Expiry is not the end
This feature article appears in Volume 25 issue 2 of Partnerships Bulletin magazine.
The next chapter in the saga of public-private partnerships (PPPs) will be defined by how assets developed continue to benefit their users after the contract expires.
In June the UK’s National Audit Office (NAO) warned of the danger that important infrastructure could return to the public sector in an unsatisfactory condition and services could be disrupted unless a more consistent and strategic approach is taken to ‘Managing PFI assets and services as contracts end’.
While the warning from the watchdog was directed at the UK Government, it represented an alarm to all stakeholders in PPP contracts that the time to prepare for the end had arrived.
Despite an ominous outlook, Gareth Davies, the head of the NAO, offered a reprieve that with the bulk of PFI contracts expiring from 2025 onwards there is still time for government to make changes that will help public sector bodies to exit from contracts successfully.
Shortly after the release of the NAO’s report the UK Government commenced recruitment for the Infrastructure and Projects Authority’s (IPA) PFI Contract Management Programme team.
The IPA told Partnerships Bulletin: "While very few PFI projects have expired so far, we are learning the lessons from those that have and are using examples of good practice that already exist across the public sector. We have also set up a dedicated team to ensure that sites are returned to public ownership in an appropriate state."
With 20 of the 120 PPP projects in Scotland to reach the end of contract in the next 12 years, the Scottish Futures Trust (SFT) has also been gearing up for handback and in April released guidance on PPP Projects Nearing the End of Contract. A document that has been highly commended by the industry.
The industry meanwhile has also been gearing up with specialist PPP contract management teams assembled at firms across the UK, and beyond, ready to support the 800+ PPPs in the UK find a successful conclusion.
Industry experts have kindly provided Partnerships Bulletin with insights into what success in the expiry and handback process means, and how to achieve that success. However recent events in North London have underlined that these insights are not about what is coming in the near future, rather they are an insight into a new chapter in the story of PPP that has already begun.
Islington Council has decided when a housing PFI contract (known as PFI2) comes to an end in April 2022, the council should directly deliver services to the 4042 homes. While much of the handback discourse so far has been focused on the earliest PFI contracts expiring, it is worth noting PFI2 was signed in 2006.
There may still be time for changes, but what those changes are will need to be figured out quickly.
What are the options to be considered for PPP projects nearing the end of contract?
James Ryan, director, AA Projects, summarises the options as;
• a complete clean break with procuring authorities re-establishing their own in-house teams for management of assets.
• A partial break, with the transfer of the FM CO or Operator team (TUPE Transfer) and continuation of a Total FM delivery model or similar with some services added or removed
• Limited break – continuation of the FM service and lifecycle contracts with the same provider under the same or similar terms
• Extension of the contract and rolling of some Project Equity and possible raising of new debt to fund expansion and to all intents and purposes continue the PFI.
What does a successful ‘handback’ look like?
SFT senior associate director Donna Stevenson believes success may well look differently across the various sectors reflecting, in part, the scope of services provided by the PPP operator. However, she says the base line for success will be where the Project Company/SPV meets all the contractual obligations for expiry, assets are in the condition required by the contract and there is a smooth transition into the post expiry arrangements, with no formal disputes.
Any staff transfers will be well managed with business as usual operations unaffected by handback and transition. Successful handback outcomes will be founded on early preparations, transparency, a collaborative approach between the public and private sector partners and effective planning taking into consideration the disruption to users that handback works may have. This will require the public sector to have the right resources with a clear understanding of any continued need for assets and a clear plan for service delivery after expiry.
Stevenson, who leads on SFT’s operational contract management workstream, notes future PPPs could benefit from existing projects being seen to successfully take advantage of the handback process to contribute towards carbon reduction targets in a collaborative manner.
Where asset replacement takes place as part of the handback process, if that opportunity has been used effectively to replace old assets with new assets that contribute towards carbon reduction, that will be seen as a huge benefit and will also reduce the need for the public body to undertake replacement works again in the short or medium term simply to meet carbon reduction targets once it is responsible for managing the facility concerned, she adds.
