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Top tips for managing contracts leading up to PFI expiry

By Paul Styler, director of Infrastructure Solutions at ETL

PFI contracts come with their own set of challenges and day-to-day management needs, but have you considered the contract expiry process? There are some important themes that trusts need to be alive to while navigating PFI contract expiry and the best practices to ensure a smooth exit.

Such themes include contract extension and the preparatory work in dealing with contract extension provisions; future arrangements and the potential for procurement/ re-procurement and future service provisions; disputes as each party will be looking to maximise their own position through expiry; and surviving provisions such as payment, confidentiality, and information requirements. Ultimately, those dealing with these matters effectively can pave the way for the positive outcome Trusts are looking for – ownership of an asset that will be able to sustain the future of front-line services.

Potential scope to extend the contract

You are backed in a corner, time is running out, you haven’t yet decided whether the services will be taken in-house or if there will be a need for a re-procurement. So, is it feasible to extend the PFI contract? The contract may well provide for a short extension though there will be several matters to consider including;

  • If there are existing contract extension provisions, what do these say? Is there a unilateral right to extend the contract?
  • Any preparatory work on the contract extension should commence as soon as possible.
  • If the contract provisions aren’t sufficiently clear or you wish to alter the terms, these may need to be negotiated by the parties. Care will need to be taken to ensure that any changes don’t constitute “material differences”, potentially exposing the Trust to a challenge by contractors if there is no new procurement.
  • A plan will need to be agreed covering all critical aspects to be considered when agreeing the extension, identifying any potential obstacles that may prevent the contract from being extended and considering how these risks may be mitigated.

Future arrangements post expiry

Ahead of reaching contract expiry, Trusts will be considering future arrangements for the services provision (whether this involves a re-procurement or otherwise). At the same time, a Trust may be considering extending the contract for a short period. It will be important to consider the following;

  • What market testing will be carried out?
  • The strategic options for going forward with relevant information collated together and an options appraisal carried out.
  • If there is to be a re-procurement, the potential procurement options and the proposed allocation of risk, whilst ensuring the project remains attractive to the market.

Disputes

As the PFI Contract approaches expiry, each party will be wanting to maximise its position, the Trust aspiring to inherit assets in the best possible condition with the PFI Contractors want to limit their expenditure, passing any savings generated over to its investors. The potential mismatch in what each party is seeking to achieve can cumulate in a dispute. What steps can the Trust take to achieve the best outcome?

  • Communication between the parties is key.
  • The Trust needs to be on top of its game in implementing its rights under the contract. If there are issues these should come to the fore sooner rather than later and any potential disagreements teased out.
  • The parties need to have a clear understanding of the contractual provisions and if there is any ambiguity and the position cannot be resolved between the parties, advice may need be sought.
  • Equally the mechanism for resolving the dispute needs to be understood.
  • The underlying message though is to avoid disputes wherever possible, though if they do crop up endeavour to deal with these pragmatically and robustly.

Surviving provisions

There will inevitably be a clause in the PFI Contract which addresses provisions (whether expressly or implicitly) which will survive termination. To name but a few these could cover payment, confidentiality, and information requirements.

Trusts need to be clear about what these rights and obligations are. Also, it is about being alive to the fact that obligations may remain with a Trust. The starting point will involve a clear assessment of these provisions to understand the potential implications and beyond there, the steps to be taken. This will be reliant on the nature of the provisions, but there is one thing for sure and that is for Trusts to be proactive in understanding the scope of the provisions and determining how best to manage these together with any associated risks that come with them.

The complex process to reach expiry, with the multi-layered commercial and service issues should not be taken lightly. Trusts must prepare to ensure that they achieve a positive outcome and ultimately take ownership of an asset that should be fit to support front line services for decades to come.  However, reaching expiry should not be seen as the end of the issue, nor the start of a new chapter in asset ownership. 

Paul Styler, director of Infrastructure Solutions, ETL

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