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Managing the expiry of PFI contracts


Private finance initiative (PFI) contracts are a form of public private partnerships used in the UK since the 1990s. PFI is a way to finance and provide public sector infrastructure and capital equipment projects, such as roads, hospitals, and schools. PFI contracts set out a long-term agreement between the private and public sector to deliver infrastructure such as roads, hospitals, and schools. There are currently over 700 PFI contracts and the bulk will start to expire from 2025. 

In October 2018, government announced it would no longer use the PFI model. Existing PFI contracts remain in place and the earliest ones are now starting to expire. Most PFI contracts result in the assets  - whether it’s a hospital building or an IT system - being returned to the authority once the contract ends.

PFI assets should be well maintained throughout the contract life and be in a good condition when returned to the authority. However, one of the main risks to value for money in PFI contracts is that they are not,  which poses a risk to any public services associated with those assets.

The NAO has found that public sector bodies risk underestimating the time, resources and complexity involved in managing the end of PFI contracts, and that there is danger that important infrastructure could return to the public sector in an unsatisfactory condition and services could be disrupted unless a more consistent and strategic approach is taken to ending PFI.

While authorities will want to ensure they receive assets in the best possible condition at contract expiry, PFI providers have an incentive to limit spending on maintenance and improvement work in the final years of contracts, as savings can be used to pay higher returns to investors. Survey of public authorities managing PFI contract found a third of them expect to have formal disputes over the end of contracts, which can be costly for authorities. 

Many authorities start preparing for contract expiry more than four years in advance but there is a risk this is not enough time. A lack of adequate preparation risks increased costs for authorities and service disruption. Before contracts expire, authorities will have to decide whether services, such as maintenance and cleaning, will be provided in-house, by a new contractor or by the current provider. If authorities do not prepare, services can be disrupted, or they may have no choice but to extend contracts.  

Authorities also risk underestimating the resourcing and complexity involved in the expiry process. Private stakeholders can take a more coordinated approach to managing expiry as the 10 largest private investors in PFI own more than 50% of contracts.

In contrast, the 10 public authorities with the greatest involvement in PFI oversee just 18% of all contracts. About 25% of the public authorities survey respondents said they lack the necessary in-house skills to manage contract expiry, and 60% are planning to hire consultants. The Committee recently reported on Government’s costly reliance on consultants.

The Committee will question senior officials at the Treasury, and the Infrastructure Projects Authority (tbc). If you have evidence on the issues raised in this inquiry, please submit it here by 6:00 pm on Monday the 1 of February 2021.