A successful handback will be established long before the actual expiry date, explains James Ryan, director, AA Projects. He adds: “A well planned mutually agreeable expiry of the contract where each party is reasonable in their expectations or delivery of renewal works, surveys, legal discussions etc. will all foster an agreeable outcome. A handback of an asset that has as much value to the client (end user) at the end of concession as it did at day one will be a real success for the industry and show, as we expect to be the case, that there is a longer term residual value in PPP assets compared to non-PPP assets.”
Aura’s CEO Kirsty Thirlwell comments every handback will be judged by the condition in which the asset is returned to the public sector, and how satisfied the parties are in how this meets the conditions as stipulated in the contract. Ensuring any ambiguities are addressed in the Handover Requirements and all parties have a clear understanding in what needs to be delivered is key, especially with early contract drafting.
Local Partnerships’ Sara Humber illustrates a successful handback is where a building is returned to the public sector in excellent condition having been well maintained and life cycled over 25 years in accordance with the rolling five-year maintenance and annual maintenance plans and lifecycle schedule (and in newer contracts the handback schedule).
She adds older contracts will not have specific handback provisions and so successful handback on these projects will require a good deal more negotiation with the SPV to establish the condition of the building.
What measures can be taken to achieve success?
Humber says detailed technical surveys will be required to establish the extent to which the building has been maintained and life-cycled to the required standard over the term of the contract.
The condition of the fabric of the building including any defects, Mechanical & Electrical Services (M&E) systems such as air handling units and heating systems will need to be investigated thoroughly by qualified practitioners and a picture of the remaining design life of these elements should be established. A building may look well decorated and maintained superficially but M&E systems that have not been life-cycled and maintained are likely to be hiding big ticket items for replacement. All of these projects include contractual obligations on the SPV to maintain and life-cycle the facility to a high standard so if the building fabric or M&E elements are not up to scratch then contractually they should be fixed. Detailed data will need to be gathered to form the full picture to allow for the required lifecycle replacement activities to be carried out prior to expiry.
I3PT Certification CEO Eoin Leonard explains: “Obviously, if construction and information are well-managed and documented, the asset is better protected. What was not always obvious to us, but has come to light recently, is how relevant this approach would be to the expiry and handback process. If contracting authorities and SPVs engage in a clear and transparent way, it is absolutely feasible to achieve a harmonious handback with trackable key performance indicators.”
Leonard illustrates recent surveys have indicated a high degree of concern over the quality and fitness of existing assets. “Yet, many clients under-invest in a proper diagnosis of the challenge. This is a fatal flaw, as without a detailed diagnosis, you cannot execute an effective strategy. Our multi-disciplinary team of engineers, clerks of works and surveyors are now engaging on projects which are approaching expiry in five years or so. Our initial detailed conditional surveys are tracked on our platform and all issues are getting addressed and closed out in a live environment. We are also engaging with the SPV’s and contracting authorities to assess the standard of information management and maintenance.
He adds: “Once the diagnosis is done, we set policies and actions around how best to manage handback. This includes tracking life-cycle maintenance (ensuring that it’s done correctly) and translating the building information, O&M’s etc to modern standards, so that they are searchable and accessible. If contracting authorities and SPVs engage in a clear and transparent way, it is absolutely feasible to achieve a harmonious hand-back with trackable key performance indicators.”
Ryan points to agreements on how to do handback surveys (the level of detail to survey to and the methodology applied) will all be useful and should set the tone for a successful handback of many assets.
HCP Director of Consultancy Services Eddie Davies says: “The management of expiry must not be seen as only about contractual compliance, building condition, and project data and documentation, essential as all that is. Expiry presents a great opportunity for the SPVs (and their service providers and advisors) to work in collaboration with the public sector, to explore the best possible outcomes for the transferred estate.
If we do not, the risk is that we tumble into an undefined post-concession position, with limited planning or strategic thinking as to how the estate will be best managed thereafter and lose all the gathered intellectual capital. The industry is awash with ideas, and at HCP we have been thinking through this with the best of them, but the difficult task is the management of effective stakeholder dialogue to ensure that we act in time and avoid missing the opportunity expiry presents. Each project has its own dynamics, which will affect the efficacy of such work, but at HCP we think that a number of positive options should be explored.”
