PFI: dealing with the distress signals

Caroline Mostowfi looks at the lessons to be learned from a recent report on addressing the risks of PFI project distress.

The topic of PFI expiry has been hitting the headlines in recent months as its significance slowly filters through to the public. The case in Stoke, in which schools were engaged in a battle over repairs, showed how PFI expiry can and will affect every day people as expiry of more than 600 live projects loom.

Last year we sought to highlight the issue with a report PFI Expiry: How London boroughs can get ahead which illustrated how many London boroughs were not adequately prepared for PFI expiry. Whilst focused on the capital with a its own set of circumstances, examples like Stoke illustrate that this is a wider national issue.

New report

In March an excellent resource for those participating in operational PFI projects was issued by the Infrastructure and Projects Authority (the IPA, now part of the National Infrastructure and Service Transformation Authority) entitled Navigating the risks of PFI project distress.

Its publication follows on the White Frasier Report in 2023 and (albeit not explicitly) is presumably influenced by activity that the IPA has been undertaking through its project “health checks” and its support on those PFI projects that require restructuring or rescuing.

But what does the new guidance outline and what can we learn from it?

More than projects in distress

Whilst the title of the guidance is certainly headline grabbing, its potential audience is far wider than those faced with a project that is going (or is about to go) badly wrong. A great deal of its content is relevant to those who may simply be seeking a better understanding of how their project is structured, how it works and how it could be better managed. For example, understanding rights to access data; establishing appropriate governance; tracking the financial position of Project Co and ensuring value for money are all examples of matters that are equally relevant to the operation of a project, irrespective of whether distress is around the corner.

The end of fee farmers?

The last few years have seen the emergence in the PFI sector of a category of consultants known as “fee farmers”. Often possessing a mix of commercial, legal and technical expertise, their offer can generally be summed up as one of recovering their fee from amounts that they help the public sector recover from Project Co (often by way of deductions).

Fee farming is not though without its critics. Many see this approach as driving the wrong behaviour in what is purportedly a “partnership” between the public and private sector. Interestingly, the guidance goes out of its way to comment that: “Parties should also be clear that it is not appropriate to enter into conditional fee arrangements for PFI Disputes.” 

This could prove to be yet another blow to the fee farming community.

Protecting public finances

Understandably, the protection of the public purse is one of the Government’s primary objectives when considering the rescue of a PFI project. The guidance is entirely consistent with that narrative.

Rescue solutions that risk a change of “classification” or seek to transfer additional risk to the public sector have been seen as the clearest red flags when considering a threat to public finances. The need for rigid adherence to obscure complicated accounting standards that are understood by very few, is often seen as an unnecessary constraint by those focussed on more commercial and objectively beneficial solutions.

However, there is only one mention in the guidance of classification and one of risk transfer to the public sector.  Rather, the guidance places great emphasis on value for money in its broad sense; considering factors such as “economic, financial and operational consequences of different potential outcomes”, “project company insolvency” and “wider impacts, including on the continuation of any PFI grant”. It also recognises that applying “contractual remedies to their fullest extent” may not always produce value for money. 

It is unclear whether this nuanced shift is deliberate or indeed real. If it is intended, this is a welcome development. Permitting greater flexibility in rescuing projects via solutions that do not tick every technical regulatory box but which the public and the private sectors embrace and which deliver the “right” outcome, will result in greater, quicker, cheaper and more appropriate rescues.

Is it realistic?

The guidance’s thorough approach to problem solving; its adoption of sound project management principles; its use of comprehensive risk assessments and data gathering and its endorsement of hiring the right external advice, are all consistent with a model approach to rescuing a project.

But models rarely function perfectly in the real world. As our report with research from the Future of London showed, a dearth of resource (particularly financial but also skilled contract management) is one of the factors behind the chequered operational record of many PFI projects and a significant reason behind projects running into trouble.

With increasing pressure on the Chancellor to curb public sector spending even further coupled with her commitment to reduce the public sector’s use of private sector consultants, it is difficult to see how the IPA’s “best practice” model can be fully implemented in the real world. 

With increased murmurings of the reprise of PFI or its variant there has never been a better time to debate this often controversial route to delivery. For local authorities there is much to consider to prevent projects going into distress.

Caroline Mostowfi is a partner at Devonshires.