Public-Private Partnerships (PPP), also known as Private Finance Initiatives (PFI) in the UK, have become a solution to a gap in public investment derived from natural budgetary constraints worldwide. This model is based upon joint working and risk sharing and brings together private sector solutions, technologies and investments and public sector oversight.
Long-term PPP contracts are marked by substantial complexity and involve elements of design, construction, financing, operations, legal and regulatory aspects that must be addressed for the success of a given PPP.
Learn more about the five major risk factors causing distress for PFIs/PPPs.
PPPs have expanded out of core infrastructure projects into new sectors such as district heating, broadband, cable and fibre communications, renewables, water and electric vehicle charging.
The UK is known as one of the pioneers in the use of PPPs where this model was first adopted in 1992 (£59 billion of private sector capital investment in over 722 UK infrastructure projects). In October 2018, the UK government announced that it would no longer use the PFI model. 78 projects are due to expire before December 2027 and a further 91 projects will expire in 2028-2030. PPP contract expiry is a complex transition and is becoming an increasingly pressing issue. To ensure a successful transition is it important to know which key risks and challenges the stakeholders are likely to face.
Risks associated with PFI/PPP contract expiry
Contractual requirements are not well defined and not fully understood
Public authorities are not being sufficiently prepared, incentivised and resourced for the handback process
Disagreement regarding quality and condition of assets at handover
Uncertainty regarding future of the assets or service delivery model
Increased costs and risk to service continuity if handback preparation is delayed
All these are to help public authorities and private sector entities including investors, funders, asset managers and market suppliers to manage expiry and service transition. This is particularly important as both sides want to avoid disputes and work amicably and cooperatively towards a smooth exit, handover and transition process.
There is no hard and fast rule for when to start preparing for handback transition. But what did we learn from recent NAO, IPA guidance and GIH recommendations?
The UK NAO recommends that preparation starts seven years before expiry. Where contract expiry is further away, the parties have more time to foster collaboration and minimise the risk of disputes on expiry.
The UK IPA recommends undertaking a health check of PFI projects expiring within seven years to assess their readiness for expiry and to identify corrective actions with further contract reviews at five and three years before contract end date.
The GIH recommends that depending on the size and complexity of the relevant asset/contract, public authorities may need to start planning for handback three years or more before the expiration of the PPP contract.
Early engagement and a collaborative approach between the private and public sector stakeholders are vital to facilitate the structured PPP handback transition process and minimise the risk of adversarial, protracted and costly disputes.
Plans for an orderly PPP handback should be developed and a strategy put in place for future service delivery model, to ensure that contract expiry can be a success.
Six steps to consider for a successful PFI/PPP handback
Undertake handback risk and opportunity assessment – The main emphasis should be given to development of plans for expiry preparation and future service provision, identification of ‘gaps’ in the processes, systems or areas of contractual ambiguity, assessment of availability of core information including contract documentation and asset registers as well as resource availability.
Ensure you have sufficient expertise to manage expiry as a programme – The need for improvement of multidisciplinary resources and skills has been identified when surveying public authorities. It is natural that both contract parties focus more on day-to-day operations and less on the ultimate backstop of expiry. Specialist project management, commercial and technical resources may need to be procured to support handback.
Focus on building collaborative relationships – Some public authorities do not engage in sufficient discussions with the private sector around expiry. It is important to remember that a collaborative approach benefits both the public and private sectors and, most importantly, the consumers and taxpayers.
Undertake joined survey to assess asset conditions – The majority of public authorities in the UK believe that they don’t have sufficient details about asset conditions and that the handback provisions are unclear. An accurate picture of the asset conditions is essential to ensure uninterrupted service provision once a PPP contract is handed over.
Ensure a robust commercial approach – Many public authorities and their private partners in PPPs do not have a clear view of the contractual provisions on handback. A clear and simple commercial guidance document will need to be developed to facilitate handback transition. This structured approach brings rigour and arm’s-length contracting practice.
Plan for future services – Public authorities must ensure that future services plans are developed early and integrated with the expiry process. The future service model will benefit from the lessons learned from the live PPP contracts and delivered handbacks. The modelling assumptions should also consider risks of rising inflation, any potential hidden charges and uncertainties related to asset conditions. The future service model should have clear and measurable protections of public authority interests e.g., performance deductions and maintenance reserve accounts.
Restructuring Private Finance Initiatives (PFI) and Public-Private Partnerships (PPP) – part 2: challenges and key success factors
In recent years, the market has seen an increasing number of high-profile defaults of Private Finance Initiatives (PFI) and Public-Private Partnerships (PPP) – and the risk remains that these continue going forward. After examining major risk factors causing distress in part one of this two-part series, we focus in this article on common issues and […]
Restructuring Private Finance Initiatives (PFI) and Public-Private Partnerships (PPP) – part 1: causes of distress
Private Finance Initiatives (PFI) and Public-Private Partnerships (PPP) have come under increased scrutiny in recent years after a rising number of defaults. In part one of this two-part series, we examine five major risk factors causing distress, while in part two, we reveal common issues and key success factors when it comes to restructuring PFI […]