Five key opportunities presented by PFI Expiry
Patrick Hamill, Vercity’s Commercial Director, has identified five opportunities that can arise from the expiry of a PFI contract – and why there’s no need to wait until the expiry date arrives.
There has been regular discussion in the UK about PFI handback and expiry. That discussion often centres on managing the associated risks, partly because we are hard-wired to fear the unknown and the disruptive. Given the length of PFI contracts, they have provided a known and generally stable atmosphere for a long time.
While the risks do need to be managed, as we’ve explored in previous articles, the changes that will arise from an expiry will present opportunities.
Data published by HM Treasury and the Infrastructure and Project Authority details 198 PFI contracts, which expire in the seven years between 1 January 2024 and 31 December 2030.
The largest proportion (57) of these are education (primary and secondary), many of those contracts containing multiple schools.
Where there are opportunities the planning and preparing for those rather than reaching the expiry date at a standing start will allow the asset owners to maximise the potential gains. In some cases, the implementation can start before the PFI contact has expired, while the expertise of the PFI partners is still on hand to support.
Individual contacts and assets may experience different opportunities, and different assets within the same contract might find themselves in different positions after expiry, particularly education contracts where alternative Academy Trusts and Local Authorities may inherit assets.
Without trying to capture all possibilities, here are five key areas where opportunities may exist.
1) Maximising Estate Utilisation
Understanding whether the available estate is being used effectively and efficiently can be done at any time, but the provisions in PFI contracts and the requirement to follow the relevant variation and consent processes can add time and cost to major reconfiguration while any attempt at rationalising sites or part disposals will be complex.
As a PFI expires and those restrictions end, considering what is needed from the estate can ensure that the best use is being made of the footprint and ensure value for money. Pressure on budgets and funding will underscore the need to maximise the use of an organisation’s estate, and innovative approaches that were not possible during the PFI contract can play a part in delivering this.
This case study about the review of the estates strategy for the Alder Hey Children’s NHS Foundation illustrates that the opportunity to critically assess how best to use the estate is not one that should be missed.
2) Renewing Delivery Model and Specifications
In a similar manner to a review of the estate, proactively reviewing the delivery model and associated specifications ahead of expiry will ensure these can be updated. Often set at the beginning of the PFI process (before financial close and contract signature), these may no longer reflect what is needed, modern practices, technologies or approaches.
Reviewing the current delivery model and establishing what services are needed and how they should be specified, measured and reported will need to draw on relevant sector and service expertise. Once those service specifications are established, there can be an assessment of whether those services are then best delivered insourced or outsourced (either with a market exercise or with an incumbent PFI contractor).
Setting the criteria for new services can include requirements for social impacts or decarbonisation initiatives, such as the innovative approach to moving equipment around large sites by Bouygues Energies and Services using e-cargo bicycles.
Planning for this opportunity should commence in advance of the PFI expiry so that the solution is ready. Deploying experts to support the planning and implementation will avoid the need for any follow-on of the existing service specification where the facility treads water rather than realising the potential benefits.
3) Adopting Low Carbon Technologies
Evolution of technology incorporated in planning capital spend on asset renewals can significantly impact both carbon emissions and energy costs. As explored in this article, changing a three-boiler facility to use ground source heat pumps could result in a net 36% decrease in carbon dioxide emissions.
As a member of the working group convened by the Infrastructure and Projects Authority, Vercity endorses the guidance produced for Decarbonisation of Operational PFI Projects. That guidance makes clear that opportunities for asset decarbonisation can commence before expiry, and indeed that beginning this during the PFI contact can “streamline the contract change process on a journey to net zero that will begin during the remaining years of operational PFI projects and that may continue post contract expiry.”
Achieving that within a PFI contract will unlock the benefits earlier, but there may be reason to wait on certain activities or expenditures until after expiry. Expert advice will be needed to undertake an assessment of the existing facility, understand the options available and the impact they will each have, consider any available funding, and then unlock the right route to net zero. Having a strategy to achieve this, which will likely straddle the operational phase of the PFI Contract and the period after expiry, will lay the foundations for the opportunity being effectively realised.
