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Beyond PFI: a guide to non-reversionary contracts
The expiry of private finance initiative (PFI) contracts presents an opportunity for authorities to assess how these assets fit into their broader estate strategy, write James Meakin and Nigel Badham of property consultancy Knight Frank’s public sector advisory team
James Meakin & Nigel Badham are partners in the public sector advisory team at Knight Frank
As we approach the next five years, over 130 PFI contracts – valued collectively at £5bn – will expire across the UK. For many public sector authorities, this is a major transition point.
Historically, much of the focus has been on ensuring assets revert to public authorities in good condition. However, not all contracts include automatic asset reversion.
In its 2020 report, the National Audit Office notes that, from its survey of 75 authorities, about 35% of assets don’t revert, or only revert partially, back to authorities. These contracts often contain a complex series of options, notice periods and valuation clauses, creating additional challenges and opportunities from the PFI expiry process.
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PFI expiries offer authorities a unique chance to reshape their asset portfolios, optimise long-term value and address emerging priorities, from financial sustainability to achieving net-zero goals.
Knight Frank has identified five essential considerations for authorities to navigate and capitalise on the complex process of approaching expiry for PFI assets that don’t automatically revert to the public sector.
1. Strategic assessment: does the asset still serve your needs?
PFI expiry presents an opportunity for authorities to assess how the assets fit into their broader estate strategy and whether an asset aligns with future operational needs. Changing demographics, for example, may render a school unnecessary or create a need for extensive retrofitting to meet operational or sustainability requirements.
It is critical that this review is undertaken early, as this then informs the entire approach to the expiry of the PFI contract.
2. Exploring your options: beyond the expiry
This form of PFI contract offers various options at expiry – such as extending leases, outright acquisition or vacating the premises – that carry significant financial and operational implications.
Authorities should engage experts who can conduct a detailed analysis of these options, which may include developing cashflow models and understanding the operational impact of the options, to select the preferred option(s).
Authorities need to be aware of contractual deadlines and allow sufficient time to consider the options and the necessary governance that will be required to ensure deadlines are not missed, which can be disastrous.
3. Asset valuations: getting the numbers right
Where an authority has an option to make a payment to acquire an asset at expiry, determining the cost of acquiring the asset is one of the critical stages. Many early PFI contracts contain valuation clauses that lack specificity, often referring to ‘market value’ ambiguously.
Authorities must engage expert valuers who are familiar with PFI contracts to clarify the valuation basis, with any restrictions or considerations within the leases factored into the valuation scope. For example, establishing what exactly is required to be valued, is the valuation based on current use, or could future-use potential provide a higher value?
4. Preparing budgets: exploring funding solutions
Where acquisition is the preferred option and reversionary payments are determined, funding them is a critical next step. Public sector budgeting requires significant capital expenditure to be identified well in advance and supported by business cases.
Innovative financing options, such as public-private partnerships or generating post-expiry income from the asset, can offer flexible solutions.
5. Evaluating the asset’s condition: avoiding unpleasant surprises
When contracts lack automatic reversion, requirements for final condition surveys are often absent from the contract, posing the risk of significant unplanned investment in repairs or upgrades.
A condition survey should be procured to confirm the asset’s state and inform authorities of any remedial works required before acquisition. This proactive assessment of the asset’s condition allows authorities to factor these potential costs into their negotiations and avoid unexpected post-expiry expenses.
PFI expiry for non-reversionary contracts represents both a complex challenge and a pivotal opportunity for public sector authorities. With deadlines fast approaching, now is the time for authorities to engage to identify their options and implement strategies that will optimise asset value, align with community needs and support future objectives.
By leveraging expert guidance and taking a forward-thinking approach, authorities can ensure a smooth transition and secure long-term value from these assets well into the future.
James Meakin and Nigel Badham, public sector advisory team, Knight Frank
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