Older buildings managed under PFI contracts - a current and growing problem

In the recent oral evidence session for the Public Accounts Committee’s (PAC) ‘Government’s use of private finance for infrastructure’ inquiry, Matthew Vickerstaff, Deputy CEO of the National Infrastructure Services and Transformation Authority (NISTA), stated that -

‘Some of them [schools] should have never been in the [PFI] programme because they were old Victorian schools which had latent defects which were taken on by the local authority. That’s where… problematic issues have been’. 

Notwithstanding that a Victorian era building has more complex structural issues because of its age, and not deficiencies in its construction, this comment piqued our interest, and is worth exploring further.

It is a common type of construction project to take on a historic building, with the objective of properly renovating and reinstating its fabric to modern standards. 

However, this is not something that was typically done within the scope of PFI Projects, as Vickerstaff alludes to in his evidence to the PAC.

What has typically happened to old school buildings under PFI?

Some pre-existing and older buildings, including schools but also other buildings like courtrooms and structures on hospital sites, were folded into a number of PFI Projects, often combined with a portfolio of other pre-existing buildings and some new build projects. Where this was the case, responsibility for the structural integrity of the pre-existing buildings typically sits with the Contracting Authority, even in instances where internal renovations have been delivered by the PFI Project Company as part of the PFI Project’s capital works phase. 

While it is straightforward to see the attractiveness of this decision, because it means a  lower overall cost of the PFI Project, this risk allocation can cause a number of problems. 

What are some of the issues caused?

1. Split responsibilities within the same building

Deductions from the Unitary Charge, and associated Service Failure Points (SFP), arise under PFI Projects when service delivery falls below defined standards (‘a service failure’). The severity of the penalty varies depending on the level of impact on the facility a service failure causes, the most severe of which is typically known as ‘unavailability’, where the failure is sufficiently serious to prevent the part of the asset that has been impacted from being used by the Contracting Authority. Where such service failures occur under a wholly new build PFI, it is almost always unequivocally the responsibility of the Project Company, and therefore there is little debate about the fact that there must be an appropriate Deduction made with SFPs applied, as determined by the contract. 

However, where there is part Contracting Authority responsibility, for the building structure, and part Project Company responsibility, arguments can and frequently do emerge about whether service failures are caused by the building being in its aged state, or a failure by the Project Company and its supply chain to meet Project Agreement obligations, notably related maintenance and lifecycle. This typically results in a disagreement on the correct volume of Deductions and SFPs that should be levied, which may result in a formal dispute if agreement cannot be reached. 

2. Interfaces between buildings, or areas of buildings, classified differently

There are also problems where there is an interface between a pre-existing building and a new build, where the latter is under the jurisdiction of the same Project Agreement. A Project Company is likely to claim that Deductions and SFPs should not be applied where something that causes a failure event originated in the pre-existing building, such as a flood, for example. However, many such instances we have had experience of are complex, and are therefore challenging to unequivocally determine their origin. 

What are the impacts and what should be done?

Despite attempts to structure contracts accordingly where these complexities exist, it is not practically possible to envisage how and where every type of issue that causes a service failure might originate, and how it might manifest. This leads to the more complex multi-site multi-asset type PFI Projects, where responsibilities are split in the way described above, being inadequately dealt with under most Payment Mechanisms and contracts, with disputes inevitably following.

Not only are both of these issues causing problems now, but will also likely cause difficulties in the handback phase of the Project. Without a carefully defined scope and prior agreement between the parties on contract interpretation, Handback Survey reports, responsible for identifying Handback Works, could mis-identify certain deficiencies as within the responsibility of the Project Company, or identify them as not being within their responsibility when they should be. This is likely to lead to disagreement between the parties and therefore disputes, and at a critical time for the Contracting Authority’s transition to the post-PFI operating model, which if not delivered successfully could lead to increased cost and the risk of operational disruption.  

It is vitally important to identify any lack of clarity in contractual documents, including on the categorisation on the different parts of a PFI Projects asset or assets as described above, as early as possible, even if no issues as a result of these ambiguities has yet crystalised. 

The lesson to be learned from this in relation to any future infrastructure delivery model is that complexity of this kind was almost inevitably going to present challenges even with thorough scenario planning and legal drafting to cater for every scenario. Projects like the ones referred to by Vickerstaff are going to continue to be problematic and generate headlines, are not representative of the wider sector, and should be avoided in the future

At Curshaw, we specialise, through extensive PFI experience and team-wide expertise, in identifying such ambiguities on your behalf, and supporting you in resolving these with your counterparty. Get in touch if you would like to know more.