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With the government weighing up the pros and cons of launching a new generation of Private Finance Initiative (PFI) contracts to fund its 10-year infrastructure programme, Ð԰ɵç̨ is focusing on what this could mean for the construction industry. In England, PFI was wound down in 2018, but it has continued in devolved administrations, where PFI contracts have developed and improved.

Should the government choose to revive PFI, it is likely that many of these learnings would be incorporated into new contracts in order to avoid some of the mistakes of the past.

Last week, the Public Accounts Committee of MPs met to discuss the merits of PFI and the risks that might remain for the public sector. The committee heard evidence from a range of officials including Matthew Vickerstaff, deputy chief executive of the National Infrastructure and Service Transformation Authority (NISTA), as well as other experts with knowledge and experience of PFI and PF2 having worked on these schemes prior to 2018.

But the issues around PFI are notoriously convoluted and jargon heavy. To give Ð԰ɵç̨ readers some insight into what was discussed, we asked Craig Elder, a partner at law firm Browne Jacobson, to explain the implications of some of the questions raised.

Q: Matthew Vickerstaff at NISTA said that contracts would be improved with new PFI schemes. Is this true?

A: PFI originally started without much standardisation. In the early 2000s, there were no real PFI lawyers, so they were bringing together lawyers who had commercial or construction experience and cobbling a contract together. Some of these early contracts were quite flawed. 

Later contracts became much more standardised, with things such as refinancing provisions, which were not always included in the original contracts. Vickerstaff was saying that lessons had been learnt, and experience and institutional knowledge of that type of thing now goes into contracts as a matter of course.

The other factor is risk allocation, which had a revised formulation in PF2 contracts. The government had worked out that contracts were incorporating the soft FM services in the day-to-day services, as opposed to the building and the hard FM services that were causing a lot of the inflexibility and the risk and the problems with PFI.

So it would be possible to have some kind of private finance or public-private partnership more broadly, but without the services embedded into it, and that it wasn’t always to the contracting authorities’ benefit to transfer loss risk.

Vickerstaff also spoke of procurement fatigue, where negotiations went on for five or six years and then the scheme was pulled. That really arduous, time-consuming and costly process is something the government would want to avoid.

So, there are a few areas where the point was being made that all of the bad things about PFI don’t have to be replicated. Vickerstaff was saying that contracts will be better, the risk allocation will be better, and the experience of managing procurements will probably be better as well.

>> See also: Is PFI about to stage a comeback?

>> See also: PFI: Do the numbers add up?

Q: Is risk management too often conflated with effective risk management?

A: Soft facilities management is a classic example of this, particularly in the case of changes in law. The standard project contract allocation of risk around changing law will say that you – the operator – are responsible for general changes in law. You have to price the risk for that and only if it’s a specific change in law that directly affects PFI projects or those particular services will that risk be shared or bought by the public sector.

That was an area where the government said they were trying to get schemes off-balance sheet, passing as much risk as they could to the private sector, including this change of law risk.

Actually, there is a really strong argument that, at the end of the day, the government is passing the laws, they’re in control of that. If they make a policy decision – which may be that everyone has got to have golden fire escapes, or people work three-day weeks, or income national insurance goes up, or what have you – why is that the operator’s fault? Why are we passing the risk for that kind of general change in law to them?

We only end up paying for it one way or another, so that was an inappropriate behaviour that would be seen as being associated with chasing off balance sheet.

Q: Would excessive complexity and transactional costs put off investors?

A: If you are integrating soft FM or hard FM, you’ve got buildings, you’ve got a building contract, you’ve got funders – and they’ve all got different interests and stakes in the project – you might have a complex payment mechanism, and it’s a long-term contract. And if you’ve got technical, financial and legal advisors of both the procuring authority – which might have been a local council – the bidder and its funders all arguing over this quite long contract, which will be around 200 pages without the schedules, that can lead to complexity, particularly when it’s not properly standardised.

All that kind of thing takes an awful lot of time, particularly if it’s embedded within a complex procurement process, which it used to be when contracts were not standardised.

That’s a sort of complexity that the government would now seek to avoid. They would want that procurement process to be more streamlined – the terms, the risk allocation to be more standardised – and for there to be less scope for bespoke negotiation.

The government is really trying to drive down legal costs. So, going forward, if there were two big lessons learnt that they would seek to embed into a new programme, it would be increased standardisation and maybe even a kind of centralised negotiating position that would grind these things forward, rather than letting local authorities and NHS trusts run riot over these contracts and spend lots of money on expensive advice. 

Q: What risk transfer really occurs in PFI school projects?

A: Clive Betts [Labour MP] questioned where the risk was in a school, which is not a commercial operation. It’s not a leisure centre where, if you’re not generating a profit, that’s an operating risk. The customers are the kids, effectively.

The point which NISTA made was that it’s not a commercial operating risk, but who maintains the roof? Who makes sure that the boiler is working? Who makes sure the central heating works?

If a county council had to fix a school’s roof and had to make sure it was all ready for September, someone has to do all of that. You’re still paying for someone to do something, and you’re still paying for someone who doesn’t do something to take financial accountability for that. Because, if they don’t do it, they’ll be in breach.

There will be financial consequences under contract. And it can be enforced, though it might not always be well enforced. 

And that, again, is one of the lessons learnt. That’s another example of better risk management and contract management, rather than risk transfer, because sometimes I’m absolutely sure it’s true that contracts have got away with not doing stuff they should have been doing under the contract, which makes that risk transfer illusory.

But the overarching point is that merely because there is a business risk does not mean there’s no risk, and even managing a static asset is still a risk.

>> See also: Are Starmer and Reeves ready to gamble on PFI to fix our broken infrastructure?

Q: What is the importance of ‘living wills’?

A: The key aspect to living wills is monitoring contracts more closely to make sure that you know potential financial irregularities or weaknesses in contracts are identified early, and that there are back-up plans. So, if a contractor’s credit rating starts to fall, if it’s in jeopardy, then there is some kind of facility in the contract that can remove them, or parent company guarantees are in place to support them.

If it’s in the supply chain and there’s a really fundamental issue with a particular contractor – as there was with Carillion – then the public sector itself has a plan B. The analogy is: if the worst happens, this is what I want to happen to me. 

This goes back to a challenge with the difference between risk allocation and risk management. The Carillon risk was all allocated to the private sector, but nevertheless, it ended up falling on the public sector, because arguably, it wasn’t managed, it wasn’t seen early enough. 

When Carillion went under, it was still the case that the resources weren’t there to pay out any claims, and the public sector had to step in, because it’s a public service.

So, when Clive Betts asked what the reality about risk transfer is, he may have been thinking about that. The profits are privatised, but the risk is nationalised, because these things are too big to fail. They have still got to be provided.

And if Carillion – or whoever it is in the future – hasn’t been maintaining it, hasn’t been doing what they were supposed to be doing, ultimately that is going to be a public sector risk. So the contract can say whatever it likes.

The living will notion is that, however we allocate risk under the contract, we’ve got to know what happens if that all just goes wrong.