8 The public sector does not take a strategic or consistent approach to managing PFI contracts as they end and risks failing to secure value for money during the expiry negotiations with the private sector. Across the UK, 328 authorities are responsible for PFI contracts, with 182 authorities responsible for only one contract. These authorities are at various levels across government, with local bodies, such as individual NHS trusts and local authorities, managing 82% of contracts. As such, they receive varying degrees of support from sponsor departments or supporting bodies, such as the IPA. Around 30% of survey respondents have told us that they would welcome more support and want the opportunity to learn from other authorities; government is starting to address this. In contrast, ownership among private investors is far more concentrated. The 10 largest private investors in PFI own more than 50% of the contracts, and the top six management companies are responsible for almost 45% of the contracts. This concentration allows the private sector to take a portfolio approach to expiry negotiations which risks putting the public sector at a disadvantage (paragraphs 1.8 to 1.17 and 2.6, Figure 3 and Figure 8).
9 There is a risk of increased costs and service disruptions if authorities do not prepare for contract expiry adequately in advance. At the end of the PFI contract authorities will have to decide whether services, such as maintenance and cleaning, are either provided in-house, by a new contractor or by the current provider. If authorities do not prepare properly there is a risk to service continuity or they may have no choice but to extend the contract. Where assets do not return to the public sector, authorities will still need to decide if they want to continue to use the assets. If so, they will need to negotiate with the PFI company or procure alternative assets. For example, at the end of an accommodation PFI contract the authority had to buy the homes it still needed, running into the tens of millions of pounds. Some PFI school contracts have more unique challenges - as some schools have been reclassified as academies, the future ownership of the assets and the responsibility for administering the PFI contract are not aligned. Authorities may not be incentivised to use their resources to manage the expiry process effectively knowing that they will not retain ownership of the assets. This creates a risk of service disruption and increased maintenance costs after expiry, if assets are returned below the contractually stipulated condition (paragraphs 3.8 to 3.14, Figure 6 and Figure 12).
10 Some authorities have insufficient knowledge about the assets' condition, which risks them being returned to the public sector in a worse quality than expected. Around 55% of respondents recognise they need more knowledge of the assets' condition. It is the SPV's responsibility to maintain the assets and report to the authority, but the authority needs to monitor asset condition. Authorities can gain this knowledge by proactively monitoring assets during the life of the contract, but this does not always happen - 30% of survey respondents are not monitoring annual maintenance spending and 50% do not maintain an asset register. Many PFI contracts, particularly those signed before 2000, contain contractual limitations over what data can be requested from the SPV, such as maintenance expenditure and the ongoing assets' condition. Around 35% of respondents stated they had insufficient access rights to monitor the maintenance programme adequately. There is also evidence that PFI investors and sub-contractors are not cooperating with authorities to provide information - 20% of survey respondents who had asked for information considered the contractor had been uncooperative, with data requests being ignored or denied on grounds of not being a contractual obligation. Not continually monitoring the assets' condition increases the risk of assets being returned below the contract's stipulated quality. Four out of nine survey respondents whose contracts have already expired were unsatisfied with the condition of the assets they took ownership of at expiry (paragraphs 2.7 to 2.19, 3.22, 3.23 and Figure 4 and Figure 10).
11 Many authorities start preparing for contract expiry more than four years in advance but there is a risk this is not enough time. Most authorities are confident they have started early enough, with 57% of survey respondents preparing more than four years before expiry. Experience from expired contracts, however, suggests that preparation time is often underestimated, and the process should be started as early as possible. Preparation times will vary across contracts depending on the complexity and the treatment of assets on expiry. The IPA's guidance recommends preparations start seven years in advance. Highways England, which is managing the expiry of multiple PFI road contracts, is preparing seven to eight years in advance of expiry (paragraphs 3.15 to 3.21, Figure 13, Figure 14 and Figure 15).
12 Authorities recognise that contract expiry will be resource intensive and require unique skills, and expect to fill gaps with consultants. During the life of a PFI contract, the priority for each authority is to ensure the assets are operational and running smoothly. In the final years of the contract, authorities will need to deliver the contract expiry process alongside day-to-day management, creating additional pressure on resources - about 30% of respondents anticipate not having enough staff. The skills required to deliver the expiry process, such as contract negotiations and asset management, differ from those needed to manage the day-to-day running of the contract. About 25% of respondents consider they lack the necessary in-house skills to deliver the expiry process and 60% are planning to hire consultants. The government's piecemeal approach to hiring consultants, such as legal experts, may not represent value for money in the long term. Authorities told us they would appreciate standardised procurement documents and processes to support them when hiring consultants (paragraphs 2.2 to 2.6 and Figure 9).
13 A misalignment of investor and authority incentives at contract expiry creates a potential for disputes. Authorities will want to ensure they receive an asset in the best condition possible as this will minimise future maintenance spend. Meanwhile, PFI providers have an incentive to limit expenditure on maintenance and rectification work in the final years of the contract as any savings can be used to pay out higher returns to investors. This will be more likely where the cost of completing rectification work is greater than any performance penalty for not doing this work. For 35% of respondents, the main method to compel SPVs to complete rectification work is by withholding a portion of the monthly unitary charge. If any contractual rectification work remains outstanding at contract expiry, there are limited options for recourse, increasing the need to resolve all disputes before contracts end. More than one-third of respondents expect to have formal disputes - 86% of anticipated disputes relate to the amount of rectification and 75% to the cost of this work. Disputes can be costly for authorities and a positive outcome is not necessarily guaranteed (paragraphs 3.22 to 3.32 and Figure 16).
14 Early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at contract expiry. Only one-third of respondents stated that contracts are clear about roles and obligations of different parties at expiry. Around one-quarter stated their contract does not contain any information on how and in what condition assets should be returned. Poorly drafted clauses are often open to interpretation, which has resulted in differing views between authorities and PFI providers, particularly around the quality and useful life of assets upon return to the public sector. Where issues do exist, some authorities are making improvements. For example, Highways England proactively engaged with SPVs to jointly interpret and clarify ambiguous clauses, thereby avoiding the potential for disputes and legal proceedings (paragraphs 3.2 to 3.7, 3.18, 3.19 and Figure 11).