The Handback to the Future event was split between four key topics for consideration, with an interactive approach designed to stimulate discussion and increase participation between attendees.
The event provided delegates with a chance to think deeply about some of the main issues facing the industry - with an important underlying theme that the handback of a PFI contract should not be considered the end of the story: for many projects, the expiry of the PFI contract simply means moving to a different phase of an asset’s management, not the end of that asset.
Delegates were encouraged to think about the long-term impacts of handback, but also consider different perspectives and take stock of some of the key factors that will need to be thought through ahead of a successful handback process.
To read the key takeaways from the four different sessions, click on the links below - or scroll down to read the whole review in one go.
Asset Transition
During a session led by Vercity’s Patrick Hamill, delegates were invited to consider three questions: What is the most important ‘asset’; How can parties achieve mutual benefit and shared success; and Can expiry be successful in isolation from the follow-on?
What is the most important ‘asset’?
While this may sound like a curveball question, Hamill explained that in any given project, there are a whole range of things that may be considered ‘assets’, not simply the building itself. He pointed to stock, documents, the shared knowledge and the people worrying within those projects as examples of ‘assets’.
During the discussions, many in the room agreed that to answer this question will depend on a range of variables, chief among them being the type of project being worked on and the perspective of the individual stakeholders in the project. The ‘it depends’ response was something of a theme across the sessions, as individuals in the room recognised the fact that these different viewpoints may well come up against each other. Therefore, it was suggested that a collaborative approach between parties, where empathy is a key part of the relationship, will be an important ingredient.
Notwithstanding these different perspectives, there was broad agreement that having a clear picture and understanding of what the plan for the building and its services will look like post-expiry is critical to being able to begin prioritising which are the most important assets in any given project.
The discussions also highlighted that some of the different ‘assets’ would overlap in terms of their importance: for example, it was agreed that transferring knowledge from the PFI contract into whatever comes next (whether an extension, a completely new contract, taking services in-house or something else) is critical, but in many cases the best way to do this is through the staff who have built up the experience and expertise over the life of the contract.
How can you achieve mutual benefit and shared success?
Again, this question came back to a discussion around perspectives, and while it was acknowledged that ‘success’ would look different to different stakeholders, the point of the enterprise is to deliver something that all sides could be comfortable with.
First and foremost, it was suggested that, as an industry, success would be ensuring that the delivery of services are maintained, so that teachers in a school or patients in a hospital effectively notice no difference on the day after the contract has ended.
One of the difficulties discussed here is the disconnect between what the public sector will rightly want (an asset in as brand new a condition as possible) and what the private sector will be hoping for (the best returns possible). These can become competing interests where, for example, two different experts provide differing views on whether a project’s roof needs to be replaced within the next 10 years.
Again, it was agreed in the room that much of this will have to come down to negotiation, and therefore starting early to have these conversions between parties will be vital. While the Infrastructure & Projects Authority (IPA) guidance proposes a seven-year lead time for discussions, some in the room suggested that this should be 10 years where possible - especially if there is the prospect for variations to become part of the handback process.
An overly contractual approach - which has become prevalent in some schemes where relationships have broken down - was considered a potentially dangerous route, in which all sides would end up failing to get an outcome that could be considered successful.
Another issue raised in this conversation related to ensuring those with shorter term horizons (for example, lenders) buy in to the long-term nature of the project. Early conversations were considered critical here.
It was suggested that a more streamlined process, focused on different sectors, with central government guidance, would help to ensure shared success - and representatives from the IPA confirmed that more guidance in this area is in development.
Can expiry be successful in isolation from what follows on?
The room agreed that the answer to this is a resounding ‘no’. As discussed above, having a clear vision of what is going to happen to the project post-PFI expiry is critical to being able to make informed decisions around how to carry out a successful transition. There has to be a strategy in place from early on as to how the asset will continue to function on the day after expiry, and much of the other conversations and decisions will flow from that common aim.
