Spitting in the wind: some thoughts on the future for PFI assets post expiry

 

In and amongst the debate around PFI handback, one of the most interesting questions is around how the public sector will manage legacy PFI assets post expiry. While much of the debate focuses on the handback process, the longer term operation and management of facilities poses some challenging (but perhaps more interesting) questions for the public sector.

Given the £400bn odd COVID bill, I think it's fair to say that over the forthcoming decade there are likely to be some constraints on capital spending for the Treasury. This could prove to be a drag on any aspirations to level up, build back better or, indeed, bus back better. However, as more and more facilities return to the public sector following PFI expiry, could these valuable assets be used to generate capital for reinvestment?I think the answer lies in the existing investment made by the public sector over the lifetime of a PFI scheme. Yes, PFI is expensive, but the associated ring fencing of maintenance budgets is a large contributory factor to that. And let's not forget, the ring fencing of maintenance budgets was one of the key purposes of the PFI model. That maintenance regime coupled with the hand back arrangements should operate to ensure assets are returned to the public sector in good condition. Importantly, handback should also generate sufficient data to have an accurate picture of the asset condition at the point of hand back. This line in the sand could give rise to a more imaginative opportunity than simply returning the management of the assets to the public sector. An opportunity which fits both the economic landscape and also the government's net zero commitments.

What's the solution?

In simple terms, the letting of a long term FM concession for the facilities, on the basis that the successful bidder pays an upfront premium for the concession, which would be funded through senior debt and equity. That premium would then be repaid through the service fee for the duration of the concession. This would generate a capital receipt for the procuring authority, which could then be reinvested to finance other projects. Many of these could even be revenue generating for the procuring authority, particularly if reinvested in clean energy projectsMore interestingly still, the successful bidder could be tasked with using the capital raised to redevelop, extend or refurbish the existing facilities. This could also include the retrofitting of energy generation/storage assets, energy efficiency measures and/or electric vehicle charging infrastructure, something which has always seemed to be something of a lost opportunity for the PFI estate.Clearly either of these solutions will require a long term revenue commitment from the public sector. However, procuring authorities already have commitments to PFI contracts, so it should really be case of reinvesting the handback dividend (PFI credits excepted). In addition, if the public sector is willing to be a little more circumspect around risk allocation and to remove some of the gold plating, it should be possible to deliver enhanced value for money (particularly if the parties are willing to harness the revenue generating opportunities of clean energy). Notwithstanding the need for a more forensic approach to risk allocation, there will clearly also be the advantage of risk transfer to the private sector.

Is this likely to happen?

Probably not. The use of private capital to finance public infrastructure remains shrouded in a miasma of toxicity. Only the other day Private Eye had the knives out for the Welsh MIM Programme. However, it seems to me that there is an opportunity here which meets the demands of the age. To seize that opportunity will require imagination, political will and something of a PR campaign. Over to you Rishi.

Please get in touch with the PFI handback team if you would like to discuss anything covered in this article.

 

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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