PFI – Distressing News from the IPA

Last week saw the issue of further PFI guidance from the Infrastructure and Projects Authority (the IPA) entitled “Navigating the risks of PFI project distress”. Putting aside its unfortunate subliminal reference to sinking ships, this is another well produced and excellent resource for those participating in operational PFI projects.

Its publication follows on from the White Frasier Report and (albeit not explicitly) is presumably influenced by “under the bonnet” activity that the IPA has been undertaking through its project “health checks” and its support on those projects that require restructuring or rescuing.

Taking account of Devonshires’ background of working throughout the full lifecycle of various PFI Projects, here are four observations on the Guidance:

Does its Title Lack Ambition?

Whilst the title of the Guidance is certainly headline grabbing, its potential audience is far wider than those faced with a project that is going (or is about to go) badly wrong. This is because so much of its content is relevant to those who may simply be seeking a better understanding of how their project is structured, how it works and how it could be better managed. For example, understanding rights to access data; establishing appropriate governance; tracking the financial position of Project Co and ensuring value for money are all examples of matters that are equally relevant to the operation of a Project, irrespective of whether distress is around the corner.

It may upset Jeremy

The last few years have seen the emergence in the PFI sector of a category of consultants (perhaps) unflatteringly known as “fee farmers”. Often possessing a mix of commercial, legal and technical expertise, their offer can generally be summed up as one of recovering their fee from amounts that they help the public sector recover from Project Co (often by way of deductions).

The pure commerciality of this approach is very appealing to some, particularly where public finances are so constrained and paying external fees without any certainty of recovery is seen as too risky.

Fee farming is not though without its critics. Many see this approach as driving the wrong behaviour in what is purportedly a “partnership” between the public and private sector. Interestingly, the Guidance goes out of its way to comment that “Parties should also be clear that it is not appropriate to enter into conditional fee arrangements for PFI Disputes.” 

Will this prove to be yet another blow to the (albeit figurative) farming community?

But possibly not Elon?

Understandably, the protection of the public purse is one of the Government’s primary objectives when considering the rescue of a PFI project. The Guidance is entirely consistent with that.

Rescue solutions that risk a change of “classification” or seek to transfer additional risk to the public sector have been seen as the clearest red flags when considering a threat to the public purse. The need for rigid adherence to obscure complicated accounting standards that are understood by the very few, is often seen as an unnecessary constraint by those focussed on more commercial and objectively beneficial solutions.

However, there is only one mention in the Guidance of classification and one of risk transfer to the public sector.  Rather, the Guidance places great emphasis on value for money in its broad sense, considering factors such as “economic, financial and operational consequences of different potential outcomes”, “project company insolvency” and “wider impacts, including on the continuation of any PFI grant.” It also recognises that applying “contractual remedies to their fullest extent” may not always produce value for money. 

It is unclear whether this nuanced shift is deliberate or indeed real.  If it is intended, this is a welcome development. Permitting greater flexibility in rescuing projects via solutions that do not tick every technical regulatory box but which the public and the private sectors embrace and which deliver the “right” outcome, will result in greater, quicker, cheaper and more appropriate rescues.

What would Rachel Say?

The Guidance’s thorough approach to problem solving; its adoption of sound project management principles; its use of comprehensive risk assessments and data gathering and its endorsement of hiring the right external advice, are all consistent with a model approach to rescuing a Project.

But models rarely function well in the real world. Research by the likes of Future of London and an abundance of anecdotal evidence, clearly identify a dearth of resource (particularly financial) as one of the main factors behind the chequered operational record of many projects and a significant reason behind projects running into trouble.

With increasing pressure on the Chancellor to curb public sector spending even further coupled with her commitment to reduce the public sector’s use of private sector consultants, it is difficult to see how the IPA’s “best practice” model can be fully implemented in the real world. 

The above is not intended to fully critique the Guidance but rather to stimulate further thought and discussion. With increased murmurings of the reprise of PFI or its variant (it has even made it to the UK REiiF programme this year), there has never been a better time to debate this often controversial route to delivery.

If you would like to hear more thoughts or discuss the above, do contact me.