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30 November 20208 minute read

PFI and PPP in the UK – is it time to talk about handback?

In brief

The most recent standard form contracts and guidance in the UK for public-private partnerships (PPP) and similar forms of contract recognize the importance of prescribing detailed handback requirements and making provision for lead-in processes to be followed when a project approaches the end of its term. 

In accommodation projects (e.g. those in the health and education sectors), it is anticipated that new technologies, such as Building Information Modelling (BIM), will have a key role to play in testing the condition of assets and the building’s thermal and energy performance will be given further attention. This may bode well for clarity of requirements, quality assurance and continuity of service in 20 years plus, but what about those reaching expiry now?

Earlier private finance initiative (PFI) contracts are unlikely to benefit from the same level of specification. Some of the very first PFI contracts which have expired or are due to come to an end in the near future have little, if any, provision made for handback of infrastructure assets to the public sector.

In fact, in some early PFI contracts, the relevant assets may not require to be “handed over” to the public sector at all (as is the case for current Design, Build, Finance and Maintain (DBFM) models in the UK).

With authorities managing PFI/ PPP contracts being encouraged by the Infrastructure Projects Authority (IPA) to start handback preparations some seven years in advance of the anticipated expiry date, this is an area that we expect will require significant industry focus from the public sector, sponsors, service providers and senior funders alike in the coming months and years. The IPA is not alone in its calls for “early” handback planning, with Highways England suggesting an eight-year period and the Scottish Futures Trust (SFT) a five to ten year period (depending on the complexity of the infrastructure asset in question).

Lessons learned?

When we look back, this impending wave of handbacks is likely to be a pivotal point for the PPP industry. With early contracts sparse on handback detail, successful outcomes hang in the balance, yet it may be the point at which the industry showcases what has always been heralded as one of the key pillars of PPP – value for money through a whole life approach.

So, to achieve successful outcomes, what lessons can we learn from some of the early transitions?

The National Audit Office recently published a report “Managing PFI assets and services as contracts end” (June 5, 2020) (the NAO Report), which provides some helpful initial insight and learning. The report was based on a survey of over 100 contracts, 18 of which had expired, and is a useful source of information for the sector as a whole.

Some particularly poignant points of note from the NAO Report, include:

  • In response to general portfolio approaches across the private sector, there is a call, on the IPA in particular, to plan and develop a program of support for authorities and consider a centralized approach. This is already underway, with the IPA gearing up to deliver.
  • It recognizes a need for sufficiently early preparations and planning for handback, to mitigate against service disruptions, manage costs and allow sufficient time for any disputes to be addressed.
  • The report acknowledges the reality that public and private sector goals and drivers in planning for contract expiry will often be different and, as such, this is an area with heightened scope for disputes.
  • Similarly, with handback provisions not always being clearly defined, the report notes ambiguity is another reason for disputes in this area, but that proactive engagement can mitigate the risk of legal proceedings.
  • It acknowledges that authorities have different rights to information on asset condition under different contracts and how the approach to information sharing and knowledge within the public sector can affect asset condition at handback.
  • The NAO Report also recognizes the resource-intensive nature of handback preparations.
Looking forward – the assurance lifecycle

Industry experience shows that well-managed contracts with adequate assurance measures in place (at all levels), can mitigate against the risk of infrastructure assets being below standard and also reduce the scope for lengthy and costly disputes.

It is perhaps here, more than anywhere, that all parties’ interests in PPP or PFI contracts are aligned, i.e. act now and don’t pay later!

The latest focus on handback in the industry is very much a natural progression of the quality, assurance and preparedness themes we have seen running through other reports in the sector, seeking to draw on lessons learned from contractor insolvencies or assets with significant defects. Examples of such reports include the 2017 Report of the Independent Inquiry into the Construction of Edinburgh Schools, Professor John Cole CBE and the National Audit Office’s 2018 report on the Investigation into the handling of the collapse of Carillion and the June 2020 Independent Review into the Queen Elizabeth University Hospital (ultimately implemented as a D&B Contract).

A “cradle to grave” approach to assurance is encouraged, from all parties’ perspectives in PPP to ensure delivery of successful projects.

This begins of course with the drafting of the underlying contract documents and specifications and this has been an increasing area of focus for our public sector clients in recent times.

We are also seeing additional practical assurance measures being put in place by authorities to provide regular “health checks” on projects - not just on handback. This includes, for example, enhanced provision for independent testing during construction, commissioning and ultimately on sign-off of infrastructure facilities moving into operation. Too often in the past, issues have arisen where projects have been allowed to move to the operational phase with defects or significant snagging in order to trigger availability payments. Increased assurance throughout the life of the project is seen as part of the “fix” to avoid escalation of issues further down the line.

Project sponsors are also becoming more keen to carry out checks on the condition of assets, particularly in the run-up to the expiry of defects liability periods under construction contracts. Surveys are now often being undertaken a good number of years in advance of expiry of the typical 12-year liability period, for similar reasons that early handback preparations are beneficial to the public sector.

PFI and PPP project agreements of all ages generally make specific provision for ongoing assurance processes, typically with a focus on self-monitoring and with recourse available to authorities where Project Companies (through their maintenance contractors or otherwise) do not comply with such obligations. However, in our experience, authorities can take quite different approaches to monitoring and carrying out their own surveys.

Needless to say, the more rigorous the approach to assurance from all sides during the construction phase and through the operational period of a project, the less likely issues and costly disputes will arise during the handback process.

Many PFI/ PPP contracts will make specific provision for handback surveys to be undertaken from six months to two years in advance of the contract expiry date. Such periods are likely to fall after the term of the senior debt has been repaid, so handback provisions may not always have been at the forefront of senior lenders’ minds. However, with the drive from organizations such as the IPA, SFT and Local Partnerships for handback preparations to begin anywhere from five to ten years before contract expiry (and ongoing monitoring of asset condition being actively encouraged), senior lender involvement will more than likely be required in some discussions relating to handback.

Concluding remarks

The natural starting point with review of handback is to understand exactly how an authority will wish to use the asset (if at all) after the existing PPP contract expires. Key provisions need to be considered, including those dealing with: whether the asset is to be handed over; the condition the asset should be in if handed over; the processes to be undertaken (such as surveying); the position of employees; transfer of equipment, data and warranties; resolution of disputes; costs any compensation payable; and any rights of retention.

In some cases, it may be appropriate to consider contract variations or opportunities for contract extensions and in this respect, statistical treatment and procurement implications will need to be considered.

Whilst many have argued in the past a successful project is a project where the contract stays in the drawer, experience in recent years suggests it should most definitely be taken out of the drawer from time to time – and it is important to know which drawer it is in! For all parties, careful reference to their own contracts and early collaboration will be a critical part of the assurance process, to avoid potentially costly and relationship breaking disputes further down the line. With this may also come potential opportunities to extend partnering arrangements and to meet the challenges of the current sustainability agenda.

Experience has shown that where there is ambiguity in standards to be applied, processes to be followed or contractual gaps, agreeing joint approaches to interpretation and recording mutually agreed protocols can be beneficial for sponsors, authorities, contractors and senior lenders alike.

The success or otherwise of handback in the next few years is likely to be critical for the industry as a whole and creates an opportunity to define the benefits of the PPP model and secure the “additionality”, whole life model for future generations.