Preparing for Project Expiry – higher education sector
Infrastructure and Projects Authority guidance
Whilst higher education projects are not strictly PFI projects, the IPA’s guidance could be relevant to the sector as many higher education projects follow a PFI contract model. For instance, there might be a Project Agreement with construction and FM sub-contracts, with funding provided by senior lenders and subordinated equity investors. To all intents and purposes, the higher education project might be as similar to a PFI project as it could possibly be. Whilst the IPA’s guidance might be intended strictly for PFI projects, many of the principles might equally apply to higher education projects that adopt the PFI contractual model.
The IPAs guidance concerning the expiry of PFI projects considers two fundamental questions: (i) in what condition should the PFI asset be handed back to the contracting authority, and (ii) what will the services such as cleaning, catering, and building maintenance look like in respect of that asset on day 1 after handback and contract expiry?
It’s worth considering the IPA’s guidance and considering some of the points which might be transferrable to higher education projects. It is important to stress that the IPA’s guidance is not mandatory for higher education projects, but it does provide food for thought.
Isn’t this still years away?
The IPA estimates that it takes 7 years on average to get a PFI contract ready for expiry. So, if a PFI project expires in say 2029, it will be in its 7-year expiry process from 2022/2023. Therefore, if a particular Higher Education project will expire on the same time frame (or sooner), then some of the expiry considerations which apply to a PFI project 7 years pre-expiry might equally apply.
The risks of not planning
The contracting authority (CA) to the Project Agreement (e.g. a University) should already have been paying for the asset to be maintained in a proper condition ready for handback. But if a substandard Project Agreement asset (e.g. accommodation) is handed back, the CA risks paying again after contract expiry to bring the asset up to standard.
If contract expiry is mishandled, there is a risk of operational disruption, lack of service continuity, financial loss and reputational damage to the CA. Plus, the transfer back of considerable risks e.g. health and safety and statutory compliance, which might not have been foreseen.
How to implement an effective expiry
The answer is planning and a recognition that the IPA’s 7-year timetable identified for PFI projects might also be realistic for Higher Education projects too.
The 8 bullet points below highlight the IPA’s key recommendations for PFI projects which might be translatable to higher education projects:
- The CA should set up a new dedicated team to run the expiry process. It cannot rely on its “business as usual” team.
- At the start of the 7-year process the CA should commission a review of all its project documents to understand how the current services are operated, the expiry process, the condition the Projects Agreement asset should be handed back in and its information rights to obtain information concerning the above. The IPA does not recommend a high-level review, it recommends a detailed review as, for instance, the FM contract might have a considerable number of sub-contracts beneath it which the CA will need to understand if they are essential to provide services post-expiry.
- This review might throw up ambiguities which need to be resolved with the ProjectCo, its investors and the FM subcontractor. For instance, the handback criteria might not be clear and will need to be commercially agreed. Plus, the CA might need to agree a protocol if it needs to obtain information it is not contractually entitled to.
- Any legacy issues with the other parties to the project and all disputes need to be resolved so they can’t be used as leverage in the expiry process. A relationship “clean slate” across the board is required.
- Project Agreements traditionally require a final asset survey 24-18 months before contract expiry. However, the IPA thinks this is too close to the contract end date. It recommends an additional survey 5 years before contract expiry. This is because in complex projects it might take this long to survey the assets and to then fund and undertake any works identified by the survey. Extra time might be needed if there is a dispute between the parties on asset handback which could take some time to resolve. This should lead to the production of a 5-year plan to bring the assets to the handover condition, followed by the contractual final survey 24-18 months before expiry to monitor progress.
- Even if the handback criteria are clear and agreed by all parties, the assets might no longer be fit for the CA’s purpose. This could be due to changes in service delivery, law, guidance or policies. Contract variations might therefore be needed pre-expiry which, again, take time.
- The CA should also have a clear plan for future service delivery and the personnel and skills it needs to deliver them. The Project Agreement expiry process and new service plan will have to be run together as the IPA considers that it is difficult to plan the new services without understanding the existing services.
- Whilst there are many actions on the CA, the other parties to the project should also be engaging at the same time in this process alongside its CA partner. This isn’t just a CA list of actions. There will be a knock on everyone’s door at some point.
End thoughts on Project Agreement expiry
The summary above represents a fraction of the points covered in the IPA’s guidance. Project Agreement contract expiry is a “cliff edge” fixed date, that may be difficult to postpone. As the IPA is not prescriptive about the form a Project Agreement expiry should take, this whole process will be labour intensive to implement a bespoke new services solution for each project. That’s why it’s important to plan early. A key challenge will be to find the people with industry experience when the demand for skilled people hots up.