Return to public sector all services outsourced under PFI! says Public Accounts Committee

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Teachers at Forest Hill secondary school in south east London taking strike action against budget cuts as a result of a PFI deficit

VITAL public services such as schools and hospitals face serious disruptions should government fail to prepare for the expiry of its 700 PFI contracts, warn MPs on the Public Accounts Committee (PAC).

The summary of the latest PAC report, ‘Managing the expiry of PFI contracts’, continues:

‘These PFI projects represent public infrastructure assets worth around £60 billion, and future costs of around £170 billion. The very earliest contracts have expired, and some 200 will expire in the next 10 years, accelerating from 2025 onwards.

‘Any mismanagement of the expiry process could result in large sums of taxpayers’ money being wasted. A lack of attention from the public authorities running these contracts could also leave the public sector footing large bills for rectification work which the PFI company has already been paid to do.

‘The Infrastructure and Projects Authority (the IPA) estimates it takes seven years to adequately prepare for expiry. The IPA plans to review 55 PFI contracts by 31 March 2021 using its new health-check tool.

‘But many challenges remain, and it is unclear how these will be addressed, and at what level of government.

‘Smaller local bodies, especially those with a single PFI contract, are exposed to greater risk as they often have limited resources to effectively manage expiry.

‘Local bodies will need support to manage the expiry risks. While discussions are progressing around who is responsible for providing this support, no decisions have yet been made. What is certain is that action needs to be taken now to avoid this becoming a huge payday for consultants.

‘By minimising expenditure on maintenance in the final years of the contract, PFI investors can pay out higher dividends and walk away with limited threat of recourse.

‘The IPA is aware of “difficult” investors who are not sharing important information that authorities need to successfully manage the expiry process. The IPA plans to engage with investors but has not yet set out what this will entail, or how this will help authorities when disputes arise.

‘The high concentration of PFI ownership among private investors allows the private sector to take a portfolio approach to managing the expiry process, which risks putting the public sector at a disadvantage. A lack of contractual tools to hold non-cooperative investors to account further disadvantages authorities in securing value for money from the expiry process.’

Conclusions and recommendations include

‘1. Government has started to deal with the expiry of PFI contracts, but there remains a lack of urgency and overall plan …

‘Recommendation: Within 3 months, the IPA should publish a plan for how it will support all public bodies with expiring PFI contracts, beyond those expiring in the immediate short-term, including what they will deliver and by when. It should also proactively publish guidance for authorities. HM Treasury should write to key departments encouraging them to develop sector specific PFI expiry guidance.

‘2. The IPA does not yet have the data it needs to fully understand the challenges of managing the expiry of PFI contracts. The PFI contract is central to understanding the potential expiry risks an authority may face.

‘However, these are long, complex documents which have been subject to multiple revisions over time, as many as 75 variations in one example. An authority may not hold a complete version of the contract, with either part or all of it lost.

‘The contracts are not always easily accessible, sometimes being held on older technology such as CD-ROMs.

‘A lack of standardisation in the early PFI contracts means that the clarity of each contract’s expiry clauses can vary, exposing authorities to different challenges depending on the contract’s age.

‘The IPA does not hold a central registry of all PFI contracts as it does not consider creating this to be value for money …

‘3. Many authorities currently lack the skills, expertise and capabilities to successfully deliver PFI contract expiry, with locally managed contracts most at risk.

‘The IPA recognises that there is a huge demand for skills, expertise and capabilities in contract management – all of which are currently in short supply. Contracts owned by local bodies, which represent over 80% of the total portfolio, are the most concerning because expertise has dwindled as resources are prioritised elsewhere.

‘4. The IPA is not clear what support will be provided to authorities with expiring PFI contracts, and who will provide that support. Each individual authority is responsible for managing the expiry of its PFI contract.

‘When an authority needs help, support is often lacking, or it is not always clear how to access it, with varying degrees of support available from multiple sources across central government …

‘Recommendation: The Treasury and the IPA should set out, within 3 months, their plan for providing support to all PFI contracts, especially those owned outside of central government. This should cover:

‘1. What support will be made available, including how additional funding will be provided to authorities with limited resources or those with the most challenging contracts.