4) Gathering and Using Data Effectively
For any of the above and a myriad of different areas, understanding data will be key. Modern technologies can generate vast amounts of data on how buildings are performing and how effectively services are being delivered. Properly reported and understood that data can drive efficiencies in delivery model and improvements in outcomes for the users of the facilities.
This is an area that has moved forward significantly since the reporting requirements of PFI contracts were established. A monthly report with a series of word and excel spreadsheets will not leave facilities well-equipped for the ongoing opportunities this data can present. New data collection and analysis approaches , driven by the particular needs of the facility or asset in question, will lay the foundations for effective management. Embarking on the data journey will unlock further opportunities and create a virtuous cycle.
An initial investment may be needed to unlock the data needed. This will need appropriate funding with a business case that assesses the desired outcome, the approach, mitigation of risks, and expected capital outlay. Many organisations will need expert support on aspects of that process, and the planning can commence early to ensure alignment with other plans.
5) Forming New Partnerships
The end of the PFI contract may unlock opportunities for completely new partnerships. While the assets will be subject to restriction during a PFI contract, not least as security for the external funding, when those restrictions are removed, decisions on whether to enter new partnerships, with the lessons learned from the PFI contract embedded from inception.
Examples of these opportunities already exist , and others will come into being to meet the various challenges placed on critical infrastructure.
Development opportunities to ease housing pressures in the UK, such as those proposed in the White Paper by the NHS Homes Alliance to develop housing for NHS staff, will be of interest to private partners who could bring expertise and capital.
Inspiration can be taken from the UK university sector, where there is an established and ongoing development programme for student accommodation. Best practice in this area has changed significantly from designs set out in the late 1990s or early 2000s and accommodation assets may not have kept pace with the changes in the needs and expectations of student experiences. A capital injection to fund modification and refurbishment from a partner who can then take on the responsibility and risk of operation and occupancy levels may be attractive – if the terms are right. Investors are keen to put capital into student accommodation amid a continuing rise in UK and international students, with Savills projecting total students will pass 1.75m in 2023 (up 9.3% on pre-Covid student numbers for 2019-2020).
Forecasting the opportunities that may arise in this area over the next decade would be a challenge, but it remains one area that asset owners exiting a PFI contract may want to consider as part of the broader strategy for the use of their estate. Ensuring an awareness and understanding of the approaches and ideas being taken elsewhere will be key to opening horizons on the art of the possible.
The Process Can Start Now
None of these opportunities need to wait for the expiry to occur. Planning can take place in advance to ensure appropriate time for governance and approval. That will ensure that when expiry does arrive, there is no time lost capitalising on these opportunities, and there may well be elements that can be implemented during the final years of the PFI contract.
Expiry Support at Vercity
Vercity has experience across a range of PFI sectors and a portfolio and network stretching across both PFI and non-PFI partnerships. Vercity provides infrastructure project management consultancy and are well placed to understand the opportunities, and our expert teams support clients in realising these. With the time needed to develop the right strategy and plan, it is never too early to start thinking about what will happen after the expiry of a PFI contract.
Click here to read more about how Vercity can help realise the opportunities from the transition out of a PFI contract or use the links below to learn more about specific examples:
As the expert advisor to the Alder Hey Children’s NHS Foundation Trust Vercity brought forward recommendations on how to utilise the available facilities in the most effective and efficient way while ensuring high quality care delivery. Learn more about how to realise the opportunities.
There are various options for adopting energy- efficient technology to meet the challenges of Net Zero, which can either be implemented as part of the PFI project or planned for after its expiry. Learn more about how to realise the opportunities.
When the public sector authority has identified that an asset will be disposed, the review and transfer of documentation and registers takes on additional importance as these will then be passed on to another party. Learn more about the process of handing over the Old War Office.