AIIP Policy Position Paper: Proposed approach to Management of Change in PFI contracts

March 2024 

Issue 

1. The long-term nature of Private Finance Initiative (PFI) contracts (with some operating for over 20 or 30 years) means there will be a certain amount of change required to reflect changes to or expansion in operational needs, changes in technology and/or service delivery practices. 

2. This Procurement Policy Note (PPN) sets out information and associated guidance on the management of PFI contracts, specifically the management of change and the processing of variations, for the benefit of all PFI stakeholders. 

3. This PPN should be read alongside and in parallel with other PPNs on Contract and Performance Management, Relational Contracting, and Financial Challenges. 

Dissemination and Scope 

4. This PPN is applicable to all contracting authorities, including all central government departments, their executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding Devolved Administrations). Together these are referred to in this PPN as ‘contracting authorities’. 

5. Please circulate this PPN across your organisation and to other relevant organisations that you are responsible for, especially ensuring that it is drawn to the attention of those with direct operational responsibility for PFI projects and those with a commercial role. 

Timing 

6. With Immediate effect.

Background 

7. PFI contracts are a form of public private partnerships used in the UK since the 1990s, as a way to finance and provide public sector infrastructure and capital equipment projects, such as roads, hospitals and schools. PFI projects involve the establishment of a new company that delivers the project, commonly referred to as a special purpose vehicle DRAFT 

(SPV). The SPV finances, builds, maintains and operates the asset over the contract term, usually 20 to 30 years. During this period, contracting authorities make regular payments to the SPV that comprise debt repayment (covering the cost of building the asset), through-life operation and maintenance costs, financing costs, insurance costs etc, (usually referred to as the Unitary Charge). In many PFI contracts, the SPV is, in addition to delivering the services associated with PFI, are also responsible for reviewing its own performance and reporting back to the contracting authority. 

8. Often, the management of PFI contracts involves different organisations across the public sector ranging from the contracting authority which entered into the original agreement (with primary responsibility for managing the contract, including the expiry process), through to sponsoring Government Departments. The Infrastructure and Projects Authority (IPA), reporting into HM Treasury and also the Cabinet Office, supports Government Departments and contracting authorities as the Government’s Centre of Expertise for Infrastructure and Major Projects. HM Treasury is responsible for PFI policy and fiscal decisions and co-owns the PFI strategy along with the IPA. 

9. The Government announced in the 2018 Budget that it would no longer use PF2 (the most recent PFI model) for new government projects, but existing PFI and PF2 contracts did not end because of this announcement. Archived documents including the retired PF2 policy and standardisation of PF2 contracts are available at the National Archive. As a result of both the mass-deployment of PFI during the late 1990s through to 2017, there are 669 PFI projects across the UK with a total Unitary Charge value of £10,193m in 2024. 

10. The IPA-commissioned White Fraiser Report, published in 2023, highlighted a range of areas in which some PFI projects were seen by both sides of the partnership to be working ineffectively, in ways which jeopardised value for money, eroded trust, diminished collaborative working and placed expiry and handback at risk. The report called for a ‘resetting’ of the operational basis in the case of these PFIs and the AIIP has responded separately and awaits the IPA’s formal position in regard to the recommendations. 

11. One issue that was identified was the management of change in PFI Projects, and formal variations to the underlying contracts. 

Key Considerations 

12. In the case of a long-term relational contract such as a PFI contract, best practice should be expected to change and adjust continuously based on the constructive engagement of the parties and the relationships involved. Whilst respecting the performance terms and intent of the contract, contracting authorities should expect a need to flex in order to DRAFT 

anticipate and minimise the impact of unforeseen issues and outcomes and to prioritise local needs. 

13. There are, however, key areas where specific focus is required, and which should form an operational framework for managing change within contracts. These include: 

• Contract management resourcing and responsibilities 

• Contract management, strategy and objectives 

• Managing and communicating change 

• Variation of contracts and routine matters 

Actions 

Defining Objectives and Purpose 

14. As noted by the White Fraiser Report, it is frequently the case that there is no properly defined methodology that the contracting authority (and its sponsoring Government Department) has agreed in advance to clearly and consistently communicate the contracting authority's objectives with SPVs. Contracting authorities should develop methodologies based on well-understood objectives defined by the contract management approach, addressing questions of: performance measurement and how the parameters for that are implemented; the relationship between service performance and cost savings; and methods of achieving best value for money. 

Managing and communicating change 

15. Effective management of change in relational contracts is a bi-partisan activity, not one based on a more traditional ‘master-servant’ relationship. It encompasses the need to pragmatically address not just the mechanics of variations to contract, but also contract management practice when change is necessary. This requires: 

• Good communications with the SPV 

• Clarity on the objectives of the change 

• Establishing the benefits to the performance of the PFI

16. Where a change to contract management practice and processes is considered necessary, those changes should be communicated well in advance to the SPV to the extent possible. The White Fraiser Report references that frequent changes to contract management practice, which may include a perceived ‘ramping up’ of scrutiny, are carried out without advance notice or providing the reasoning for the change in approach and that this can have a detrimental effect on relationships. 

17. It is important for contracting authorities to discuss with SPVs and the supply chain the reasoning behind the changed activity and to agree which underlying issues are being addressed by the change. The ultimate objective should be achieving clarity on what the change addresses and a mutually agreed ‘win-win’ position, particularly where improved performance or value can be achieved and the SPV is better enabled to do its job more effectively. 

18. It is also essential that any change takes into account local constraints, especially in operationally critical environments, where change allowed within the letter of the contract may have practical implications which make it challenging to implement. In all cases, local needs should be prioritised over strict contractual entitlements. 

Formal Variations 

19. Formal variations to the contract should be driven by operational need, either in terms of performance or physical change, with specific defined requirements and a clear understanding of the risks the contracting authority and SPV are each willing to accept. As such, it is important to assess what is proposed collaboratively with the SPV and leverage its support in determining the best way of achieving the variation. 

20. It is beneficial to both parties and end users that the frustration of unnecessary delays is minimised. To that end, it is important to agree at the outset whether a particular variation represents significant material changes to the PFI. These are as distinct from more routine matters, which should be expedited within a streamlined process and, where possible, have any required consent processes accelerated. This is particularly important where urgent determinations are required in time-critical environments such as healthcare. 

21. For all variations, contracting authorities should consider that any change in risk allocation is likely to require additional due diligence (legal and technical) before the SPV (driven by its lenders) is able to commit to proceed. With this in mind, early communication of the intended variation and purpose and engaging professional advisors from the outset is essential. Clear and comprehensive information should be provided to enable the SPV and relevant advisors to actively contribute in assessing, where appropriate, alternative options in order to obtain the best, most cost-effective outcome. 

22. The key components of an effective variations process should be understood by both parties and include: 

• A clear process map, including approval stages and timescales 

• Fully documented statement of requirements and supporting information 

• Early options analysis including any necessary value-engineering 

• Relevant specialist input required and clarity on delegated authorities 

23. Equally, both parties must agree the basis on which an accelerated process should be used and what the fast-track process involves. This should take into account any relevant defined contractual milestones / timelines and means of escalation for necessary consents.