Educational bodies operating PFI-funded estates are being urged to act ‘before it is too late’ as the controversial contracts near the end of their lifespan

The Infrastructure and Projects Authority’s (IPA) 2022 report, Preparing for PFI Contract Expiry, recommended that public sector bodies with a Private Finance Initiative (PFI) contract start taking steps at least seven years prior to contract expiry.

Government figures show 694 PFI projects in operation across the country having an initial total capital investment value of £54.7bn.

And that means hundreds of organisations will need to take action to prepare for handback and decide how they will fund and operate their estate moving forward.

In particular, as many Private Finance Initiative (PFI) contracts also included the delivery of facilities management (FM) services, there will also need to be decisions made on how these will be provided in the future.

The long-term contracts – which typically spanned a period of 25 years, but sometimes 30 years or even longer – were signed between public sector bodies and a private sector consortium, typically through a special purpose project company, and meant the private sector designed, built, financed, and operated the asset and provided related services.

Under the contracts, the private sector bears the risks associated with construction and maintenance and overall management responsibility, and its remuneration is linked to performance.

The state of play

There are currently 172 schools PFI schemes still operational in England, with a varying number of schools within each scheme, but all including the delivery of hard FM maintenance and lifecycle services. Most also include soft FM services such as grounds maintenance, security, cleaning, and catering.

Most of these schools contracts were signed between 1997-2010 when the coalition government cancelled the national Building Schools for the Future programme (BSF).

A new model of PFI called PF2 was introduced in 2012. Under that model the DfE’s Priority Schools Building Programme (PSBP) signed five further programmes nationwide in 2013/14, before the Government announced it would no longer support the PFI model in October 2018.

Now local authorities and other public sector organisations which have operational PFIs need to begin planning for the future, ensuring their estate is handed over in the required condition and either finding the in-house expertise to take over operations, or opting for a new public/private model.

Underestimating the challenge

The National Audit Office (NAO) found in its June 2020 report on PFI contract expiry that public sector bodies risk underestimating the time, resources, and complexity involved in managing the end of PFI contracts.

And, in its 2022 report, the IPA’s deputy chief executive, Matthew Vickerstaff, said: “The expiry phase of PFI contracts, including asset handback and the transition to future services provision, presents additional risks, including potential operational disruption, lack of service continuity, financial loss, and reputational damage.

“The effective management of the expiry process is therefore of particular importance.”

The report adds: “The IPA expects that senior leaders will commence planning for PFI expiry at least seven years prior to the contract end.

“Early, but cost-effective steps will need to be taken to increase awareness and active management of the contract in advance of expiry, understand the assets, systems, and people involved in the exit and transition process, build supportive relationships with other

parties, and obtain information from the PFI project needed to shape and plan the future provision of services.

“Significant risks will need to be managed, diverse expertise and resources will need to be applied, and additional budgets will likely need to be made available.

“What is certain is that the whole expiry process will require more, and different, senior management support than is currently being provided to the PFI project.”

 

The next steps

The IPA guidance is supplemented by an expiry toolkit, which provides additional tools and materials to support authorities in managing expiry.

So what is next for these PFI schools?

Speaking to Education Property, Ioan Davies, legal director and PFI specialist in international law firm, DAC Beachcroft’s infrastructure and projects team, explained: “The message is, if you are coming up to seven years from expiry, then – if you don’t have a good handle already – now is the time to start looking at how well run your contract is.

“You also need to ask whether senior managers familiar with both the expiry process and the need to have a strategy for what comes next.

“Maybe, because of staff turnover etc, an organisation’s corporate memory is not that familiar with what is a complex arrangement, especially trying to get to grips with contract conditions which may have been altered or superseded, often several times, over the years.

“The education sector is no different to others and over the years we have seen a mix in terms of successful contract management. A lot of that is down to the resource applied to the project.

“Having recently looked at several early PFI contracts, many may not be that sophisticated or specific about what the expiry and handback requirements are, especially when compared to the provisions seen in more-modern contracts such as on BSF and PSBP schemes.”

Fit for purpose

Central to the handback will be clarity as to the required condition of the buildings and the respective rights and responsibilities of the parties under the PFI contract.

Davies said: “Organisations will struggle to make strategic plans for taking these buildings back unless they know what condition they are currently in and what condition their contract says they are meant to be in to be fit for purpose at expiry.”

But, threatening to hamper this process, are the sometimes frosty relationships that have grown over time between some organisations and their PFI provider.

Davies said: “We have unfortunately seen a breaking down of that relationship on some schemes, and a number of schemes are considering the ‘reset’ approach recommended in the recent IPA-commissioned White Fraiser Report, with a view to restoring the relationship between the parties and, in turn, improving the performance of their PFI contract now, rather than waiting until the contract is due to expire.

“It provides for the carrying out of an audit of the PFI contract, by way of surveys, and then gives the PFI provider a period within which to rectify any issues identified without threat of being penalised under the contract for non-compliance.”

Moving forward, Davies predicts there will continue to be a public/private approach to delivering and maintain the education estate.

He said: “The million dollar question is what comes next once a PFI contract has expired?

“There has been a lot of academisation within the national primary and secondary school estate since 2010 and, even though the PFI contract is still formally with the local authority, a lot of PFI school buildings are now occupied and run by multi-academy trusts.

Investment opportunities

“So, what comes next will be down to them and that might be, in the short term at least, integrating within existing FM service delivery contracts serving their other academies.

“If you are a local authority, especially one with a grouped schools contract coming to its end, do you have an in-house direct delivery provider which can take it on – including the staff that would transfer – or might the procurement of a new facilities management contract be attractive?

“Certainly, we think there will be an appetite within the private sector to continue to provide FM services – however configured – to the schools and academies sector.

“In terms of building new schools, as well as the DfE’s current programmes, in Wales there is the Mutual Investment Model (MIM), which has a risk profile that is very similar to PFI. So, might we even see something similar to that as an option promoted by the centre moving forward?”

Jonathan Bond, a fellow legal director at DAC Beachcroft and construction specialist with particular knowledge of the schools sector, added: “The challenge for education providers will be how ongoing school maintenance programmes dovetail with the additional impact of managing and maintaining buildings when PFI contracts are handed back as part of the wider school estate.

“The priority is getting on top of the current contracts and making sure the estate is handed back in the right condition and that schools are clear on what happens next.”