1. Given the background to our report, we anticipated that we would be faced with an overwhelming amount of evidence to suggest that formal disputes are now not only commonplace across the PFI industry, but also that the level of trust between the public and private sectors was fundamentally eroded. In actual fact, many PFI Owners, Public Agencies and Government Departments reported to us that formal disputes (ie adjudication, arbitration or litigation) are still very much the exception, rather than the norm. Feedback has, however, allowed us to reach some broad conclusions with respect to the prevalence of disputes across the PFI market, including:
(a) At any point in time, we estimate that the number of PFI projects engaged in disputes makes up less than 10% of the total number of operational PFI projects; and
(b) Of those PFI projects that are, at any time, working through disputes, we estimate that less than 10% of them are referred to formal dispute resolution. The majority of disputes are typically resolved through negotiation and/or mediation.
The above estimates are not representative of the landscape in each PFI sector, however. As highlighted elsewhere in this report, the prevalence of disputes in the health PFI sector is now significantly higher than the broader PFI industry norm and this has consistently trended upwards over the last ten years. Feedback from all consultees engaged in health PFI projects has caused us to conclude that this trend has arisen as a direct consequence of an increasing number of relevant Public Authorities choosing to manage their PFI Contracts more robustly than they have in the past and, in particular, the strategies that those Public Authorities have (consciously or not) taken with a view to resolving failures by the relevant SPVs (and their supply chains) to deliver the relevant services in accordance with the requirements of the PFI Contract.
2. We encountered a significant level of anxiety on the part of the private sector that the approach to contract management increasingly being adopted by Public Authorities in the PFI health sector may, over time, begin to be adopted in other PFI sectors. When we probed deeper into this concern, it was clear to us that the private sector doesn't have any issue with Public Authorities committing more resource to the management of PFI Contracts (we actually encountered a broad level of opinion in the private sector that Public Authorities have not, historically, typically been able to effectively resource PFI Contract management). The anxiety associated with increased contract management is fuelled by a concern that in the context of Public Authorities managing their PFI Contracts more robustly, the focus will quickly be on punishing the relevant SPV for any historic under performance that is discovered, rather than a focus on ensuring all round better performance.
3. It should not be surprising that, during the life of a long-term sophisticated contract, the parties will encounter disputes. Despite the significant time spent negotiating the terms of PFI Contracts, it would be unrealistic to expect any PFI Contract to foresee every eventuality that will arise during its term. PFI projects can only be a success if both parties work collaboratively together and create the level of "trust" and "goodwill" that will allow the PFI project to successfully navigate all of the changes that it will inevitably encounter through its life. Evidence that we gathered suggests that some level of breakdown in trust or perceived lack of goodwill is typically either a prerequisite to any formal dispute and/or, unfortunately, a consequence of the relevant dispute.
4. The prevailing view across the PFI market appears to be that formal dispute resolution should be used as a last resort, on the basis that it is often expensive, inefficient and/or damaging to future relations between the parties. Of those consultees that had been involved in disputes, we often heard feedback that suggested some level of regret associated with being involved in a lengthy and formal dispute. We consistently heard of "wasted time and effort", "missed moments in time to resolve the issue" and "only serving to take scarce money away from the project" as ways of expressing such regret. Although any level of regret is sub-optimal, these experiences are important lessons learned for the broader PFI industry, especially in the context of the expiry and handback of PFI projects, where the prevailing view across the PFI industry is that there is significant scope for disputes due to lack of contractual definition with respect to the condition that PFI projects are required to be in at expiry.
5. Some Public Authorities also expressed regret at not referring particular issues for formal dispute resolution. Typically, this was because the relevant Public Authority felt that it had a strong case, but lacked the resource or corporate bandwidth to pursue a dispute more fully. This was more an expression of regret at conceding on an issue that they felt they would have prevailed on, rather than a desire to engage in a formal dispute process.
6. Notwithstanding the evidence to suggest that only a minority of PFI projects have encountered major disputes, we did hear broad concern across the PFI market that the prevalence of disputes is increasing. That is not to suggest that we believe the percentage of disputes being referred to formal dispute resolution is increasing; it is the frequency with which disputes are arising, generally, that is trending upwards. We also heard concerns that the current environment is creating a lucrative and self-perpetuating disputes advisory market. Public and private sector consultees involved in the health sector frequently expressed concern that advisers are, when engaged, increasing distance between the commercial parties and often advising their clients with a view to winning the current dispute "at all costs". We deal with is issue more fully in the next section.
