When is a good time to start preparing for contract expiry?
You may think that it is years before your PFI contract comes to an end and contract expiry preparations are something that can be put on the back burner. Besides, there will be enough challenges with the day to day management of the contract which you will inevitably be dealing with and in some cases already stretched resources. So to start having to consider the delivery of the contract expiry process as well maybe a bridge too far. There is no mistaking that the longer the contract expiry management process is put off, the greater will be the potential for issues that could have been eradicated or minimised at the outset, but for Trust’s with health PFIs, the lights must remain on, the doors remain open and front line services continue without disruption.
What are the potential issues and how can these be managed?
These will inevitably vary depending on your project though there are definitely some common themes in many of the contracts which are approaching contract expiry. It is about being alive to some of these issues and putting in place plans to get rid of or minimise the potential risks.
In a series of three articles, we will address some of these common themes, concluding with a number of non-PFI aspects that the Trust should now be considering making the most of, as a result of inheriting a significant asset.
In line with the National Audit Office report and findings from the Public Accounts Committee Trusts should be preparing for expiry if this is expected to occur within the next 7 years.
Whilst the majority of health-related projects will expire after 2030, there will be some which are due to expire ahead of that date and in the next 7 years.
If your project is one of the early PFI contracts there may be no information on the handback process and obligations or it may contain provisions that lack clarity about the different parties’ roles and responsibilities, with clauses open to interpretation. There will therefore be a number of considerations for the Trust:
- How do the handover provisions operate? You can’t assume that the drafting will be SOPC4, the drafting could be bespoke, particularly as early project documents preceded standardised contract documentation;
- Is there a survey process and if so, what is involved? When and what standards should be tested?
- What will happen to the land, asset, equipment and data? What condition are assets etc. expected to be handed over in? Will any warranties be assigned? What data protection considerations are there?
- What provision has been made for employees? There may be potential TUPE and pension considerations.
What can be done to proactively manage the expiry process?
- A timeline can be set for the required preparatory work ahead of expiry;
- Surveys can be carried out in advance, with remedial works identified and resolved in good time and the lifecycle fund managed more efficiently;
- Where there are no handover provisions or these fall short of the Trust’s requirements, any changes to the contract should be sought to be negotiated well in advance of contract expiry though at the same time being alive to the procurement aspects;
- The contract provisions should be implemented with a particular focus around the payment mechanism; and
- If a potential dispute is looming this needs to be stopped in its tracks, with parties collaborating to reach a satisfactory solution.
The contractual documents
These contracts were entered into in the 1990s or 2000s. Personnel who negotiated the contract may have long gone, the rationale for why things were done and corporate knowledge will have waned, documents may have been mislaid and over the life of the contract, a number of variations may have been agreed, in many forms from a basic letter, to a change notice and potentially a fully drafted deed of variation.
- It is imperative that Trusts take time to collate this information together at the earliest opportunity. Some of this information could have an impact on the clarity of handback requirements;
- Any buildings, assets or services added or removed during the contract term may have handback consequences. Clarity may be needed as to whether these additional buildings and services form part of the PFI contract, and what long term obligations will persist and with whom;
- What will inevitably be important is that the parties need to come to an agreement on the contractual position;
- However motivated equity, Project Co and FMCo providers are, they may have differing views on future obligations to the Trust. Therefore prior to detailed engagement with the private sector, Trusts must take time to clarify their own understanding and application of the contractual position which will then underpin the process of determining and agreeing a position with its counterparties;
- By the time the Trust sits down to agree on any position with these organisations, they could well have been through a number of PFI expiry negotiations in other sectors. They will be well versed and rehearsed in taking negotiations to a position favourable for them. The Trust need to be prepared in the same manner.
This is inevitably going to be a challenge and if a Trust has limited resources to manage the PFI expiry, it potentially exposes the Trust to more risk. The position will be further exacerbated if the Trust doesn’t have people on the ground with the necessary skills, expertise and capabilities to deliver a successful PFI expiry.
- How will handover arrangements be resourced? As put by one witness in the Public Accounts Committee, the public sector is “Short of skills, short of advice”;
- Is there the right and sufficient resource in-house to deal with the PFI expiry?
- What’s the scope of the work expected to be? Will it be limited to addressing the handover arrangements or may there be a re-procurement?
There are clearly steps that the Trusts can be taking to manage their exposure:
- Ascertaining the current resources and whether there are any skills gaps that need plugging;
- Considering appropriate training to build capability and potential recruitment;
- If external resources are required, identifying the scope and timing of the advice needed.
Our next article explores other common themes to be dealt with in the lead up to PFI expiry and what can be done to help release pressure on Trusts who are running out of time.
If you would like to discuss how to be best prepared for the expiry of your PFI contracts or have any further questions please contact Paul Styler, Director of Infrastructure Solutions at ETL or Jackie Heeds from Freeths.