You’ve eaten your first PFI frog – there are plenty more for the public sector to enjoy!
Much of the debate to date around PFI handback has focussed on the carrying out of condition surveys. That’s not surprising given that the process would seem to be fertile ground for disputes. However, beyond that process the public sector will be facing much bigger questions around the future management of the PFI estate.
FROG NO 2 – Residual Value
The working assumption is that the PFI estate will revert to the public sector at no cost. However, there are a number of projects where the project company has a residual value interest (LIFT being the prime example). In these projects, the procuring authority will typically have an option to acquire the facilities at a market valuation. Alternatively, the procuring authority can walk away and leave the project company to realise the residual value in the assets – in some cases the authority may also benefit from a gain share mechanism. Opting to walk away does pose some significant questions around procuring replacement facilities, but given the constant changes in our working life residual value risk transfer could well be viewed as the smart option.
FROG NO 3 – Options to extend
Many older projects include a right for the procuring authority to extend the project term. On the face of it this provides a simple means of procuring service provision, whilst the authority explores its options. And that should be straightforward enough if the extension is on the same terms as the existing project agreement. However, it would seem unlikely that the risk allocation and scope of services negotiated 30 years ago is going to remain fit for purpose. This is where procurement law hoves into view – too many changes and the authority may be required to go back out to procurement.
FROG NO 4 – Reprocurement?
Assuming that the facilities revert back to the authority, it is then faced with the question as to how to procure continued service provision. One option may be to revert to in-house service provision. This would require careful analysis of the risks assumed as a result and consideration as to whether there is sufficient in-house expertise and resource to do so (there would of course be a TUPE transfer of existing maintenance staff to the authority – a risk in itself).
The alternative would be to outsource service provision through the usual procurement routes. More interestingly, it might be possible to raise further capital for additional works by letting a long term service contract in the same manner as the original PFI scheme. This would seem to be an attractive proposition for investors, whilst allowing the public sector to access much needed capital to enhance its infrastructure. I sense much is likely to depend on the political temperature at the given time.
The public sector is presented with a number of options on the expiry of a PFI project. However, this requires as much planning and forethought as was given to the original procurement. Given that the original procurement process took many years, perhaps it’s time for these issues to move up the public sector to do list?
(For the uninitiated the frogs represent the things on your to-do-list that you don’t like doing, or keep putting off, but you actually need to do now – please see my note here.)
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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