7. When sharing regrets or "lessons learned" with us, consultees frequently commented that one of the consequences of entering into a lengthy and formal dispute had been some degree of breakdown of the relationship between the parties, which often caused those parties (with the benefit of hindsight) to recognise that they had undervalued the benefit of using a dispute to invest in the value of goodwill and trust between the parties. "Life after a major dispute" had been particularly difficult for a number of consultees because one or both parties had thereafter managed the PFI Contract in a strictly contractual (rather than relational) manner, leading to a significant reduction in the willingness of the relevant party to "go the extra mile" or find solutions to unforeseen changes in circumstances. Several Public Authorities considered this a sub-optimal outcome, particularly when they subsequently realised that they needed to rely on the goodwill of the relevant SPV to more readily navigate through significant issues arising during the remaining term of the PFI Contract (eg transitioning to carbon neutral targets, handback/expiry and/or addressing future needs with respect to service configuration).
8. A number of Public Authorities highlighted evaluative mediation as an effective approach to resolving disputes, which they felt was not just quicker and less costly than adjudication, but also a useful reality check for both parties with respect to the strength of their respective cases. Unlike with facilitative (or traditional) mediation, where the role of the mediator is principally to engage the parties to generate their own solutions, evaluative mediation is more directive, with the mediator providing both reality testing and settlement recommendations. Although evaluative mediation is often criticised for not being neutral in its approach (because the mediator may favour one party's argument) those Public Authorities that highlighted the effectiveness of this approach felt that it was particularly effective where both parties already felt that they had a "cast iron" case against the other and that they should not settle for anything less than they were asking for.
9. When we requested feedback on why formal dispute resolution was considered inefficient and/or sub-optimal, two comments were often made by consultees:
(a) As a result of most PFI Contracts having standardised contractual terms in common, there should be no need for the same disputes to arise time and time again across multiple PFI Contracts, especially if those disputes relate to the interpretation of the same contract provisions. Yet this is the reality. As a result of most disputes typically being resolved through private adjudication processes, one party sharing the outcomes of a dispute with a third party will typically constitute a breach of confidentiality undertakings given to the other party to the dispute. In practice, this has had two effects on the PFI market:
(i) Significant public and private funds have often been spent disputing the same issue time and time again; and
(ii) There is an asymmetry in the level of knowledge sharing across the public and private sectors, with the private sector typically benefiting from a significantly greater level of knowledge sharing due to the higher level of consolidation of SPV ownership, O&M Contractors and Management Service Providers relative to Public Authorities. For example, we spoke to Government Departments that are not privy to the outcomes of disputes across the PFI Contracts entered into by the Public Authorities that they fund, due to concerns that the relevant Public Authorities would be in breach of contract if they shared the relevant information.
Reassuringly, there was broad recognition that it was in the best interests of the PFI market (as a whole) for the outcomes of formally adjudicated disputes to be made available, on an anonymised basis, to the broader market.
(b) There is a general lack of confidence in the ability of the current stipulated panels or professional dispute resolution bodies to recommend adjudicators with appropriate levels of expertise and knowledge relative to the operation of PFI Contracts. Several consultees shared stories of how, despite the parties referring a dispute to formal dispute resolution, several issues still required negotiation following conclusion of the process, because the relevant adjudicator was not sufficiently qualified to hear the dispute or certain aspects of it.
10. When we asked consultees if they were concerned about any issues that could give rise to future disputes, there was broad concern that there could be scope for significant disputes during the period running up to the expiry of the PFI Contract (typically referred to as the "handback" period), particularly in the context of those PFI projects that are due to expire in the next 5-10 years and don't necessarily have clear contractual provisions relating to the condition of the asset when it is handed back to the Public Authority .
11. Finally, we were specifically asked to consider the establishment of an "Expiry and Handback Resolution Council". As set out in DLA Piper's Project Autumn Report, this would be mandated to determine disputes relating to expiry and hand back. We see value in these proposals, although we would not limit the scope of the Council's "jurisdiction" to hearing just handback disputes (see our recommendations below).