Avoiding Disputes at Expiry of PFI projects

Andre Kruger January 19, 2021 Articles

https://www.shlegal.com/insights/avoiding-disputes-at-expiry-of-pfi-projects Rebecca Carter Partner Stephenson Harwood E: rebecca.carter@shlegal.com

In this article we review the conclusions of the 2020 report from the National Audit Office (NAO) into the expiry of PFI contracts and set out our views on the most likely areas of dispute at handover and how to avoid them.

The NAO Report

Many of the key findings of the report will make unhappy reading for government:

1. The public sector does not take a strategic or consistent approach to managing PFI contracts as they end. Responsibility for management is fragmented with no central oversight.

2. Authorities need to prepare for contract expiry adequately in advance – whilst most authorities begin preparations more than 4 years in advance of expiry, a period of 7 – 8 years is more realistic.

3. Many authorities have insufficient or no knowledge about the assets’ condition. For example, less than 25% of respondents were able to confirm whether planned maintenance work had been completed and 50% do not maintain an asset register.

4. Government has a piecemeal approach to retaining consultants. Expertise and knowledge is not shared. Furthermore, resources are tight – 30% of respondents anticipated not having sufficient staff to manage the expiry process – and many authorities report lacking the required skills.

5. There is a misalignment of investor and authority incentives at contract expiry that creates a potential for disputes, particularly where the cost of completing rectification work is greater than any performance penalty for not doing the work.

6. Early PFI contracts are likely to contain significant ambiguity around the roles and responsibilities of the parties at expiry. Clauses are drafted poorly and open to interpretation. Only one third of authorities surveyed were clear about who is responsible for what in relation to expiry.

In light of the above, the report makes a number of recommendations as to how government can better prepare. The emphasis is very much on taking action sooner rather than later and on encouraging collaboration, so it seems certain that we will soon see increasing activity from authorities in this area.

This is particularly because the report identifies that it will be difficult to recover payments from project companies post expiry and emphasises that disputes should be resolved before the contract ends.

Recommendations include:

1. Actively engaging with project companies to jointly identify and clarify ambiguous clauses well in advance of expiry (which may require contract amendment), or going through formal dispute resolution sooner rather than later if this is not possible.

2. Agreeing tiered dispute resolution procedures in order to try to settle disputes before formal proceedings become necessary.

3. Improving contract management in terms of: monitoring maintenance and lifecycle funds; ensuring any backlogs of lifecycle maintenance are carried out; and conducting asset condition surveys well in advance of expiry to give enough time to complete the identified work and resolve any disputes.

4. Identifying contractual rights to maintenance information from project companies and robustly challenging any variance in planned vs actual maintenance expenditure.

5. Involving wider stakeholders, in particular funders, before their debt has been repaid and the ‘equity tail’ kicks in.

6. Ensuring robust records, management procedures and staff handover processes so that knowledge of the contract is not lost.