Spending watchdog warns public bodies on challenge of managing end of PFI contracts as disputes loom

More than a third of public bodies expect to have formal disputes as PFI contracts come to an end, the National Audit Office has found.

In a report, Managing PFI assets and services as contracts, the spending watchdog called on government departments to provide direct financial support to authorities to help fund dispute resolutions.

The NAO recommended that the Infrastructure and Projects Authority assess the value to taxpayers of providing authorities with access to a centralised pool of internal resources, such as lawyers and surveyors, during negotiations.

“It should also develop a consistent approach to resolving legal disputes, and an investor strategy which manages the relationship with private sector stakeholders across all PFI contracts,” the report said.

Overall, the NAO warned that public sector bodies risk underestimating the time, resources and complexity involved in managing the end of these contracts.

“With many contracts coming to an end from 2025, there is danger that important infrastructure could return to the public sector in an unsatisfactory condition and services could be disrupted unless a more consistent and strategic approach is taken.”

PFI agreements usually provide for the assets to be transferred to public sector ownership when contracts expire. There are currently more than 700 PFI contracts and the bulk will start to expire from 2025, the NAO said. In October 2018, the government announced it would no longer use PFI. 

The NAO warned that the failure of government to take a strategic or consistent approach to managing PFI contracts as they end “risks a poor outcome for the taxpayer from the expiry negotiations with the private sector”.

The report suggested that poor management of contract expiry could result in assets being returned to an authority in a worse condition than agreed in the contracts. This could lead to extra costs for the authority to pay for repairs and maintenance.

“Although it is the responsibility of special purpose vehicles (SPV) – private finance companies set up to finance, build and operate PFI assets over the contract term – to maintain the assets and report to the authority, the authority still needs to monitor assets during the contract,” the NAO said.

Around 55% of respondents to a survey of public bodies by the NAO recognised they needed more knowledge of assets’ condition. 

The NAO said it had found that many PFI contracts contained contractual limitations over what information could be requested from the SPV. “Around 35% of survey respondents said they had insufficient access rights to monitor the maintenance of assets, and there is evidence that PFI investors and sub-contractors are not cooperating with authorities to provide information – a fifth of authorities that asked for information said requests were ignored or denied.”

The watchdog said: “While authorities will want to ensure they receive assets in the best possible condition at contract expiry, PFI providers have an incentive to limit spending on maintenance and improvement work in the final years of contracts, as savings can be used to pay higher returns to investors. More than a third of respondents expect to have formal disputes, which can be costly for authorities.”

The NAO said many authorities started preparing for contract expiry more than four years in advance but there was a risk this was not enough time. A lack of adequate preparation risks increased costs for authorities and service disruption, it suggested, adding that if authorities do not prepare, services can be disrupted, or they may have no choice but to extend contracts. 

According to the NAO, early preparations, and a collaborative approach between public and private stakeholders, could help to ensure a successful exit from these contracts. In addition to its recommendations on dealing with potential disputes, it said:

• Government departments should encourage authorities to prepare for contract expiry as early as possible and develop a contract expiry plan “that identifies all the critical tasks and obstacles that may prevent a successful exit”.
• Departments should provide direct financial support to authorities where required, helping to fund dispute resolutions and hire additional staff.
• Departments and the Infrastructure and Projects Authority should help build sector specific expertise, and a range of tools, including specialist advice and guidance documents.  

Gareth Davies, the head of the NAO, said: “With the bulk of PFI contracts expiring from 2025 onwards, there is still time for government to make changes that will help public sector bodies to exit from contracts successfully.

“If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.”