PFI contracts have underpinned the delivery of many schools, hospitals, and other public infrastructure during the first quarter of the 21st century. 

As many of these long-term agreements approach expiry over the next decade or more, contracting authorities face a critical challenge: how to manage the handback process smoothly, protect public value, and ensure service continuity.

Why end-of-term clauses matter?

PFI contracts can vary considerably but should typically include detailed provisions on what happens at expiry. This is usually referred to as “handback provisions”. Key points that these handback clauses may cover include:

• asset condition requirements – to ensure the asset is not in disrepair;
• lifecycle maintenance obligations – so that certain components have a remaining life span; and
• information/data transfer – to help the authority or replacement provider operate the facilities after expiry. 

What type of contract do you have?

Your exact handback provisions will depend on your type of PFI contract and when it was entered into. For example, earlier PFI contracts are likely to have more bespoke handback provisions. In contrast, later PFIs benefit from more harmonised terms due to SOPC (Standardisation of PFI Contracts) and schemes such as BSF (Building Schools for the Future). However, that may not necessarily mean that those provisions are detailed or of better quality.  It is certainly the case that the standard terms evolved over time with more experience. 

The first point of consideration is whether ‘handback’ has actually been addressed within the contract itself. It could be detailed in a specific schedule or clause within the PFI contract, with the level of detail varying. In some contracts, this could be a full schedule and in others, it could be something which the parties were to agree closer to expiry.  The drafting may assume that an exit plan has already been generated and kept under review. 

As mentioned in our previous posts, early preparation is key when dealing with PFI exit to allow time for surveys, dispute avoidance, and strategic planning.

Condition of assets

Before undertaking surveys, it is essential to understand what standard (if any) the contract sets for condition, as this is what any survey needs to measure against.

When reviewing your PFI contract, authorities should take notice of when, or if, surveys can be conducted as this will be key in understanding what assets are held and the condition of the assets which will be handed back (and if this meets any contractual standard), and this could directly impact negotiations with the PFI contractor.

Following on from the condition surveys, the parties can enter into negotiations around an exit strategy. The authority will want to ensure that the discussions will lead to a position which aligns with its future plans for the assets and the services, as well as holding the contractor to account for what it committed to in the contract. 

Building an effective exit plan

Creating an exit plan is a project in its own right and time should be taken to create an effective plan, including by reviewing and updating any plan developed during the term. 

There are different ways that the parties can work together to create this plan, which can include: 

• traditional negotiations;
• creation of a steering or working group;
• creation of an Exit Agreement which will run alongside the PFI contract during the expiry period – this may be essential where matters are to be agreed, whether changes in principles or agreeing the actual detail of exit. 

What if the parties cannot come to an agreement?

Creating an exit plan which is acceptable for both parties will take time and in some instances, there could be elements where the authority and contractor cannot agree, and negotiations have come to a stalemate. There are different routes which the authority could consider in these instances. 

Before heading down the disputes route, an authority could consider what other rights it has under the contract and if it could exercise those provisions. An example of this is where the PFI contractor intends to hand back an asset which is considered to be ‘Unavailable’, and as a result of this, the authority could potentially withhold payments under the payment mechanism.

A lack of agreement between the parties could trigger the dispute resolution provisions under the PFI contract and the matter could be referred to adjudication. However, as mentioned in our previous briefing, mediation could be a better way to settle a dispute in a way that can also maintain the relationship of the parties, as co-operation will be needed throughout the exit process. 

In a complex PFI arrangement, sufficient time is needed to appropriately plan your exit strategy and to foresee the possible hurdles that may need to be overcome in this process. 

Our team at Anthony Collins are on hand to help guide authorities through the exit process. If you have any questions surrounding PFI expiry, please contact Alex Lawrence or Rumandeep Dhariwal.