However, once this future has been agreed upon, there are some areas where expiry can then be prepared for in isolation to what comes next - in particular in relation to FM providers. If it has been agreed that the FM provider will not be continuing its involvement post-PFI expiry, in theory the provider may be able to work towards a hard stop - although it was acknowledged that good practice would be to support wider preparations for whatever is to replace that FM provision.
Indeed, it was suggested that part of the opportunity being presented by the handback process is to look at the relationship afresh, and to think more about what is needed at that higher level and how all parties can work to get there.
Net Zero
A lot has changed in the world of technology and energy consumption over the past 30 years, and while Addleshaw Goddard partner Paul Dight suggested that the Net Zero agenda in some ways has nothing to do with PFI expiry, he went on to point out that it does offer a significant opportunity to help authorities decarbonise their estate.
Therefore, as part of those discussions that parties need to be having several years ahead of contract expiry, they could and should also be looking at what opportunities might emerge to bring in some low-carbon features within the overall development of the project. As part of this, he warned that it is important to keep an eye on the future, and not simply be constantly referring back to the building requirements contained in the original contract.
The bottom line is that any extra-contract changes to assets, such as what Net Zero targets envision, will have to navigate the additional requirements of a sometimes rigid PFI contract; as one attendee put it, “as soon as PFI is involved the difficulty is squared”. Not to mention that some contracts have neither the “carrot or the stick” to incentivise these kinds of changes.
That being said, the intimate expertise built up over the decades of project management, plus the private sector’s involvement in the specifics of each project, present an opportunity for the public sector that is “not to be missed”, one asset manager said.
However, a cautionary note was struck by John McKenzie, technical director at Equans, who pointed out that changes to reduce emissions may need to be accompanied by appropriate changes in the way contracts are administered.
He used the example of replacing a gas boiler with a ground source heat pump during the latter years of a PFI contract, ready to hand over a more eco-friendly facility than the one originally envisioned. While this may be an admirable ambition, McKenzie explained that, as an FM provider, the ability to respond to a failure of the heat pump will be significantly reduced, as there are far fewer experts available to fix such problems. As such, it may no longer be appropriate for the PFI contract to insist on heating failures to be fixed within two hours (easy enough when plumbers able to fix gas-fired boilers are in plentiful supply).
Such issues therefore need to be carefully considered in consultation with all relevant parties, including FM providers.
Services Post Expiry
This session, led by Farah Abou, assistant director in PwC’s real estate team, considered three critical questions relating to delivery of services after the PFI contract has expired. These were: Have you already transitioned services during a contract and what lessons have been learned; What has been the biggest market shift over the years; and What does success look like? Discussions were held around the room, feeding back at the end of the session.
Have you already transitioned services during a contract and what lessons have been learned?
Most in the room referred to their experience of handling the fallout of the collapse of Carillion - and in some cases, Jarvis before it. This experience had given many in the room an insight into the granularity that is required when transitioning services, right down to knowing where the keys for each cupboard are. At the same time, being able to keep a certain high-level view of what is happening was also felt to be important in this situation.
The Carillion experience also provided an opportunity for the public sector to review what they were being provided with - and outline where they had not been getting the service that the contract had stipulated. As handback approaches, it is hoped the public sector will have the time and space to do this work before assets are transitioned, in a way that the collapse of Carillion did not allow for. Nonetheless, there was a concern that in many cases it will only be when the transition happens that issues will come out of the woodwork.
Delegates also felt that Carillion’s collapse had provided a common goal - in a similar way to the Covid-19 pandemic - that had given a compelling reason for all sides to come together and work effectively as a unit to literally keep the lights on. There was some concern that there is often far less urgency and less of a feeling of a common goal around projects that still have seven or even five years left to run, leading to a fear of drift that will result in a crisis point much closer to expiry.
What has been the biggest market shift?
