Out-Law Analysis 2 min. read
07 Dec 2023, 10:17 am
Projects procured under the UK’s private finance initiative (PFI) are currently subject to increased levels of industry-wide scrutiny and review, with focus increasingly being placed on relationship “resets”.
This environment could provide fertile ground for public and private partners to deliver meaningful change in the decarbonisation of real estate assets before the assets return to public ownership.
The move could help unite PFI project partners behind a common goal at a time when distress levels in the PFI market are at an all-time high.
There are currently around 669 PFI schemes operational, with an estimated £143 billion in payments still due under the related contracts. More than 200 of those contracts are due to expire in the UK over the coming decade. While most PFI projects are accommodation projects, particularly in core strategic sectors of health and education, PFI and PPP contracts have also been popular in other areas of public services, such as in defence, waste and water, as well as roads.
An independent report commissioned from Barry White and Andrew Frasier earlier this year by the Infrastructure Projects Authority (IPA) highlighted the risks involved where public authorities, in seeking to take “a more rigorous approach to contract management”, stray into “overly draconian” enforcement of the terms of the PFI contract and exhibit what is seen by some to be “unprofessional behaviour”. Some public sector stakeholders complain of disengagement, long running or chronic underinvestment, and an unwillingness or inability to respond to calls for improvement.
The White Frasier report highlights the increased trend towards relationships between private and public partners to PFI projects becoming strained or even completely breaking down, individuals’ wellbeing being impacted, and an increase in the likelihood of disputes and, ultimately, project failures.
PFI projects that have the hallmarks of a distressed project tend to end up in often long-running adversarial disputes, and more frequently now insolvencies and terminations. It can be very difficult to reclaim a positive dialogue and constructive approach to PFI projects where relations between the parties involved have deteriorated.
A crucial recommendation of the White Frasier report is for a “reset” approach to fundamentally overhaul relationships across the PFI sector. The private sector has shown a real willingness to engage in this approach in principle – for example, with the formation of The Association of Infrastructure Investors in Public Private Partnership involving international infrastructure investors including Equitix Limited, InfraRed Capital Partners Limited, Dalmore Capital Limited, and Semperian PPP Investment Partners Group Limited.
Much of the activity and discussion has been focussed on creating a transparent environment for proactively identifying and remediating issues. The logic being that adopting this approach before a PFI project has hit significant identified problems can reduce the risk of project distress and align the parties in moving towards a normalised level of higher performance overall.
Our prediction – and hope – for 2024 is that we will see projects increasingly looking to move towards that reset mindset. This is good news from a number of perspectives. In particular, it may create space to allow the built environment assets comprised in PFI projects to more rapidly become part of the decarbonisation solution that October’s second National Infrastructure Assessment identifies is needed to deliver UK government policy of net zero by 2050. Indeed, this is acknowledged, albeit in passing, by the White Frasier report suggesting resets could include as additional items, “on a project specific basis”, variations to incorporate elements of energy efficiency or decarbonisation.
For health trusts and local authorities with large estates under PFI contracts, there are clear and current opportunities to achieve meaningful results across a portfolio of asset. We would encourage stakeholders from both public and private to really focus on what can be achieved in this area as part of any wider reset review.
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