‘2. Who is responsible, between the Treasury, the IPA, departments, and local government, for providing support.

‘3. The circumstances under which authorities can access different types of support and the process they need to go through to obtain it.

‘6. The IPA has not set out a clear escalation process to avoid disputes between the public and private sector going through the courts. At expiry, all parties will want to maximise value from the PFI contract. Authorities will want to ensure the assets are returned to the public sector in the condition stipulated in the contract, with all maintenance and rectification work completed before expiry.

‘The PFI company will want to reduce expenditure in order to maximise payments to shareholders. These misaligned incentives can create disputes. The formal process for resolving disputes is outlined in the PFI contract and will usually require an expert panel to make a judgement.

‘If this does not lead to an agreement a resolution is sought through arbitration or the courts. This process can be long, taking a minimum of 10 months in some cases, and prohibitively expensive for some authorities.

‘This can lead to a situation with a small, under-resourced authority dealing with a large, well-resourced PFI company.

‘There are some examples of good practice, such as Highways England agreeing an informal disputes resolution procedure with the PFI company, which is quicker and cheaper.

‘Recommendation: The IPA should publish a disputes protocol, outlining how disputes can be escalated by authorities, and the steps that can be taken to ensure disputes only need to be resolved by the courts as a last resort. Where disputes do materialise, the IPA should conduct a review to determine whether it is a one-off disagreement or a wider problem that may impact other contracts.

‘7. The IPA has not outlined clearly how it plans to engage with investors to ensure that authorities have access to all information needed to manage the expiry process. Authorities need to monitor the performance of the PFI company to ensure it is delivering the services that taxpayers are paying for. Transparency can be a problem and the IPA recognises that there are some difficult investors which adopt an approach of “asymmetric information” where the PFI company holds much more information on the performance of the contract compared to the authority.

‘The IPA plans to engage directly with investors to hold them to account, ensuring that information critical to managing PFI expiry is shared with the authorities, but has not yet set out what this will look like in practice. The IPA is also looking to develop a protocol outlining how investors should operate during the expiry process, but this is not yet available. Authorities can withhold a proportion of their annual payments to encourage non-cooperative PFI companies to carry out maintenance, but this is not always an option.

‘Some authorities can also build up retention funds to pay for any identified rectification work but there is a risk that these are not sufficiently large and as these are contractual arrangements they cannot be unilaterally increased later in the process. IPA does not yet have a solution to these scenarios or the actions it would take in response.

‘Recommendation: The IPA should write to the Committee within 3 months outlining the steps it is taking to ensure PFI investors are being fully transparent and compliant with contracts, and what action, if any, it will take if an investor is found to be deliberately non-co-operative.’

Responding to the PAC report, Unite assistant general secretary Gail Cartmail said: ‘Over decades, private finance initiatives have provided a vehicle for spivs and speculators to thoroughly and unscrupulously rinse the taxpayer of cash.

‘These same companies cannot now be allowed to get away with letting infrastructure and services go to rack and ruin, safe in the knowledge that the state will pick up the bill when the contract ends.

‘The government and other public bodies must listen to the Public Accounts Committee and take appropriate action. It would be a travesty if naked corporate irresponsibility and greed were allowed to disrupt vital health or education services, which the committee warns is a distinct possibility.

‘Ultimately, the lesson of the wasted billions from PFI has to be that the auctioning off of public services and infrastructure to the lowest private sector bidder does not save money or improve standards. As the Carillion disaster demonstrated, the exact opposite is true.’

Rehana Azam, GMB National Secretary for Public Services, said: ‘PFI was a disastrous policy that saddled taxpayers with extortionate charges while low-paid workers were outsourced on inferior terms and conditions.

‘As historic PFI contracts finally end, Ministers must intervene to prevent a bonanza for private equity profiteers and fat cat consultants.

‘All services that were outsourced under PFI must be returned in-house to the public sector, where they belong.’