MPC0002
Written Evidence submitted by Leeds City Council
Introduction
Leeds City Council has 13 active PFI contracts (and 1 LIFT joint service centre) with a combined capital value of c. £920m and annual cost of c. £114m (based on 2019/20 anticipated Unitary Charges). All contracts have passed through the construction phase into service provision with remaining contract periods of between 4.5 and 20 years. The PFI projects are as follows:
- 6 school projects (expiry 2025, 2030, 2031, 2033, 2034, 2034)
- 1 street lighting project (expiry 2031)
- 2 housing projects (expiry 2033, 2035)
- 2 leisure projects (expiry 2035, 2036)
- 1 independent living project (expiry 2036)
- 1 waste project (expiry 2041)
LCC’s particular concern is that there will be 6 contracts expiring between July 2033 and June 2035.
Evidence for Inquiry
LCC agrees and endorses the finding of the NAO in their report of 6th June 2020. Therefore, to add value and evidence for the Inquiry, we have used the points within the summary as a structure for our comments.
Key findings
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.
Agree overall but resources and funding are at the heart of the issue here from a LA perspective. Many struggle to have adequate resources and expertise to even manage the contracts on a day-to-day basis. It is agreed that the private sector are taking advantage of portfolio approach to day-to-day contract management (a prime example being fees and mark-ups being charged on variations), so no doubt they will do the same on expiry.
It is therefore difficult to envisage how LAs can take a consistent approach across the board without sponsor department lead and additional resources to facilitate such an approach.
Guidance developed following consultation across the public sector which ProjectCos are obliged to comply with may assist, as might sponsor department dialogue with ProjectCos and funders to ensure compliance with such guidance.
We agree that the typical survey of expiry periods may not present sufficient time to: a) undertake surveys (e.g. in relation to street lighting PFIs involving large numbers of assets across a very wide area; in the context of finite technical surveying expertise; if access to key areas/sites/systems is not facilitated by ProjectCos), b) satisfactorily remedy any defects and c) provide ProjectCo’s with adequate financial retention incentive to remedy. At the very least, consideration should be given to allowing surveys to be undertaken further out from expiry (for the benefit of all parties).
9 There is a risk of increased costs and service disruptions if authorities do not prepare for contract expiry adequately in advance.
Again, this is a resourcing issue for many LAs, as in the majority of cases the arrangements for post expiry will need to be dealt with like a new procurement. Even where an LA has a well-resourced PFI contract management team, a new procurement needs different skills and engagement from additional stakeholders. We would reiterate the issue about how contract management and the re-procurement can be run effectively side-by-side without additional resource.
In terms of re-procurement, certainty over future funding is essential – a procurement in relation to a particular asset that continues to enjoy some degree of revenue support grant may be materially different from a procurement to be funded solely from existing LA funding streams that are at continuous risk of reduction.
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.
In addition to the NAO comments, LCC would emphasise the need to “reset” relationships if they are not open and transparent around all parts of the contract. Co-operation of ProjectCos and their willingness to provide information (even when contractually required to do so) is often problematic. Hard conversations and a willingness to enforce contractual provisions now are needed, and Government guidance/intervention with Project Cos/funders would assist.
There is a risk that if numerous PFI contracts are requiring surveys on expiry at the same time, there is insufficient available technical expertise to undertake such surveys. This may be particularly problematic for smaller, single-project authorities. Government should take action to ensure that the necessary expertise and capacity is available when required by authorities. As above, consider whether typical survey periods are adequate. Also, note that creating a lucrative new industry overnight may (amongst other things) create risks of fraud (surveyors with close links to ProjectCos/ProjectCo managers in what may be a small market-place), utilising under-qualified surveyors, undertaking inadequate surveys in order move onto the next job, premium-pricing by surveyors due to lack of competition, gazumping etc.
11 Many authorities start preparing for contract expiry more than four years in advance but there is a risk this is not enough time.
Again, this comes back to the issue of adequate resourcing as stated above. The issues from a LA perspective are not necessarily that they have underestimated the time, but they do not have the resources to start early preparations alongside their other work. Further, uncertainty over future funding streams may present material difficulties to achieving a smooth expiry (i.e. if re-procurement is based on a set of funding assumptions that change during the expiry preparation period, that will necessarily have adverse consequences).
12 Authorities recognise that contract expiry will be resource intensive and require unique skills and expect to fill gaps with consultants.
No additional comments to above, but to reiterate the LCC considers that there are 3 interlinked strands which all need to be resourced appropriately:
- Continued focus on contract management and delivering best value for money out of the contract during its contract period;
- Ensuring that the project expires in an orderly and efficient manner, with co-operation of the ProjectCo, FM and funders, and to meet handback standards etc.
- Deciding upon future requirements and procuring the same (with a requirement for adequate and certainty of funding).
13 A misalignment of investor and authority incentives at contract expiry creates a potential for disputes.
See comments above in respect of resetting relationships. There needs to be a rebalancing recognising that the LA is the client. Emphasis needed on the fact that the ProjectCo’s obligations to provide information, facilitate surveys and provide reasonable assistance on expiry (and potential transition to a new provider) are part of their contractual obligations (and therefore should be carried out at no additional cost to the LA). Extending periods in which surveys may be undertaken may mitigate this risk to a degree. Again, a willingness on the part of the LA to enforce these provisions through the disputes procedure or an order for specific performance may be required if the ProjectCos are not complying.
14 Early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at contract expiry.
Agreed that the best route to resolve this is a get a joint interpretation of the clauses in advance. However there is a concern that ProjectCos or their funders may consider this a “variation” to the contract and therefore (1) require the LA to pay their and their advisor’s costs; (2) require additional payment on top of the UC for any assistance provided for expiry; and/or (3) simply refuse to engage if there is a perceived risk of an adverse interpretation. Or indeed the funders may consider this to be a shift in the risk profile and therefore either not approve it or require a de-risking of the ProjectCo in some other manner
Recommendations
In addition to the recommendations in the NAO report:
February 2021