PFI to save the day! Reducing the burden of public sector energy bills

With energy bills soaring, a wider cost of living crisis and the prospect of a lengthy recession, PFI handback is unlikely to feature high up on the new Government's to do list.

Most commentators have been focussing on managing the PFI expiry process, but as detailed in the recent IPA guidance (see my previous article here), the public sector has to have at least one eye on what life looks like after PFI. Whilst we can debate handback surveys until the cows come home, the longer term operation and management of facilities poses some challenging (but perhaps more interesting) questions for the public sector.

Let's face facts - the incoming Government is going to face some very real spending constraints. There is a huge amount of pressure for the Government to shelter individuals and businesses from the ravages of the pending increases in energy prices. Yet at the same time, Government will also face its own inflation nightmare - and don't forget that there is no energy price cap for business or Government (whether local or central). Add into the mix, the £400bn odd COVID bill, and you'd hardly need to be Nostradamus to conclude there are likely to be some constraints on capital spending for the Treasury and at a local level.

The increasing cost of energy is going to gobble up departmental budgets, placing further pressure on public services and creating something of a vicious circle. Resolving the current energy crisis needs long term strategic thinking, which isn't going to help means a school or an NHS Trust struggling with its energy bills in the short term.

How can PFI help?

There are two obvious options for the public sector. The first option is to engage constructively with its private sector partner over the thorny issue of life cycle spend. As we approach the latter years of a contract there is likely to be increased lifecycle expenditure in order to meet the handback requirements under the Project Agreement.

But do the handback requirements meet current aspirations? It's at this point that I usually cite the example of a gas boiler which is scheduled to be replaced at year 20 of a PFI scheme - is that what the procuring authority really wants? And does that help the procuring authority with its energy bill? Surely the best solution would be for the authority to negotiate an alternative solution (e.g. energy generation and storage assets, perhaps with energy efficiency measures) funded through the lifecycle monies earmarked for the boiler (and possibly topped up by the authority). The alternative would be to be lumbered with an asset which is expensive to run and does nothing to meet net zero ambitions.

If you like that, then we could go even further. How about letting of a long-term FM concession for the facilities post expiry, 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 in clean energy / efficiency measures to mitigate its exposure to the death spiral of soaring energy costs.

This solution necessitates 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). At the same time, the public sector would benefit from reducing its energy costs, thereby reducing the increasing pressure on budgets.

The way ahead?

Our current predicament requires innovative thinking. However, the deployment of private finance in public infrastructure remains an anathema to many. But now is not the time for political dogma - it's really a question of what works.

For further information on this topic, please contact PFI Partner, James Larmour.