The expectation of the IPA is that every Contracting Authority is practising good contract management throughout the PFI contract’s lifecycle. This will include both operational management, ie, day-to-day management, and forward-looking management, ie, future processes and obligations. Contract management won't only establish the essential actions, milestones, and decisions but also naturally connect to various other aspects of PFI expiry.
Know your contract
Are all documents kept within a document register? This will include the original project agreement and all variations/sub-contracts, as well as the financial model, including revisions as and when there are changes to financing.
Documents relating to the project agreement and Special Purpose Vehicle (SPV) information, including but not limited to annual financial statements and ownership structures, should be stored.
The Project Agreement will outline information, which is readily available to the Contracting Authority. This might include performance reports, maintenance plans, and lifecycle plans. These should all be stored in the document register and will help dictate future negotiations at expiry.
Risks and gap analysis
The Contracting Authority should perform a review of documents included in the document register. This will help identify any potential gaps in knowledge or information. These gaps typically exist in the following areas:
Ownership
Are there provisions regarding buyback? This potentially creates additional financial implications which might not have been considered.
Asset condition
Is asset condition at handover fully understood? A good understanding will reduce risks around further costs post-handback.
Condition surveys
Has a timeline been established? There needs to be time for condition surveys to be executed and then rectification works to be completed.
Through completing a document review and identifying potential areas where understanding might be lacking, a clear action plan can be developed to bridge these gaps.
Expiry planning
Once gaps in knowledge have been closed, contracting authorities can begin to plan for expiry. This will shift the focus from operational contract management to future thinking in respect of service requirements, asset condition, and linking these into a commercial strategy to take forward to negotiations with the SPV.
Contracting authorities must look to use all information-reporting mechanisms that would have been identified during the contract review. This will aid the Contracting Authority to utilise all payment mechanisms which will encourage the right behaviours in the lead up to expiry.
Noting that statutory compliance will rest on the contracting authority post handback, it's essential that this is reviewed and tracked as expiry approaches. This is especially important in assets such as hospitals and schools, which naturally have more risk involved in respect of reputation and operations.
Exploring financial options to deliver variations
PFIs are typically 25-to-35-year contracts and there's limited scope in terms of variations in respect of the use of the asset, or the services provided within those contracts. PFI expiry offers an opportunity for Contracting Authorities to rethink how the asset is used going forward.
As an example, a hospital built in 1991 might not have the same level of patients, especially if larger hospitals have since been built in a close proximity. This might therefore provide an opportunity to deliver an alternate use of a part of that asset.
Similarly, the services provided at the unit might no longer be fit for purpose. In this instance there might need to be a variation to the services which might incur more cost.
In both these examples there will likely be additional financial requirements. In the current macro-economic environment Contracting Authorities will need to develop innovative delivery models to ensure value for money (VFM) while not impacting service delivery.
For more insight and guidance, get in touch with Nick Moseley.
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