Prepare now for expiry of your PFI contract

Kirsti Olson

Kirsti Olson, partner at Dentons and construction law expert, explains what to be aware of regarding the expiry of your PFI contract, and why you should start preparing now to avoid last-minute pitfalls

OVER 700 assets (such as schools, hospitals, roads and prisons) have been built under the UK Government’s Private Finance Initiative (PFI) since its launch in 1992. Many are in Scotland.

PFI enabled public sector bodies (such as hospital trusts and local authorities) who couldn’t otherwise afford to update their ageing infrastructure, to do so using private funding. The public sector body would enter into a contract with a private sector company, specifically set up for that project (Project Co). Project Co would finance, design and build the asset. Project Co would then operate and maintain the asset over the life of the project (typically 25 to 30 years) in return for payment of a monthly fee.

The monthly fee would pay for the operation and maintenance of the asset and also the costs of financing it.

25 to 30 years on, these contracts have started to expire. Some assets have already been handed back to the public sector. The Government’s IPA (Infrastructure and Projects Authority) is forecasting a substantial peak in the handback of assets between 2026 and 2037.

Those originally involved in drafting and negotiating these deals would agree that not a lot of thought was given then in relation to how handback to the public sector would work upon project expiry. It wasn’t high on the agenda at the time. The agreed contractual handback procedures are therefore relatively short.

Typically, Project Co will be obliged to carry out work to ensure that the asset, on the expiry date, complies with the contract’s handback requirements. But what state does the facility actually require to be in? This is often unclear. The handback requirements can be as simple as needing the facilities to meet design life requirements, be consistent with the construction requirements having been met and the services duly performed.

Typically, the handback procedure will require a survey or inspection of the building to be carried out two years in advance of the expiry date. But the survey requirements are usually vague. It is not always clear which party should be carrying out the inspection, whether external consultants should be employed, who should pay for the survey and how detailed it requires to be. A detailed survey will be costly; a light touch survey may therefore be the cheaper option, but major defects may be missed.

Starting the survey process two years out is unlikely to leave sufficient time before expiry for remedial works to be carried out. These are substantial assets: major UK hospitals; groups of schools; large sections of road. There will have been multiple changes and variations to the assets since they were built. The survey process will take time. Many public sector bodies are therefore asking for an additional survey to be done five years out. While this is not normally contractually required, starting early should give Project Co (and its facilities management company, to whom those obligations will be passed down) a better chance of getting the remedial works done. It may, however, be too early to reveal defects that haven’t yet become apparent. So, later surveys and inspections will likely still be required. The IPA, in its guidance, in fact recommends starting the planning process seven years out.

Two things are clear from all of this. The first is that we are looking at a substantial upturn in work for surveyors in Scotland over the next 15 years. In fact, there is concern across the UK that there may not be sufficient surveying capability available to cope with the forecast peak in demand. This is specialist work. It will need to be done by surveyors who understand the types of building or infrastructure in question and the standards to be expected.

The second is that there is going to be plenty of scope for future disputes. There will be disputes over who instructs the survey, what the scope of it is, who pays for it, what the results are, what work requires to be carried out, what standards require to be applied and met and ultimately whether any remedial works carried out have been properly done. There may also be a period of ongoing liability for Project Co after the asset is handed back.  This will generate work for surveyors, lawyers and other construction experts who are called in to assist, not just in the near future but for many years to come.