Posted: 30 Jul. 2020 10 min. read

PFI expiry and the public sector - Key considerations for contract exit

The Private Finance Initiative (PFI) was introduced in 1992 to leverage private capital and innovation to deliver new infrastructure at a scale that would not be possible solely through public spending.  It did this though offering long-term contracts often covering design, finance, build, and operations. Many of these early PFI contracts are now coming to an end, with 54 expiring in the next 5 years. The sheer scale of contract exits will likely pose a serious challenge across the public sector. 

A recent National Audit Office (NAO) report considered this question and identified that organisations appeared to be underestimating the level of preparation (and time) required to facilitate exit. This report not only identified that preparations should begin up to 7 years in advance of expiry but also that 25% of respondents believed they lacked the necessary in-house skills to deliver the expiry process. 

So what should government departments be thinking about 7 years in advance of expiry? Some key areas of focus.

  1. Managing the incumbent supplier to deliver their day to day obligations: Feedback from both private sector PFI suppliers and government departments identified very mixed approaches to contract management across the public sector – of most concern were occurrences where departments had limited internal contract management capacity: the approach taken to day to day contract management sets the tone for exit.

    One element of contract management for infrastructure and real estate PFIs which acquires increasing importance as expiry approaches is lifecycle asset management, particularly any requirement to replace assets at the end of their useful life. It is noteworthy that of the 54 projects due to expire in the next 5 years, 44 have a real estate element to them.

    In many contracts, there is no requirement for the supplier to share asset condition information with their client meaning many departments will be unaware of the true condition their assets and the extent of any work to bring the asset back up to an appropriate standard.  This is reflected in the fact that the NAO report found that 55% of respondents recognised they needed more knowledge on asset condition before the exit process begins. Addressing this knowledge gap should be one of the first priorities for all departments, and has particular gravity for assets such as hospitals or prisons where the level of regulation and implication of asset failure is severe.
  2. Preparing for exit: The early PFI contracts were bespoke and many do not fully set out the provisions for contract exit.  Complex contract exit is rarely easy and 33% of respondents to the NAO believe there will be disputes near contract end. The need for formal disputes should be avoided if at all possible as it is both heavily resource intensive and time consuming. One mitigation to this will be for organisations to anticipate these hopefully avoidable disputes and ensure they are prepared to run difficult contract negotiations. Early engagement and proactive planning with the incumbent supplier, along with an understanding of the supplier’s objectives and approach to the contract negotiations could also further mitigate the risk of potential disputes ever coming to fruition.
  3. Planning for post PFI operations: Whatever the outcome of these infrastructure and real estate PFI expiries, there remains a need for a solution to be in place upon contract exit. In order to achieve this the department needs to understand what requirements it has for the asset going forward. Some immediate considerations include:
    • Does the asset revert to the public sector at the end of the contract (this is not always the case in early PFI projects)? If not does occupancy of the asset need to be secured (e.g. through leasing)?
    • Is the asset fit for purpose and is a refurbishment project needed (and how does this link to asset condition obligations)?
    • Does the organisation have sufficient funding in place to re-model the asset as may be required following contract exit?
    • Is a new footprint strategy required?
    • Does the public sector organisation have the sufficient in house expertise to operate the asset post expiry, and if not how do they upskill?
    • What new service contracts will need to be procured?
    • If the government were to go through the existing sourcing channels to procure the best value service contract for each service in each project, then it could be looking at multiple active sourcing programmes being live for each expiring contract. This would require a level of resource beyond BAU commercial requirements.

Key take away: The NAO report highlights the risks, concerns and scale of challenges facing the public sector as PFI exits near. The more planning that can be undertaken by the public sector, the better the challenge posed by these complex processes can be managed.



Claire O'Shaughnessy
Director, FA - Real Estate
+44 (0)20 7007 1752

Adam Rigby
Associate Director, FA - Real Estate
+44 (0)20 7007 4100

Jon Morley
Manager, FA - Real Estate
+44 (0)11 8322 2482 

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