Across the UK, more than 700 active Private Finance Initiatives (PFIs) that have created investment and subsequent enhancements to public infrastructure. While these PFIs are often long-term partnerships, many are approaching their expiry within the next decade. Guidance issued by the Government’s Infrastructure and Projects Authority (IPA) provides support to those approaching the transition. However, early engagement between the private and public sectors to mutually understand each other’s needs is critical to minimise delays in moving to a new arrangement.
Amey manages a diverse range of services across the country through 21 PFIs, with 50 percent expiring in the next five to ten years. Given that PFI contracts facilitate the delivery of public services over extended periods, expiry could be a daunting proposition for all involved parties. To navigate this challenge effectively, establishing a well- defined hand-back strategy can help ensure a smooth transition and mitigate future risks. But where should one begin?
Walsall Council’s streetlighting PFI contract will be the first in the country to run its full term and be returned back to the local authority. Amey, as Walsall’s streetlighting provider, has collaborated closely with the Council to manage this transition effectively.
Neil Sennett, Principal Commercial Manager at Amey, shares his insights on how to ensure public service continuity during and after the transition period: “Over the past 18 months, we’ve been working in collaboration with Walsall Council to design and agree a hand-back process that works for everyone involved.
"While there is helpful IPA guidance, and of course, the requirements set out in original contract documentation, it has become apparent neither provides a comprehensive process that sets out the practical steps needed by either party. Our initial focus was to create a process that worked in Walsall, but over time, we wanted to design something which could also be applied elsewhere.”
Relationships, time, and a mutual plan
Inevitably, ambiguity and challenges will arise as expiry approaches, with constructive relationships critical to successfully negotiating these. The culture and behaviours developed through decades of hard work and success should be built upon. Understanding each other’s expectations, aspirations, and constraints establishes common ground with shared objectives. This, in turn, facilitates pragmatic discussions, informed decision making, and effective solutions. Operating transparently, supported by clear governance, ensures both parties remain focused on maintaining assets to the required standard throughout the transition.
“Working together for over 20 years has enabled us to create a collaborative culture. This gave us a solid platform to start our discussions, yet even so, we still learnt quickly that both parties needed to further invest a significant amount of resource for this to succeed. The IPA recommends planning and preparation for hand-back should start seven years out. However, particularly in the case of more complex infrastructure, considering expiry ten years out is more reasonable to get into the detail of what the future looks like, particularly for clients considering their post-PFI strategy.”
“We captured everything within one shared plan to track progress, record decisions and maintain our common understanding of the objectives, risk, dependencies, and outcomes. This approach particularly helped us to ensure asset condition was dealt with early and enabled us both to plan our resources appropriately. We needed to increase skills in certain areas and deploy others to upskill for future needs; while at all times keeping the delivery team engaged through a period of significant change.”
Challenging past assumptions
The complexity within PFI contracts is well-known, often including a variety of interconnecting performance standards. Unfortunately, many of these standards reflect the client’s aspirations from years ago rather than the current and future needs of local stakeholders and communities. To address this, early conversations must take place, engaging stakeholders, especially local politicians, in understanding the post-PFI service. By doing so, we can allocate more time to shape the genuine requirements of the future service. Unfortunately, this step is often over-looked. People assume they understand the contract requirements, rely on locally agreed practices, or make assumptions that their interpretation aligns with others.
“Having worked together for over 20 years, we recognised with Walsall Council that we could easily make these assumptions based on our historical knowledge and in-built biases. When considering the future delivery model and preferences of local politicians and communities, the one area that kept us grounded was the essential need for the streetlighting contract to leave a long-standing legacy in Walsall.
"We’ve built a positive relationship over the last 20 years which has helped these discussions, but even so, at times, the level of honesty and openness between us felt uncomfortable. And no doubt, this will continue throughout the rest of the hand-back period, but these challenges ultimately drive us to deliver an improved delivery model and service for Walsall.”
Minimising risk collaboratively
While strong local relationships are beneficial, they alone will not be enough. All 700 PFI contracts will have nuances needing individualised solutions. However, it’s important to recognise that there are commonalities that unite PFIs more than divide them. Whether in streetlighting or across various sectors, guidance, best practice, and learnings must be shared.
Local authorities cannot review a PFI contract in isolation; they must consider how it aligns and connects with other contractual services. Given the increasing budget scrutiny and different financial models over the past 20 years, clients face the challenge of determining how these services will be funded in the future. Specifically, they must assess whether maintaining the same level of service remains affordable after the PFI contract ends. These decisions are complex, and early conversations play a crucial role in evaluating available revenue funding or to seek other external funding options.
“Every organisation needs to protect itself and as such, weighs up the likelihood of further changes over the remainder of the contract. While difficult to predict, and can heighten the risk involved, questions need to be asked around locking in the future service plan earlier to avoid abortive planning and wasted costs.”
“We were mindful of the challenges that could arise from everyday items, such as assets and data transfer. Asset condition can be the most contentious issue in any PFI hand-back, so early engagement to agree on the criteria and testing of assets is vital. Predicting residual life is difficult, so we agreed on the metrics in advance to ensure all parties were comfortable and collectively risk was reduced.”
Learnings from Walsall
“While we’re still finalising the PFI hand-back, our collaborative work with Walsall has highlighted four insights for others:
1. Make time to prepare and manage expectations
Allow time and opportunities to understand every party’s perspective. Set clear expectations around assets and information, agree on the common objectives, and align outcomes that can mitigate risks in the following years. Operate a Joint Risk Register and Risk Mitigation System which sets out responsibilities for each organisation.
2. Understand nuanced provisions and commit to a unique plan
Whilst some themes are common, the hand-back process can vary considerably from contract to contract. Building a bespoke, shared plan is invaluable and creates a solid foundation on which to deliver the final phase of the contract.
3. Embrace transparent, challenging conversations throughout
Committing to a partnership based on open discussions and productive challenges can prevent relationships becoming adversarial and ending in formal disputes. Unforeseen differences will almost certainly occur at some point and adopting a transparent, solution-focused approach is essential.
4. Learn from others
Drawing from experiences and lessons learned provides valuable insights. Understanding what worked well and identifying the challenges faced can inform future practices, prevent repeated mistakes, avoid duplication, and eliminate the need to constantly re-inventing the wheel.
A positive outlook
UK infrastructure has benefited from significant investment that may not have otherwise been affordable by the public and private sectors. Effectively managing the hand-back of upgraded, well-maintained infrastructure, with many years of serviceable life, is critical as these assets return to public sector stewardship. This is a pivotal moment to re-imagine the delivery of public services. Supported by asset management information that was previously unavailable, should facilitate the implementation of strategic asset management well into the future.
Time for change
But what does that future look like? What will be replacing PFI? There are several alternatives emerging for infrastructure financing from the Regulated Asset-Based (RAB) to Tax Increment Financing (TFI), Local Authority Bonds, and Capital Market Funding. These alternatives offer diverse approaches to infrastructure financing beyond traditional PFI contracts, emphasising flexibility, risk management, and value for money.
“Here at Amey, we’re in a privileged position that for the past 20 years we’ve worked alongside our clients delivering PFI contractual obligations. All sectors now have the opportunity to pause and take advantage of time to reflect and ensure moving forwards we learn from past lessons and leverage advances in technology to support the delivery of even better public infrastructure in the future. How well both parties can effectively navigate hand-back, with minimal impact, will inevitably determine the future for financing infrastructure projects.
First featured in the September edition of Highways Magazine.