_How to plan for your PFI expiry: a Knight Frank expert explains

What is Private Finance Initiative (PFI)? 

Launched in 1992, the UK’s Private Finance Initiative (PFI) programme creates partnerships between public and private sectors. Private firms are contracted to design, build, finance, manage and maintain public facilities and infrastructure over a long-term concession.

Since the scheme’s launch, over 700 major public sector projects have been delivered – with a combined value of £57 billion.

With most contracts lasting a minimum of 25-30 years, early PFI projects are now beginning to reach their expiry date - whilst many more schemes will continue to operate for years to come.

What are the risks of expiry? 

The majority of PFI projects (82%) are managed by local bodies, rather than central government. Many are unaware that assets within their estates are currently managed under PFI contracts, and it is therefore unlikely that they will have the resources or neccessary experience at a local level to understand and manage the expiry process. In fact, in a recent National Audit Office survey, 37% of respondents said they had not yet assesed or considered their options. 

If a PFI contract expires without adequate preparation (well in advance of the expiry date) there is significant risk that the public will fail to receive vital services for a period of time. Social care facilities, libraries, prisons, courts, schools and leisure facilities all face this risk.

The Infrastructure Projects Authority’s (IPAs) ‘Expiry Health Learnings Report’, says: “PFI contracts provide significant public services including schools, hospitals, social care services, waste services, roads, housing, prisons and military capabilities. As such, it is vital that these contracts are effectively managed through their life to ensure the public gets the services they need, and for which they are paying.'' 

How do I prepare for a PFI expiry? 

All contracts are required to receive a ‘PFI Heath Check’ seven, five and three years ahead of expiry – to establish the project’s readiness for expiry and to provide advice to the authority on how to improve readiness. The health check involves a review by the IPA of key project documentation and a structured interview with the contracting authority.

A proper strategy is essential to determine how and by whom the assets are managed and maintained after expiry.

What is the right strategy?

Several important questions will need to be answered to determine this strategy:

• Is the asset still required to deliver the services?
  Many of these assets were built and delivered several decades ago, and the way local authorities provide services to local people may have changed drastically in that time.
   
  As an example, services such as GP appointments are now frequently carried out remotely using voice or video links, calling into question the need for large town-centre primary care facilities.
  
  Our Geospatial team can carry out complex mapping of localities across the UK to determine how services are being used by various demographics. If the asset is no longer required post-PFI expiry, options appraisals can help local authorities understand and consider their options. This includes redevelopment, disposal or leasing to a third party – all of which could provide income generation.
  
  
• Does the asset meet current and future requirements?
  This can include suitability of floor plans and layouts, technology and energy efficiency and how the asset fits into a wider Zero Carbon agenda. For example, under the contract the private sector partner may be obliged to replace an existing gas boiler on a like-for-like basis.
  
  
• Could there be an opportunity for the authority to raise capital on the asset?
  There may well be an opportunity for the authority to raise capital and generate revenue on these assets. Developing a lease/leaseback structure to release up front premium in exchange for a longer term lease on the asset could be one option. Arranging leasing deals with third party occupiers, deal structuring and fund raising can all also be provided at this stage.
  
  A business case can be developed for all of these options to help inform the wider strategic estate plan. Asset surveys will also play a part in understanding if a major reconfiguration is needed, and if there are more cost-effective alternatives. Equipment and technology will be analysed to ensure it is up to date, and the asset will be reviewed to ensure it is compatible with the local authority’s low or zero-carbon agenda. If upgrades are needed, such as installing air source heat pumps and electric car charging points, funding options can be provided to help inform the strategy.
  
  
• If the asset is being transferred back into local authority control, does it meet the ‘Handback Criteria’?
  If the asset is being transferred back into local authority control, it must meet the ‘Handback Criteria’. When a PFI contract was signed 25-30 years prior it would have stipulated the condition the asset needed to be in at the time of expiry. Early schemes were not as rigorous in their detail on this point compared to later schemes, meaning PFI expiries occurring over the next five years will require a lot of negotiation. We can support by liaising with legal advisors to review the contract documents and carry out condition surveys of the assets – which will include reviewing and reporting back on maintenance records and annual plans, warrantees, and lifecycle cost plans. If the facility does not meet the Handback Criteria, we can support with the procurement of rectification works.
  
  Once the Handback Criteria is met and the asset comes back into the control of the local authority they can chose to manage and maintain the building themselves, or procure a private sector organisation (or organisations) to manage and maintain the building under a new facilities management contract. This procurement process can be lengthy, involving drafting and negotiating contract documentation, agreeing scopes, budgeting, condition surveys, GDRP and TUPE considerations.
  
  Failure to allow enough time to plan for either of these scenarios could result in the public sector having to extend the existing PFI contract while a longer-term solution is found - a short-term solution that would not provide value for money.

What happens next – and how we can help you

Helping local bodies assess their needs and prepare for their PFI expiries will require a range of experts across several different specialisms. Knight Frank’s in-house multi-disciplinary team can offer much of what has been explained in this article – from reviewing contracts and carrying out a health check on the asset, to providing advice about redevelopment, capital raising and revenue generation, as well as post-handback support.

For specialist legal, technical and financial services, Knight Frank has created a collective of trusted, external advisors that provides local authorities with a “one-stop-shop” when it comes to managing their PFI expiry, and takes the hassle out of planning for the future.

With 196 PFI contracts due to expire by 2030, there is no better time to start considering your exit strategy.

With proper planning and a solid estate strategy in place for the years to come, local bodies will be able to seamlessly deliver essential public services and perhaps even discover they are able to turn their PFI-managed schemes into successful capital-raising, income-generating assets that will deliver long-term commercial opportunities for years to come.

Nigel Badham, Partner in Knight Frank's Public Sector team

Originally written for ACES' Terrier.