Co-Innovation Partnerships founding director Tim Seabrook believes a timely and well-structured exit strategy is imperative to manage drawdown through formal initiation of the disengagement process with the incumbent PFI partners.
Seabrook notes in cases where time is limited due to late starting of this process, it may be necessary to apply short-term contract extensions, additional financial incentives or other interim arrangements to avoid service disruption, especially with the very real risk of losing critical staff as the contract approaches expiry.
On this basis, he suggests it is advisable for each authority to establish an agile programme management office with a dedicated team of collaborative experts to lead and consult through this process.
Thirlwell explains handback is a complex process with a high potential for dispute, so it is key to have an approach which will avoid or minimise dispute and costly legal expenses. Assess strategically what your organisation is looking to achieve, a new FM contract, zero carbon technologies, changes to the estate; these can be delivered by engaging collaboratively in the handback process. It is important that all parties understand in detail the risks and issues for each other, so it’s crucial to ‘cover the miles’ at the start of the process. The more risks and issues that get revealed at the end of the process the more likely it is a ‘hard stop’, such as withholding the last two years of Unitary Charge, will occur.”
What should be considered for the next generation of PPPs?
Humber, who is the Programme Director for the Welsh Government’s 21st Century Schools Mutual Investment Model (MIM) Programme, illustrates how the MIM Education Team has put in a number of new provisions in the MIM Education Project Agreement to ensure that expiry and handback is as seamless as possible.
“Although we have honed our handback schedule, our philosophy has been slightly different. Rather than look at handback as a panic at the end to get the building up to scratch we have enhanced our specification to future proof our buildings from the outset by putting in place a number of measures to make absolutely sure that the quality of the building and its systems is maximised from the beginning.
“Many building problems occur between construction and operations, the infamous “lacuna” where a single Independent Tester is being pressurised to sign off a building with unfinished works and far too many snags. Breathing Building Units are wired up incorrectly, air tests have been passed by covering the vents with cling film, the mastic man has come around to fill holes to allow the air test to be passed. We have put in place a much more rigorous testing system, the involvement of an Independent M&E Commissioning Manager who can oversee the commissioning process and make representations to the Independent Tester. “
A more robust independent tester appointment has been produced. in addition, there is a clerk of works function to support the authority through the construction phase (with the ability to make representations to the independent tester). Contractually after handover the air test must be repeated every five years. An energy manager will monitor the energy efficiency of the building and may require it to be recommissioned and optimised.
There are lifecycle efficiency reviews every two years and the authority also has the right to carry out a survey of the building every two years if it does not believe that the contractor is carrying out its Planned Preventative Maintenance (PPM) or lifecycle obligations in accordance with the requirements with a self-help remedy if necessary. Buildings that are delivered to the design criteria without value engineering and properly commissioned and optimised at handover and then maintained and life-cycled to the required standard will sail through handback.
“The hard work needs to go in at the beginning. However, the monitoring and management of these requirements requires a credible public sector counterparty that will have the skills to properly contract manage the outputs to ensure that the requirements of the contract are adhered to. “
At this time the SFT does not intend to make changes to the handback provisions on its standard form MIM template contract and therefore believes that the existing legal position used in hub and NPD contracts is consistent with successful handback where there is early planning and the development of a collaborative approach between the public and private sector.
However, in order to enhance the handback process, SFT has introduced the requirement for condition surveys to be undertaken at periodic intervals during the operational period.
Stevenson thinks “there should be regular compliance checks in the later portion of the concession to ensure condition is up to scratch and there is a look forward to handback in the latter half of the concession. Bringing up any issues early gives more time for simpler, cheaper remedies. Clear drafting on the requirements for handback surveys and possibly a requirement for a joint appointed survey would all be useful. This would be a kind of “end of concession independent certifier” for the handback.”
Leonard concludes: “The net effect should be an asset which can be demonstrated as compliant and asset information which is as coherent and accessible as one would expect from a new build. The SPV benefits from clarity and a smooth exit and the contracting authority has more certainty about the quality of the asset and fewer disputes.”