NAO warns government over infrastructure contract expiry costs

Important infrastructure including roads, hospitals and schools could return to the public sector in an unsatisfactory condition and services could be disrupted when a slew of private finance initiative (PFI) contracts end in five years’ time, because the government lacks a consistent and strategic approach to managing the financial risks involved, the National Audit Office (NAO) has warned

The audit watchdog pointed out there are currently over 700 PFI contracts with a capital value of £57bn, and the bulk will start to expire from 2025. In October 2018, government announced it would no longer use PFI.

A NAO study focused on the 571 English PFI contracts suggested public sector bodies, including NHS trusts and local authorities, risk underestimating the time, resources and complexity involved in managing the end of PFI contracts.

The NAO cautions that poor management of contract expiry can result in assets being returned to an authority in a worse condition than agreed in the contracts. This can lead to extra costs for the authority to pay for repairs and maintenance.

Although it is the responsibility of special purpose vehicles (SPV) – private finance companies set up to finance, build and operate PFI assets over the contract term – to maintain the assets and report to the authority, the authority still needs to monitor assets during the contract.

Around 55% of respondents to an NAO survey on the issue said they need more knowledge of assets’ condition.

The NAO has found that many PFI contracts contain contractual limitations over what information can be requested from the SPV. Around 35% of survey respondents said they had insufficient access rights to monitor the maintenance of assets, and there is evidence that PFI investors and sub-contractors are not cooperating with authorities to provide information – a fifth of authorities that asked for information said requests were ignored or denied.

The watchdog pointed out that PFI providers have an incentive to limit spending on maintenance and improvement work in the final years of contracts, as savings can be used to pay higher returns to investors. More than a third of respondents expect to have formal disputes, which can be costly for authorities.

Before contracts expire, authorities will have to decide whether services, such as maintenance and cleaning, will be provided in-house, by a new contractor or by the current provider. If authorities do not prepare, services can be disrupted, or they may have no choice but to extend contracts. 

Authorities also risk underestimating the resourcing and complexity involved in the expiry process. Private stakeholders can take a more coordinated approach to managing expiry as the 10 largest private investors in PFI own more than 50% of contracts. In contrast, the 10 authorities with the greatest involvement in PFI oversee just 18% of all contracts.

About 25% of survey respondents said they lack the necessary in-house skills to manage contract expiry and 60% are planning to hire consultants.

Gareth Davies, the head of the NAO, said: ‘With the bulk of PFI contracts expiring from 2025 onwards, there is still time for government to make changes that will help public sector bodies to exit from contracts successfully.

‘If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.’

Managing PFI assets and services as contracts end

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