Where private finance initiative (PFI) contracts are due to expire and public authorities are intending to either re-tender, or manage the assets and services in-house, it’s essential to undertake a detailed legal review as early as possible. This should include all variations, supplemental documents and subcontracts.
A thorough legal review, together with surveys, will help establish whether current suppliers are fulfilling their obligations, the parameters of handback conditions and available remedies. This is particularly pertinent in respect of early PFI contracts that were not standardised and in which the handback criteria may not have been as clearly defined as later PFI contracts.
This guide highlights the key points that public authorities need to consider when preparing for the handback of PFI assets.
At the expiry of PFI contracts, assets may be handed back to public authorities or remain with the contractor. Local authorities need to understand what steps they need to follow to take the transfer an asset. For example, the public authority may have to exercise an option to take the asset and there are likely to be provisions governing transfer of title and interests in the assets.
PFI contractors monitor their performance through a quality control self-reporting system. Therefore, public authorities will need to review whether the availability and performance criteria are being fulfilled. Where availability and performance criteria are not fulfilled, the public authority should check if deductions can be made from the unitary charge under the payment mechanism.
There is usually a continuing maintenance obligation that requires PFI contractors, to ensure the assets achieve their full working life and reach specified standards at the expiry date of the project agreement. Public authorities need to understand their rights to undertake surveys and inspections to check for maintenance issues, as well as the parameters and timings of such surveys.
Rights to undertake surveys is particularly pertinent in respect of final surveys. If a public authority has the right to bring forward the date of the final survey, this will allow more time to ensure any rectification works are agreed, completed and inspected before the expiry of the PFI contract. It might also tie in with any lifecycle reserve funds that the contractor is required to have set aside by its PFI funders, if undertaken prior to the final repayment of the senior bank debt. This typically occurs around 18 months prior to the expiry of the project agreement.
Bringing forward the date of the final survey also affords more time for the parties to resolve disputes before the expiry of the PFI contract. However bringing surveys forward needs to strike a balance, in the event maintenance issues have not yet manifested and schedule of works to achieve handback criteria may only be interim in nature.
Once the final position is understood, final survey results and rectification costs should also be cross checked, where applicable with the unitary charge and the life cycle spend, to establish whether the contractor has underspent on the PFI asset.
Where an asset is being handed back to a public authority, it will usually be at zero cost. Depending on the terms of the contract, public authorities may be able to retain sums from the unitary charge in the final years, or require the contractor to provide a bond, to cover the cost of rectifying maintenance issues revealed in the final survey.
Alternatively, public authorities may be able to offset liquidated damages, debts and liabilities from the payments the public authority is obliged to pay to the contractor. This includes those relating to a failure to comply with maintenance obligations.
If the handback criteria are not clearly defined, then the criteria will need to be commercially negotiated and recorded in a legally binding document prior to expiry.
For example, this includes requirements relating to:
• The condition of asset.
• Rectification works and how they are paid for.
• Design life.
• Assignment of warranties, licences contracts and other rights.
• Ability to use all intellectual property, e.g. software
• TUPE, employment and pensions related matters.
There is no specialist fast track forum for PFI disputes. Therefore, if matters cannot be commercially negotiated, public authorities will need to rely on the contractual dispute resolution provisions. These are often a stepped process, and public authorities need to understand what steps need to be taken, and evidence gathered, to support and ultimately resolve a dispute. Utilising stepped dispute resolution processes and attending representative meetings with the relevant information to hand can help make progress towards an early commercial resolution.
The earlier public authorities review PFI contracts, and seek specialist legal advice on their contractual rights, the more time they will have to resolve issues and settle any disputes without resorting to expensive and lengthy litigation.
For information on Ashfords’ PFI experience please our page, or if you require any assistance please contact Mark Manning.
