PFI Expiry - Greater focus, support and resources needed now, say London boroughs – new report

Many London boroughs are not yet prepared for the expiry of their private finance initiative (PFI) contracts and are constrained from fully addressing this in the face of already overstretched resources.

In research we have carried out in Partnership with Future of London and Airey Miller, we found that several London boroughs are struggling to prepare for PFI contract expiry due to a lack of resources, including project management capacity and clear contract ownership within their organisation.

The findings are published in our new report called “PFI Expiry: How London boroughs can get ahead” 

PFI contract expiry raises a number of issues - not least, how hand back is being managed and what, if anything, will replace those projects.

The contractual arrangements that underpin all PFI projects are both substantial and complex. This report confirms that many authorities are starting to realise this and that without greater and more immediate focus and resource, they will struggle to properly manage these contracts through to expiry. 

The consequences of not doing so could severely impact future service delivery and result in unsuitable buildings and facilities, representing significant liabilities, being handed back to the public sector to sort out. 

Ensuring local infrastructure and public services are fit for the future 

However, it is not too late for authorities to address this. By doing so, they will be far better placed to ensure that tomorrow’s local infrastructure and public services will be coherently planned, procured and fit for the future.

Over the next decade, many PFI contracts will expire across at least 20 London boroughs, which account for three-quarters of all PFI contracts in the capital. These contracts represent nearly £6 billion of payments remaining from boroughs to private sector operators to manage and maintain key public infrastructure, assets and services including schools, housing, care facilities and street lighting. 

Failure by boroughs to prepare in time for expiry could lead to major disruption to essential public services and facilities, according to the report “PFI Expiry: How London boroughs can get ahead”.

At a roundtable discussion as part of the research project, senior finance and resource directors identified resourcing pressures including: 

• Increased costs of service delivery after government PFI credits stop
• Lack of management capacity to lead preparations for PFI expiry 
• Pressure on local authority PFI reserves, which have not kept up with inflation, to manage the expiry process effectively.

“The [PFI] reserve is being used up and doesn't have the money in it to close the contract down,” said one senior local government officer at the roundtable, which was conducted under the Chatham House rule. 

“So there's a net cost to get to expiry, and then there will be an ongoing net cost.”

Overall, the feedback from London boroughs highlights a concern that PFI contract expiry will increase the financial strain on councils already dealing with unprecedented financial pressures such as the rising costs of temporary accommodation and adult social care pressures. 

The responsibility for maintenance of assets and related services currently being delivered under PFI will, upon expiry, initially fall to local authorities unless and until they are transferred to third parties including, in the case of many schools, academies. The authorities could therefore inherit unknown, problematic and expensive risks and liabilities connected with these assets and services if expiry and hand back is not managed properly.

The report also highlights good PFI expiry management practice. Some London boroughs are also seeing opportunities to modernise services and deliver benefits for communities.

“We've got an absolute opportunity to reprofile our care homes to fit the 21st-century service we need to deliver,” said Fenella Merry, Executive Director of Finance, London Borough of Richmond upon Thames. “So it puts huge potential on the horizon that we didn't have without that PFI expiring.” 

Report recommendations for action

The report makes recommendations for local authorities and other public bodies with PFI contracts. They include:

• Breakdown the process into business as usual, the expiry process itself and post-expiry service delivery.
• Explore potential extensions to align contract end dates with maintenance and procurement schedules.
• Invest in project management capability and specialist expertise, which can save money in the long run.
• Agree on asset condition, at least five years before expiry, to avoid costly disputes.  

In addition to two roundtables, officers and directors from 14 London boroughs, as well as teams planning for PFI expiry at Leeds City Council and Walsall Council, were interviewed as part of the research. Additional interviews were conducted with a government agency, Infrastructure and Projects Authority, and Transport for London, among others.

Nicola Mathers, Chief Executive of Future of London, said:

"This is the first review of the implications of PFI contract expiry on London local authorities. We talked to most of the boroughs affected and it's clear that many feel under-prepared and under-resourced. 

“This comes at a time when London boroughs' capacity and resources are being squeezed from all directions. Our report highlights practical approaches that boroughs can take now to ensure they are fully prepared and make the most of this opportunity to modernise services."

Mark Humphreys, Director at Airey Miller, said:

"The research highlights that local authorities across London face a real challenge in preparing for PFI expiry at a time when council resources and in-house capacity are being squeezed. 

This practical report highlights the vital importance of planning ahead to manage the risks associated with taking on aging buildings. However, we are pleased the report also encourages local authorities to see PFI expiry as an opportunity to modernise service delivery."

With thanks to Future of London and Airey Miller for their work on this project.

Access the full report here: PFI Expiry: How London boroughs can get ahead

For more information on this topic or to get in touch, please contact me: caroline.mostowfi@devonshires.co.uk