PFI/PPP handback and Net Zero

Net-zero requirements must be integrated into PFI/PPP handback planning. Director Lee Scott sets out five steps to navigate the process

In 2020 the National Audit Office published a report highlighting that Public Finance Initiatives (PFI)/Public Private Partnerships (PPP) posed a significant issue prompting the UK Government to accelerate its activities in this area.^[1]

PFI/PPP are arrangements where the public sector paid private sector partners to design, build, operate and finance assets. In return the contracting authority would make payments to the private company for the availability and performance of the asset over the contract period.

The contractual aspects of PFI/PPP expiry have been widely discussed, there has been less focus on the challenge that this presents contracting authorities meeting their net zero carbon commitments.

Reducing carbon

Contracting authorities should take the opportunity to work with their PFI/PPP providers to ensure that maintenance and life-cycle replacement contribute positively to net zero objectives.

To understand the wider opportunity, a contracting authority should establish its current baseline carbon position. A carbon road map can then be used to determine what decarbonisation opportunities exist to assess the associated cost differential when compared with like-for-like replacements.

Options for reducing carbon could include changing lighting from traditional fitments to LED, gas or oil boilers being replaced with heat pumps and thermal batteries, adding solar photovoltaic panels together with electrical battery storage, and improving insulation. Some of these options offer an opportunity to reduce energy consumption while optimising building energy use and carbon performance in line with the climate crisis.

Funding net zero

Where no cost increase is associated with a low-carbon option, a contracting authority could request that the relevant solution is implemented by the PFI/PPP provider. If a cost increase is associated with a lower-carbon replacement, contracting authorities should consider utilising funding programs.

PFI/PPP pitfalls

In terms of potential pitfalls, the challenges emerge when inflexible PFI/PPP arrangements are considered with the interests of investors and their traditionally risk-averse lenders.

Left to their own devices, PFI/PPP providers should follow their contracts and the handback process. From a contracting authority perspective, the risk in sitting back and allowing this to happen is that:

• assets are not in the required condition on expiry and maintenance reserve accounts are depleted, and
• even if the assets are in the required condition, the opportunity to influence the scope of maintenance and life-cycle replacement work is missed.

Proactive engagement

These risks can be avoided by being proactive and ensuring that adequate annual maintenance and life-cycle replacement plans, which consider whole life carbon and life-cycle cost, are produced by private sector partners and reviewed by the contracting authority throughout the PFI/PPP concession period, particularly during the last five to seven years prior to expiry.

Over the course of a PFI/PPP concession, it is not unusual to find that responsibility for managing the maintenance interface with the private sector partner has passed across many desks resulting in a lack of detailed historic records for the asset.

Where the level of active engagement has been low, it is important for contracting authorities to gain a foothold by engaging in concession management and taking the initiative in ensuring that the PFI/PPP provider is meeting the contracted maintenance requirements, including undertaking condition and compliance surveys, and expressing their net zero requirements.

Implementing net zero

Introducing net-zero measures are likely to trigger variations in PFI/PPP agreements and the associated change protocols, which can be particularly administrative. The interests of investors and lenders will need to be considered.

Financially, investors and their lenders will want the PFI/PPP provider to be in no worse a position, which may lead to a requirement for detailed modelling of cash flows together with amendments to key project documents like maintenance specifications, performance indicators, payment mechanisms and insurances, adding more time and cost to the change process.

From a technical perspective, the position will be like that of investors and lenders, who are likely to be receptive to well-understood net-zero measures like, for example, replacing lighting fitments with more modern LED variants, but less so where a proposal involves adopting new or emerging technology with more uncertain maintenance requirements, life expectancies and performance characteristics.

Consequently, in considering any list of net-zero options, it will, in the interests of efficiency, be necessary to take a pragmatic view of what is likely to be achievable given the interests of all stakeholders.

5 steps to navigate the process

To support the achievement of net-zero objectives and to reduce energy consumption, contracting authorities should:

1. Be actively engaged in managing their PFI/PPP concessions.
2. Focus on delivery of the contract details, undertaking condition and compliance surveys on the PFI/PPP provider’s plan for life-cycle replacement activity, particularly the period starting between five and seven years before expiry.
3. Engage early with the PFI/PPP provider to identify alternative life-cycle replacement options, which better support achievement of net-zero objectives and reductions in energy consumption than replacement solutions.
4. Understand the cost impact of alternative life-cycle replacement options relative to like-for-like replacement solutions and sources of external funding where a budget shortfall exists.
5. Prioritise the implementation of measures where funding exists, that support achievement of net-zero objectives and reduce energy consumption, and do not adversely impact on the interests of other stakeholders, including the PFI/PPP provider, its investors and lenders.

[1] National Audit Office (June 2020) Managing PFI Assets and Services as Contracts End