The complexity of managing the end of PFIs could cost public sector bodies could more time and resources as those contracts could return in a ‘unsatisfactory condition’, according to a new report by the National Audit Office (NA0).
The report, Managing PFI assets and service as contracts end, says public sector bodies risk underestimating the time, resources and complexity involved in managing the end of PFI contracts. It say with many contracts coming to an end from 2025, 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.
According to the NAO, there are currently over 700 PFI contracts in the UK and the bulk will start to expire from 2025. In October 2018, government announced it would no longer use PFI’s.
Poor management of contract expiry can result in assets being returned to an authority in a worse condition thanagreed in the contracts. This can lead to extra costs for the authority to pay for repairs and maintenance. Although it is the responsibility of special purpose vehicles (SPV)- private finance companies set up to finance, build and operate PFI assets over the contract term- maintain the assets and report to the authority, the authority still needs to monitor assets during the contract. Around 55% of survey respondents recognise they need more knowledge of assets condition, says NAO.
NAO’s report draws on a survey of public sector authorities managing PFI contracts, who are largely local bodies such as local authorities or NHS trusts. The survey found that government does not take a strategic or consistent approach to managing PFI contracts as they end. This, says NAO, risks a poor outcome for the taxpayer from the expiry negotiations with the private sector.
The NAO has found that many PFI contracts contain contractual limitations over what information can be requested from the SPV. Around 35% of survey respondents said they had insufficient access rights to monitor the maintenance of assets, and there is evidence that PFI investors and sub-contractors are not cooperating with authorities to provide information, a fifth of authorities that asked for information said requests were ignored or denied.
While authorities will want to ensure they receive assets in the best possible condition at contract expiry, says the report, 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. More than a third of respondents expect to have formal disputes, which can be costly for authorities.
According to the NAO, early preparations, and a collaborative approach between public and private stakeholders, can help to ensure a successful exit from these contracts.
Gareth Davies, Head of NAO said: “With the bulk of PFI contracts expiring from 2025 onwards, there is still time for government to make changes that will help public sector bodies to exit from contracts successfully. If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.”
The full report is available here:
Managing PFI assets and services as contracts end
