How schools should manage PFI contract expiry

Many schools in the UK were built (or rebuilt) in the early 2000s under the Private Finance Initiative (PFI). Thanks to their 25- to 30-year term, most schools remain subject to such PFI contracts, under which their daily operations and maintenance are managed. 

In the next few years, many of these PFI contracts are due to expire. This will require the PFI contractor to hand back the school estate to the school or local council, raising concerns over who’ll take responsibility for operations and maintenance.

Here, experienced procurement lawyer Michael Winder offers his top tips for how to manage PFI contract expiries.

Understanding PFI contracts 

A PFI contract is a contractual arrangement between the public and private sectors where the private sector designs, builds, finances and operates a public asset and related services. The operation phase runs for a typical period of 25 to 30 years following completion of the asset. These were extensively used by the Labour governments of Tony Blair and Gordon Brown for NHS and school buildings, in order to allow private sector funding to update public assets.

PFI contracts include mechanisms for the withholding of parts of the monthly payment to incentivise PFI contractors to perform maintenance work. However, effective contract management is essential — and even then PFI contractors may dispute deductions. This is complicated by the complex payment mechanism contained within such contracts.

As these contracts expire, the ownership of and responsibility for the assets — such as school buildings — will return to the public sector for management. The handover of the PFI contracts can be a complex and time-consuming process, as the contracting parties will need to ensure that the returning assets are suitable and maintenance that should have been completed during the contract doesn’t get passed on to the local authority to fix. We’ve already seen examples of such issues starting to arise.

Risks of PFI contract expiry 

There are several considerations that parties holding PFI contracts will need to take into account to ensure the expiry is handled with care. 

As a first step, the parties should carefully review the expiry and handover provisions within the PFI contract to understand the requirements on the parties for a smooth handover process and ensure that both parties comply with their duties in respect of expiry. It’s possible that disputes will arise when the condition of the PFI assets are considered against the handover requirements under the PFI contract. 

On top of the complexities around managing the contractual provisions for expiry, there’s also a possibility that any reduction of monthly payments towards the end of the contract, or the imminent cessation of the monthly payments, means that the incentive on (or the financial ability of) the PFI contractor to comply with contractual requirements may diminish. It has been reported that earlier this year some schools in a PFI scheme in Stoke on Trent were informed that there isn’t enough money or sufficient time to complete all the necessary repairs by the PFI contractor before their contract ends. This risk needs to be managed from an early stage, with the condition that any issues are addressed as soon as possible. 

It should be noted that in most circumstances, the PFI contractor will have been established for the sole purpose of the contract. Following expiry, this will likely be a shell entity that will be wound down. This would leave schools and councils with no support if issues arise after expiry of the PFI contract. 

Top tips for managing PFI contract expiry

To successfully prepare for the expiry of PFI contracts, schools and councils should recognise the complexity of the process and take a lead, rather than being led by the PFI contractor. This helps to ensure that clear plans are made for the expiry and handover as soon as possible. 

Proactive management of the contract itself is essential, as well as managing the handover provisions. It’s key to manage the relationship with the PFI company to resolve any potential issues regarding the expiry sooner rather than later. 

PFI contracts have been long-term contracts, so it would be understandable if local authorities and schools don’t have clarity over the ownership of the assets and their maintenance history. This makes it crucial for the authorities to review assets and their conditions and take action as soon as possible to ensure that the condition matches what is required at expiry of the contract.

How we can help

Our procurement law team has extensive knowledge and experience of handling PFI contracts. Whether you’re managing current contract obligations or preparing for an upcoming contract expiry, we can guide you through the process. We’re also more than happy to assist councils with PFI schools’ academy conversions. 

Talk to us by giving us a call on 0333 004 4488, sending us an email at hello@brabners.com or completing our contact form below.