policy it is, myopic at best and a missed opportunity, especially in a time of national economic crisis when bold investment strategies are needed to reboot UK PLC.
The PFI programme which was rolled out across the public sector with such panache, cash and fanfare is now being allowed to quietly die without so much as a whimper from those who should be making the case for a substantial new cash injection targeted at local government and, indeed, the wider public sector.
A poem use in different times of national crisis by Sir Winston Churchill, sums it up for me (tweaked for current purposes):
"Who is in charge of the PFI train?
The axles creak, and the couplings strain.
For the pace is hot, and the points are near, and Sleep hath deadened the driver’s ear:
And signals flash through the night in vain.
For no-one is in charge of the PFI train!”
Rob Hann is a local government solicitor, consultant and author who managed the development the LA sector specific PFI standard form contracts and procurement packs, providing the local government input to the standardisation of PFI Contracts (SOPC) and helped develop many PFI projects between 1996 and 2016 in his role as head of legal at 4ps/Local Partnerships.