A recent report underlined the importance of closing a PFI contract effectively. Helen Randall navigates the intricacies and pitfalls.
Does your authority have a Private Finance Initiative (PFI) deal which is due to end in the next few years? Earlier this month, a National Audit Office report, Managing PFI assets and services as contracts end, highlighted the importance of “getting it right” when it comes to the end of your authority’s PFI contract.
To put things into perspective, there are more than 700 PFI contracts (with a capital value of circa £57bn) in place across UK central and local government. A large swathe of these PFI contracts will be coming to an end from 2025 onwards.
Local authorities are doing important work up and down the country in the face of extreme pressure. With all the competing priorities, is the impending end of a PFI contract really something to be concerned about now? The resounding answer is, yes, if you don’t want to be on the back foot with the contractor and risk wasting a lot of public money.
If you fail to take a firm grip on managing your PFI contract now, it could result in significant extra cost and, or, service disruption further down the line. With the tarnished reputation of PFIs, there may even be reputational consequences for your authority.
The good news is now is the perfect time to get your PFI house in order. So here are our top tips for managing the “transition period” of your PFI contract.
Know your PFI contract
Who is the counterparty to your PFI contract? It will usually be with a special purpose vehicle (SPV) but do you know who owns that SPV and whether it still owes any money? You should be able to find through a company search.
Do you know where to find the actual contract? If not, you need to find it or you will be at a disadvantage in negotiations, or any dispute, if the asset has not been maintained or, even worse, causes injury, damage or contamination. There could also be issues if the subcontractor’s employees, transferred back to the authority, brings an action against your council for discrimination, or a workplace injury, or an unpaid pension contributions which happened when the PFI was running.
This seems obvious but you would be amazed how many authorities can no longer find the actual final signed version of their contract.
The executed PFI contract will consist of a project agreement, with a very long specification, and a payment performance mechanism (PPM); a “funder’s direct agreement”, a number of subcontractor direct agreements/collateral warranties and a financial model which modelled how the payments would be made and the funding paid back. This should be in a “bible” which the contractor’s firm of solicitors put on set of CDs and sent to local authority solicitors and legal department’s deeds clerk for entry in a deeds register.
Bear in mind the partner at the law firm who negotiated your PFI may be retired and merrily sailing off the Cornish coast by now, so it is best to check the PFI credentials of the people in the law firm you plan to use in 2020.
Has the contract been varied? If so, it is a worthwhile investment to ask a solicitor specialising in PFIs to prepare a “conformed” copy of the contract which incorporates all the deeds of variation.
Variations can invalidate guarantees. Most PFI contracts were on a “non-recourse” basis so the parent company will not have guaranteed the project agreement. But you should check for the existence of collateral warranties, from consultants, or direct agreements with subcontractors, which may have been reinforced by guarantees, and whether these remain valid. This may help with enforcing your rights if there are defects or lack of maintenance. You should also collect all the “change notices” which should have been kept by the contract manager(s).
Can you find the minutes and agreed action points of the contract monitoring meetings? What is the cut off point for levying deductions under the PPM?
Has the contractor got the operating manuals, maintenance records and guarantees for any plant and equipment ready to hand over to you?
Survey
Has your asset been kept in line with the maintenance obligations of your contract? Commissioning a survey is the only way to find out, and there will usually be provisions in the project agreement setting out who pays for it. If the survey shows the contractor has not kept up its maintenance obligations, the contractor usually has to pay for the survey. Otherwise, it is often 50/50 for the end-of-the-contract survey, or a local authority cost if a council has decided to get an extra survey done.
Skills audit
What expertise do you have in-house to negotiate the end of the contract handover and, going forward, to manage the asset and services which will be coming over? What expertise might you need going forward? It takes time to recruit experienced managers and to procure consultancy.
TUPE liabilities
Will there be TUPE implications? Often the staff from the subcontractors providing the services transfer back to the authority at the end of the contract, but you should allow several months to get employee data as GDPR, Covid-19 furlough, lockdown and illness will have complicated access to information about employees.
Pensions liabilities
As with TUPE, pensions liabilities should be considered. What sort of pension arrangement was put in place? Was there a bond? Have the subcontractors kept up employees’ pension contributions? If it was an LGPS admission body arrangement, have you lined up discussions with the administering authority? Do you have a clear idea of likely pension liabilities and how risks were shared with the SPV? What happens if the SPV is dissolved after the PFI contract ends?
Is the Title encumbered?
Has the asset been pledged as security? Are there any encumbrances which you may need to get released? This is particularly the case if the asset was refinanced.
Future delivery options
Think about these now. Your future plans for service delivery may affect your negotiation strategy with the PFI provider. For example, if you plan to re-procure the services externally, or do a joint venture with a contractor, then you may feel differently about bringing services back in-house or planning to set up a trading company or a mutual, or forging a shared service arrangement with another authority.
Helen Randall is a partner at Trowers & Hamlins LLP.
