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How to achieve a smooth handback process on PFI projects

Many Private Finance Initiative (PFI) projects that were entered into at the end of the 1990s and in the early 2000s are now coming to the end of their contractual term. As a consequence, the parties to these PFI projects are having to start the process of handing the underlying asset back into public control. In a number of cases, these early PFI projects do not have a particularly detailed process for handback (or in some cases there is effectively no handback process set out in the agreement). This has potential impacts across a number of sectors, including the healthcare sector. For example, there are PFI projects where hospitals are being handed back into public control.

The handback process can lead to a significant upheaval in the operation and maintenance of the infrastructure asset in the PFI. This does not need to be the case and we have experience of assisting on handbacks and voluntary early terminations which have run smoothly. In this article, we take our experience in these processes and summarise some of the areas that the parties involved should consider so as to make the handback process as smooth as possible.

The first question that the parties need to ascertain is whether there is an option to extend the term of the project agreement and, if there is, whether the public authority party that entered into the PFI with the private sector (the Authority) would like the project company to continue providing the services and therefore utilise the option to extend. If the Authority does wish to extend the project, the points to consider and process will be very different to a situation where the project is to be handed back to the Authority. The option to extend is not considered in this note.

If there are no extension provisions or the Authority does not elect to extend, the project will be reverting back to the Authority on expiry. So how to ensure that the process runs smoothly?

  • Review the handback provisions a few years prior to expiry of the project and set out a timetable for carrying out the handback process, including key dates and actions.
  • Check that all variations have been properly recorded and that there are copies of all the paperwork related to any variation.
  • Communication between the parties is key – ensure all parties have the same understanding of the handback provisions. If necessary, agree clear lines of communication between each party and engage in dialogue with the parties early! If this process is to be a smooth one, it cannot be left until the last year of the project.
  • Fill in the blanks – some of the handback drafting is not overly sophisticated (or absent in respect of certain issues altogether). The parties therefore need to fill in these blanks by way of commercial agreement.
  • Post-handback liability – consider whether there is likely to be any liability for the project company post-expiry of the project and how this may be addressed. It will be more difficult and costly to wind up the project company if there are potential post-expiry obligations. 
  • Condition surveys – the basic provisions of the handback process generally include an obligation on the parties to carry out a survey to assess whether the project company has been complying with its obligations as set out in the output specification. The project company will have to rectify any areas that do not meet this standard. If the facilities management (FM) provider has been complying with its obligations under the FM Contract, there should be a limited amount of work to complete prior to expiry of the project agreement. However, you should note the following:
    • the handback process is the last opportunity the Authority has to ensure that the project company carries the cost for rectifying any issues and therefore it may be reviewing the project with a more critical eye; 
    • the FM provider may have failed to report defects/issues that are then picked up by the handback survey; 
    • consider whether there are fire stopping issues that need to be resolved prior to expiry; and
    • in the case of healthcare projects in particular, consider how the process of carrying out the condition survey is likely to impact the provision of the services i.e. hospitals run 24 hours a day, 7 days a week and the surveys need to work around this.
  • Check the final payment of outstanding senior debt – this should occur prior to the handback process in which case the funder is less likely to be involved in the process. However, given the number of projects that have been refinanced, the final repayment date is often very close to the project expiry date. In these circumstances, the funder will remain interested in the process.
  • Consider whether a government body is likely to have an interest in the handback process e.g. the Department for Education or the Department of Health and Social Care.
  • Ensure that stock/inventory records are up-to-date.
  • Agree a handback protocol to manage the following practical elements of the process:
    • the agreed expiry date;
    • the date that keys and security passes are handed over to the Authority;
    • the date that hard copies of Operations & Maintenance documentation and other records are transferred to the Authority;
    • whether any assets need to be transferred to the Authority to allow it to continue the service post-expiry;
    • what, if any, computerised documents/data are being transferred to the Authority (including any relevant third party licences);
    • what, if any, IP rights are being assigned to the Authority (plus any necessary consents in respect of such rights);
    • what, if any, contracts are being assigned to the Authority (for example IT contracts, manufacturers’ warranties and any utilities contracts in the name of the project company);
    • what insurance policies need to be transferred into the Authority’s name or replaced;
    • a list of employees that need to be transferred to the Authority in accordance with TUPE (including pension information); and
    • what health and safety / regulatory / fire safety and other manuals need to be transferred to the Authority and any arrangements for relevant safety checks.

The above is only a high level summary of some of the important points and common issues to consider in relation to a PFI project handback. Clearly, this is not a one size fits all situation. Projects differ in size, complexity and sector, and the handback drafting in the project agreement may include project-specific drafting. All of which will have a bearing on the process and the steps that the parties need to take.

In respect of PFI projects that provide healthcare services, it is particularly important to consider the practicalities of handing over, for example a working hospital, without interrupting the provision of essential and life-saving healthcare services.

If you would like to discuss the issues raised in this note or discuss handback more generally, please contact Sam Tye or Kim Fowler.

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