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While PFI had its heyday in the past, its legacy continues to present challenges for the public sector today as they navigate the complexities of asset hand-backs and financial obligations.

The Private Finance Initiative (PFI) was initially introduced in the UK by the Conservative government in 1992 during John Major’s tenure as Prime Minister. In essence, this innovative approach entailed the private sector funding public facilities like hospitals or schools, with the public sector subsequently utilising these facilities over extended contract or concession periods, often spanning more than thirty years.

Under this model, the private sector assumed responsibility for the comprehensive financing of the facility, encompassing everything from its initial design and construction to ongoing system upgrades, asset replacements, planned and reactive maintenance, and even the provision of soft Facilities Management services such as cleaning and catering.

The Private Finance Initiative (PFI) was initially introduced in the UK by the Conservative government in 1992 during John Major’s tenure as Prime Minister

 Typically, ownership of the facility would reside with the private sector throughout the concession period, with transfer to the public sector occurring at the contract’s conclusion. To facilitate this, the private sector would establish a consortium, often in the form of a ‘Special Purpose Vehicle,’ to manage and maintain the facility, securing necessary funds through bonds or senior debt.

Despite a change in government from Conservative to Labour in 1997, the momentum of PFI in the UK remained robust. Upon assuming office, Tony Blair continued to champion the PFI program, overcoming internal dissent within the Labour party that criticised PFI as a form of privatisation in disguise.

Beyond addressing the limitations of public sector funding for social infrastructure investment, the off-balance sheet treatment of PFI assets enhanced its appeal by helping the UK avoid breaching debt thresholds imposed by the EU. To qualify as off-balance sheet, PFIs needed to transfer an appropriate level of performance and cost risk to the private sector, achieved through incentivisation mechanisms in the contracts or Project Agreements.

Love it or loathe it, the PFI concept flourished, delivering nearly 700 assets valued at an impressive £55 billion, ranging from intricate defence infrastructure to more straightforward structures like homes, offices, and schools. While some argue that the deals may have incurred a premium cost to UK PLC, the question remains whether such an extensive asset delivery program would have been feasible without PFI.

However, over a decade ago, the tide turned against PFI, with mounting criticisms of its value for money, inflexible contract terms, and excessive profits garnered by the private sector. Stories of construction flaws, poor maintenance leading to safety hazards in schools, and exorbitant costs, like paying over £300 for a light bulb replacement, fuelled the backlash.

Fast forward to the present day, the legacy of PFI poses significant challenges for the public sector. As assets are typically handed back at the contract’s end, the public sector faces the task of managing these assets efficiently. The absence of clear criteria for asset condition and residual life requirements, especially in earlier contracts, creates uncertainties.

To navigate these challenges effectively, the public sector must thoroughly comprehend the contract terms concerning asset hand-back conditions and surveys. Leveraging contractual mechanisms to ensure the completion of necessary remedial works before handover is crucial. Building up funds by withholding payments to motivate private sector compliance, determining post-handover maintenance strategies, and ensuring data accuracy are among the myriad tasks awaiting action.

To safeguard the legacy of PFI and prevent negative repercussions during hand-backs, the public sector must proactively address risks. Starting early and taking decisive actions are pivotal to avoiding prolonged repercussions and ensuring a smooth transition.

Nigel Herbert, Partner – Head of Practice – Asset Optimisation.

Nigel Herbert BEng (Hons) MBA CIWFM is a partner at Arcadis who heads up the Asset Optimisation Practice, incorporating the PFI advisory capability.