20.2.1 In most PFI projects, the Authority's long-term objectives will be best served by requiring either automatic transfer or reversion of the Assets to itself on expiry of the Contract or at a minimum an option to purchase the assets at nominal cost. This may be because:
• legal constraints prevent any practical alternative option, for example, the private sector cannot be a highway authority so roads must revert to the public sector Authority;
• contracts which involve Assets, such as hospitals and schools are specifically designed to cater for a particular service. In these sectors, the Assets have a useful economic life if retained by the Authority but there is no realistic alternative use for the Assets. There may be only limited scope for alternative use on expiry of the Contract and conversion is likely to be costly;
• the Authority requires long-term use of the Asset for the continued provision of its services;
• bidders are likely to discount the residual value of the Assets; or
• the expiry of the useful economic life of the Asset means it has no value but there is a separate reason for the Asset, such as any freehold of the land, to revert to the Authority.268
20.2.2 The Contract must, however, protect the Authority's interest by not restricting the options exercisable at or immediately before the end of the Contract. These may include:
• taking possession of any Assets269 at no cost;
• retendering the provision of the Service, with the outgoing Contractor making any Assets available to the new Contractor at no cost;270 and
• removing any Assets.
20.2.3 In most cases in which the Authority retains Assets at no cost, the Authority should consider the extent to which it should have recourse to the Contractor if the condition of the Assets reveals that the Contractor has not carried out all its contractual (for example, maintenance) obligations (this issue is dealt with in Section 23 (Surveys on Expiry and Termination)). This would not be necessary if such Assets had reached the end of their useful economic life (as may be the case, for example, in equipment based projects). The Authority should be driven by its operational requirements and value for money rather than by an attempt to create some residual value interest.
20.2.4 Suitable drafting (where no residual value risk has been transferred) is as follows:
20.2 Treatment of Assets at Expiry Date
(a) On or before a date falling no later than [12]271 months prior to the Expiry Date, the Authority shall notify the Contractor in writing whether it wishes to retender the provision of the Service.
(b) If the Authority wishes to retender the provision of the Service then:
(i) the Contractor shall do all necessary acts (including entering into any contracts) to ensure that the successor contractor obtains all of its rights, title and interest in and to the Assets with effect on and from the Expiry Date; and
(ii) the Authority will bear all costs of any retendering of the Contract on expiry.272
(c) If the Authority does not wish to retender the Service then the Assets shall transfer to the Authority on the Expiry Date and the Contractor shall do any necessary acts (including entering into any contracts) to ensure that the Authority obtains all of its rights, title and interest in the Assets with effect on and from the Expiry Date.
20.2.5 The parties may also wish the Contract to deal with a mandatory second term option with the existing Contractor (see Section 20.6.3) in conjunction with an open competition.273 If this is the case, then the retendering would have to be on substantially the same terms as the original Contract,274 so that this can be evaluated against other bids. The Authority must also consider what the effect will be on the Authority's option if it wants to retender on different terms. The effect of this may then be to transfer some residual value risk.
The provisions of Clause 23 (Surveys on Termination) are relevant in relation to assets with no alternative use.
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268 In some cases, the land will have significant residual value in its own right, notwithstanding that the other Assets may not (see Sections 20.1.1 and 20.5 (Transfer of Residual Value Risk)).
269 See Section 20.6.1.
270 Any retendering of the Service should allow the incumbent Contractor to rebid for the Contract.
271 This date should be consistent with Clause 23 (Surveys on Expiry and Termination) to enable a decision to be made in sufficient time to facilitate the build-up of an adequate retention fund where the Authority requires the transfer of the Assets to itself in accordance with paragraph (a)(ii). See Section 23.3.1.
272 Costs of retendering of the Contract by the Authority following termination for Contractor Default should not be borne by the Authority. See Section 21.2 (Termination on Contractor Default).
273 Such a competition may be subject to any procurement regulations applicable at the time.
274 That is, the Unitary Charge may be substantially different, particularly if the incumbent or incoming Contractor is not as part of the competition, purchasing any Assets, but is taking over existing Assets.