School PFI contracts - make sure you are planning for their expiry
From the early 1990s, PFI (or Private Finance Initiative) projects were used by the Government to help regenerate school estates across the country.
The basic premise was that the private sector would fund the construction work, often new-build schools, and would recoup their investment (and make a profit) under a long-term contract to maintain the facilities, usually for 25 years. The intention was that schools would benefit from new modern facilities, maintained appropriately, helping improve educational outcomes.
It will not be a surprise to anyone involved with a PFI school, or to anyone who reads the media, that PFI projects have not been universally successful or popular. The history, practical and financial issues involved are long and complicated and not the subject of this article!
We are now entering the 'wind-down' phase and many PFI contracts will end in the next five to ten years. Whilst the default reaction to this is likely to be joy and relief in many schools, it is essential that schools and academy trusts plan properly for what will be a very significant upheaval.
The three main issues to consider are:
1. Ensuring the PFI Contractor fully complies with its contractual obligations and hands back the school estate in the appropriate condition.
Under a PFI contract, the PFI Contractor is responsible for maintaining the school buildings and facilities. When the contract ends, this responsibility passes to the school. So if the PFI Contractor has not done what it should have, the school and/or academy trust will suffer the financial consequences. Equally the PFI contract will have a lifecycle programme relating to plant and other equipment, for example boilers that should be replaced every ten years.
From the PFI Contractor's perspective, there is little incentive to invest in maintenance and lifecycle over the last few years of the contract and so it will require pro-active management of the contract to ensure that obligations are met. A significant complication here is that academy trusts do not have a direct contractual relationship with the PFI Contractor. However, under the terms of their School Agreement academy trusts must rely on the local authority to enforce the terms of the PFI contract. A maintained school may be able to rely on local authority enforcement under their Governing Body Agreement. It is unclear how different local authorities will approach the issue, given the complexity and likelihood of disputes with the PFI Contractor and that the local authority has no direct incentive where it is not responsible for the academy. This reinforces the need for the handover to be managed sufficiently far in advance.
2. Ensuring the school and/or academy trust has received the full financial benefits it is entitled to before the PFI arrangement expires.
A key part of any PFI contract is the Payment Mechanism under which deductions are made from the monthly payment by the local authority to the PFI contractor where the facilities management service doesn't meet the required standards. The School Agreement for an academy and Governing Body Agreement for a maintained school will confirm the extent to which the academy trust or school is entitled to the financial benefit of any deductions levied against the PFI contractor by a reduction in their contribution towards the costs of the PFI scheme or the receipt of monies from the local authority. Academy trusts and schools will want to ensure they have not been short-changed and, where they have, recover any outstanding monies from the local authority before the PFI arrangement expires. Most PFI contracts also include various price review and cost-sharing mechanisms. Conventionally, these comprise the benchmarking and market testing of the facilities management services at set intervals during the PFI contract, with the sharing of any price increase or reduction beyond certain thresholds with the local authority and then the academy trust or maintained school under the School Agreement or Governing Body Agreement as applicable.
Most PFI contracts also include a mechanism for the sharing of increases or decreases in the premium for insurances procured and maintained by the PFI contractor for the PFI building and assets. These price variations are sometimes shared with an academy trust under their School Agreement and with a maintained school under their Governing Body Agreement. Academy trusts and maintained schools will want to ensure they have received the benefit of any cost reduction whether arising from benchmarking or market testing or variations in insurance premium. However, they should be aware that pursuing this route may burden them with a share of any price increases which haven’t been passed on by the local authority.
3. Planning for how all the services provided by, or through, the PFI Contractor will be delivered after the PFI contract ends.
Whilst the PFI contract will always cover the facilities management and maintenance of the school buildings and facilities, they often also cover cleaning, catering, ICT, sport/leisure lettings and other services. In many PFI contracts, once the expiry date passes these services stop being provided, leaving schools and academy trusts to arrange their own contracts. Given the nature and size of these contracts, schools and academy trusts should allow enough time to design and run a competitive tender process. Contracts may be subject to procurement regulations, and ensuring compliance needs sufficient time.
So, if your school and/or academy trust has a PFI contract the first thing to do is confirm when that contract ends. Then start working backwards from that date. The Government's Infrastructure and Projects Authority has published a report '"Preparing for PFI Contract Expiry'" which recommends starting to plan seven years before your PFI contract is due to expire. The Department for Education has also launched an 'Expiry Unit', intended to help schools and academy trusts deal with PFI contracts coming to an end. However, currently we understand this is only looking to support schools where the PFI contracts end in the next five years.