A new report has been published by the Infrastructure and Projects Authority (IPA) on behaviours, relationships and disputes across the PFI sector.
The White Fraiser Report (Report), named after the authors, was commissioned by the IPA in the wake of the Public Accounts Committee’s 2021 report on “Managing the expiry of PFI contracts”. This followed a 2020 NAO survey on PFI expiry, in which 37% of respondents (a range of PFI stakeholders across various sectors) stated they anticipated having formal disputes in the run-up to PFI expiry.
The Report was commissioned to examine behaviours, relationships and disputes across the PFI sector, together with recommendations on how to improve them going forward.
The Value of Strong Relationships
As long-term contracts which require a degree of mutual trust and good faith on both sides, the Report notes that there are a number of PFI relationships that do benefit from reasonable relationships. The Report also recognises, however, that there are a number of projects where relationships are poor. Concerns from the private sector include overly technical interpretations of the PFI Contract; concerns from the public sector include failures to share critical health and safety or survey information.
The Report helpfully acknowledges that “both the public and private sector believe it is possible to have a dispute in a contract and successfully manage this through to conclusion, without damaging relationships”.
This chimes with our advice to clients, which is that it should not be a choice between robust contract management and a collaborative working relationship: our experience is that, in fact, the two often go hand in hand.
Sadly, the Report noted that there are examples in the market of overly aggressive behaviour, including from third party consultants, and that in some cases behaviours have deteriorated to such an extent that it is impacting on well-being of both public and private staff involved in the management of PFI contracts.
The Report recommends that greater reliance is placed on the Nolan principles (also known as “The Seven Principles of Public Life”) by all those working in the sector and that the IPA (together with Government Departments) should raise awareness of the relevance of these principles to PFI contract delivery.
Reporting v Monitoring
The Report noted that PFI Contracts were intended to be self-reporting, but suggests that a distinction should be drawn between this and monitoring. The Report noted that there is a clear need for a stronger monitoring/ auditing function for public sector bodies managing PFIs, and that this requires greater capacity and capability within public sector bodies.
The Report raises concerns about historic under-management by both the public and private sector. This creates very real risks for local authorities in managing PFI contracts during their operational term and also in the run up to expiry (including in respect of reverting assets, which may then require significant investment to bring up to appropriate standard on contract expiry) as well as any health and safety risks which may arise in the meantime.
The Report makes clear that capacity, capability and resource is now a challenge not only for the public sector, but also for the private sector.
Helpfully, as we have recently highlighted, the IPA has announced that a Local Government Budget is available, to help provide resource to local authorities managing PFIs. This is a welcome development and we would recommend local authorities with PFIs apply to the fund to assist in providing capacity and resource.
For other public bodies, we would strongly recommend making contact with Central Government sponsoring departments to see what support is available.
It is to be noted that the general view of the private sector is that more support for the public sector will benefit all parties in managing a smooth transition to expiry.
Approach to Disputes
The Report estimates that only around 10% of operational PFI projects are actively engaged in disputes, and that only around 1% of those are referred to formal dispute resolution.
What is, of course, not clear from those figures is whether, for the 90% where there are no disputes, this is a sign that the PFI is being managed well, or simply that issues which arise are not being challenged or addressed. The risk is that problems are being stored up for the future.
The Report expresses some concerns with the formal dispute resolution processes used in PFI disputes, although acknowledges that in reality very few disputes are in fact referred to adjudication. It is telling that, nearly 25 years after the first wave of PFIs, there are still relatively few reported Court decisions in this area.
The Report recommends the establishment of a PFI Disputes Resolution Forum. It remains to be seen whether parties will be willing to forego the confidentiality of an adjudication process, which can have clear benefits for both parties.
Finally, the Report recommends that when, addressing performance, it is important for the public sector to have a clear understanding of its strategic goals.
The Report recommends a “reset” approach, whereby the Project Co agrees to carry out a third party survey of the assets, which it shares with the public sector, on the basis that the public sector agrees to provide some relief from deductions during a reasonable period of time in which any issues highlighted by the surveys are rectified.
This is a model which we have seen used in a number of PFIs and allows both parties to move beyond a financial assessment, to achieving compliance.
It is critical that all PFI stakeholders are aware of the need for strategic planning, having strong project relationships and for active contract management. This is essential in relation to both the day to day management (“business as usual”) of an operational PFI project, and also in the lead up to expiry. As noted above, resourcing key and a potential challenge for both public and private sector stakeholders. The need to address these aspects will be become even more important as we move towards the “peak” year for expiry of PFI projects in 2035.
The IPA recommendation is that parties should start planning for expiry of PFI projects at least seven years in advance.
Whilst there remain significant challenges within the sector, there is now greater focus on finding practical solutions to help overcome those challenges, including support from Central Government.