If a public authority is not extending the term of a private finance initiative (PFI) project agreement, there are two options for the future management of the assets and services:
Whether a public authority decides to re-tender, or manage assets and services in-house, is likely to differ depending on the type of asset and services, the political will, and the availability of the necessary expertise and resources within the public authority.
This guide considers how public authorities can retender PFI projects, or manage assets and services in-house.
Re-tendering the project is likely to involve re-using the original PFI project agreement and changing the risk allocation in order to gain better pricing for the public sector. For example:
There is likely to be much greater focus on issues like net zero and decarbonisation requirements and transfer of undertakings (protection of employment) (TUPE) will also require detailed consideration on each transaction.
The current approach to the project agreement being between the public sector and a special purpose vehicle in the form of a project company would likely be replaced by a contract with the facilities management provider. This would be the case unless there is a substantial need for new debt funding with an ongoing project financed structure needing to be retained, for example a need for substantial lifecycle upgrades. In the context of schools and the building safety fund, the counterparty is likely to change to being the academies themselves.
Re-tendering enables public authorities to pass on risk and liabilities to contractors. However, where there are separate contracts for managing assets and delivery of services, care will need to be taken to ensure public authorities are not exposed to any residual risk and liabilities and that the public authorities’ cause of action is clear when things go wrong.
Subject to transitional provisions, from October 2024, all tenders will be carried out under the new procurement regime. The new regime allows public authorities to design their own competitive procurement process and tailor the tender process to their asset management and service delivery needs. Public authorities will also be allowed exclude suppliers for poor performance in certain circumstances.
Whilst the new procurement regime provides public authorities with greater flexibility, there are also some features that place a greater administrative burden on public authorities:
Until the new procurement regime has been fully implemented and public authorities are familiar with the changes to the procurement process, they are likely to require specialist legal advice when designing and publishing tenders. The re-procurement of the running of a PFI asset is likely to be relatively complex and public authorities should ensure procurement planning allows for a long enough lead in time to avoid a failed procurement.
Managing assets and services in-house potentially provides public authorities with a greater level of control. However, as assets and services will have been managed externally for a significant number of years under PFI, public authorities are unlikely to have the relevant technical, commercial and legal capacity to take over the project, certainly initially.
In other instances, public authorities may be able to manage part of the project, such as the asset, but lack the specialist commercial and technical capacity to deliver a service. Therefore, a public authority may find they have to re-tender for a service under the new procurement regime, as outlined above. In this situation, public authorities will need to be particularly careful about the allocation of risk and liabilities between the public authority and service provider.
If a public authority wishes to proceed with managing the asset and services and generate an income stream, which amounts to charging or acting for a commercial purpose as opposed to covering costs, they are likely to need to set up a separate legal entity. As always with wholly-owned companies, the public body will need to consider, and take technical and legal advice on:
Before a public authority decides to re-tender for the management of assets and services, re-tender part, or establish a wholly-owned company, it will need to undertake a thorough legal and financial appraisal. Such an appraisal should include a cost benefit analysis, taking into account matters such as the public authority’s resources, fees for technical, legal and financial advice, and allocation of risk.
Ashfords’ public sector team regularly advises on the procurement process and establishing wholly-owned companies. For more information, please see our page or contact Lucy Woods.
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