Technology changes tended to be the first thing that came to mind here, perhaps unsurprisingly. However, experts suggested this is likely to take a variety of forms in the future, from data storage to the Internet of Things and more. Technology has already changed how spaces are used within facilities, and one delegate pointed to the need, contained in the original contract, for space to store paper records. As such requirements have changed and records have become digitised, plans for those spaces will need to be considered in future.
Another major change over the past 30 years has been in the policy space, particularly in sectors such as healthcare, where the way in which services are provided within health settings has changed markedly (albeit in many cases driven by improvements in technology that allow for this). As a result, the services that the original hospital PFI was built to house may have moved some time ago - and the handback process could provide an opportunity to make more changes in this area.
The perception of PFI was also mentioned as an important change. It was suggested that some in the public sector no longer see the value of risk transfer in the way they did when they received their new building, and this has led to a more transactional approach to the contract, instead of a collaborative atmosphere. It was acknowledged that in such cases, creating the grounds for a successful handback could prove more challenging.
What does success look like?
Once again, there was a feeling that the answer to this relied on a variety of factors, including the particulars of the contract, the type of asset, the point of view of the different stakeholders, and more.
Although each side having potentially differing responses to the question might at first seem problematic, there was broad consensus in the room that acknowledging that fact will be crucial to finding a successful pathway forward - with one panellist urging participants to make explicitly clear to other stakeholders what their key ambitions look like. This would then enable more understanding and foster collaboration and compromise, they suggested.
One of the frequent suggestions in this debate was that the impact on staff is a key consideration - ensuring that those who have the knowledge and experience are brought along as part of the handback process, so that whether or not they are transitioning with the asset post-PFI expiry, that body of knowledge is not lost.
It was also pointed out that FM contracts post-expiry will need to look very different from those that formed part of the PFI deal. They will no doubt be shorter, but also the level of risk being transferred will also have to be less, otherwise the deals will simply not stack up for FM providers. It was felt that there should still be a critical role for MSAs and FM providers to play in many of these projects after the PFI contracts come to an end - potentially by providing services across a wider estate portfolio where relevant.
Liabilities
Fraser Ritson and Claire Wainwright from Addleshaw Goddard provided a summary of some of the key liabilities facing parties when the contract expires and the project company reaches the end of its life. They explained that the SPV will most likely be terminated through a members voluntary liquidation (MVL), which requires members to make a statutory declaration that the company will be able to pay all its remaining debts within 12 months.
They warned that there can be a risk of personal liability on those directors should the project company become insolvent and it is found that the directors did not prepare sufficient contingency for the liabilities it was likely to face.
Overall, the message was clear that parties need to be thinking about such potential liabilities, and what happens to the project company, from some time before handback.
Sarah Wilson, managing associate in Addleshaw Goddard’s construction disputes team, then gave a presentation on the recently enacted Building Safety Act, which may have a significant impact on asset management.
While the focus of the Act covers anything containing a ‘dwelling’ (meaning housing PFIs are within its scope), the Secretary of State also has the power to extend that to other areas - and has already done so in the case of care homes, for example. Hospitals are also likely to be impacted by the Act.
Although a lot of provisions relate to new projects, where a contractor is undertaking significant works (perhaps, in a PFI contract, as part of major reconfigurations related to handback) on buildings over 30 metres, then those provisions will also apply.
Perhaps the most significant requirement in the Act as it relates to the handback of PFI contracts is the designation of the ‘accountable person’ and ‘principal accountable person’. If these individuals are found to have failed in their duties, it is considered a criminal offence. In most PFI scenarios, the public sector and all private sector parties, with the likely exception of the funders, would be considered ‘accountable persons’ for the purposes of the Act.
Meanwhile, it has also opened up two new routes in which a claim can be brought for issues going as far as 30 years back. One of these relates to defective or incorrectly marketed cladding products, while the other is where a dwelling becomes unfit for habitation. Both of these could provide new routes for claims to be made as projects head towards expiry and authorities work with partners to consider whether their project meets the standards set in the original contract.