The National Audit Office has called on government departments to give extra support to public bodies as PFI contracts come to an end, saying many risk “underestimating the time, resources and complexity” of the task.
The government announced it would stop using private finance initiative contracts, which set out long-term agreements between the public sector and businesses to deliver infrastructure such as schools, hospitals and roads, in October 2018.
But with some 700 PFI deals still in place, with a combined capital value of £57bn, the government has no “strategic or consistent” approach to managing the contracts as they end, the watchdog warned in a report last week.
With most of the contracts set to expire from 2025, the NAO said the Infrastructure Projects Authority must provide centralised resources and guidance to public bodies to enable them to prepare properly, while the Treasury must provide funding for extra staffing and legal disputes where needed.
Contracts usually allow for assets to be transferred to public ownership once they expire. But there is a “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”, the report said.
PFI providers have an incentive to limit their spending on maintaining and improving the infrastructure they manage in the final years of contracts, as they can use savings to pay higher returns to investors.
This could mean public bodies – which include local authorities and central government departments – could be left to pay extra costs for repairs and maintenance. A third of the organisations the NAO surveyed for its report said that as projects come to an end, they expected to have formal disputes with contractors – which can be costly.
The lack of a coordinated approach therefore “risks a poor outcome for the taxpayer from the expiry negotiations with the private sector”, the public-spending watchdog warned.
Under PFI, which was introduced in 1992, private-finance companies set up to build and operate contracts, known as special purpose vehicles, are responsible for maintaining assets and reporting to public bodies.
But public bodies must still monitor assets – and the NAO found that 55% of the organisations it surveyed admitted to not knowing enough about the condition of the assets.
Of the 107 public bodies across England it surveyed for the report, 35% said they did not have sufficient access rights to monitor how their assets were being maintained.
And, the watchdog added, “there is evidence that PFI investors and sub-contractors are not cooperating with authorities to provide information”. A fifth of contracting authorities that asked for information said requests were ignored or denied.
While many contracting authorities allow more than four years to prepare for contracts, with these obstacles looming, the NAO warned there is a “risk this is not enough time”.
And it said public bodies may underestimate the cost and complexity of ending PFI contracts.
In contrast to the public-sector, private stakeholders can take a more coordinated approach as they often invest in a large number of PFI projects. The 10 largest private investors in PFI own more than half of the remaining contracts, while the 10 authorities with the most PFI contracts oversee only 18% of the total.
Despite these challenges, the report said: “Progress is being made and there is still time remaining to make changes that will benefit the bulk of the contracts expiring from 2025 onwards. Many of these issues may become less prevalent in the longer term as the later PFI contracts benefit from better defined and clearer contractual terms.”
It called on government departments to support public bodies to prepare for the ending of PFI contracts “as soon as possible”.
They should develop a contract expiry plan and provide direct financial support to contracting authorities to enable them to fund dispute resolutions and hire extra staff, the NAO said.
Departments and the Infrastructure and Projects Authority should meanwhile help to build specific expertise and tools such as specialist advice and guidance documents, it said. The IPA should also develop a consistent approach to resolving legal disputes, and an investor strategy, working with other government departments such as UK Government Investments, to manage the relationship with private stakeholders.
“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,” NAO head Gareth Davies said.
“If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.”