The Business Case for PPP Contract Term Extensions
Extending the term of existing PPP contracts, in the right way and on the right terms, can be of enormous value to the public and private sector and must be carefully considered by policy makers, contracting authorities and wider industry as a matter of urgency. Extending contract terms was one of the 30 operational efficiency ideas identified by the HM Treasury guidance in 2012/13.
Extensions are potentially a fast and effective way, in a financially constrained environment, of making a demonstrable improvement to social infrastructure in this parliament by unlocking capital that can be deployed to add capacity to existing PPP assets, deliver net zero retrofit and potentially tackle public sector backlog maintenance. This is crucial ahead of the next general election and consistent with the pre-2024 election commitment to rebuild Britain after decades of lost investment (1). The UK is now a comparatively “low investment nation” according to the OECD and this has led to growing maintenance backlogs in the non-PFI estate (2), and the related lifecycle safety risk and the growing demands on social infrastructure that is vital to the public. Extensions can directly address this challenge.
Extensions could also be a useful mechanism for resetting Projects where it is determined and agreed that historic challenges, identified in the White Fraiser Report must be addressed to renew partnership working on a win-win basis for the benefit of the contracting authorities and Project companies and the service users who rely upon high quality state critical service. As part of Project “Resets” alongside extensions, parties could put in place appropriate systems and processes, based on the lessons learned from decades of PPP delivery for the renewal period, that will improve contract management by the public sector and SPV management by the private sector which should forestall adversarial contract management that has led to value leakage and diminished investor confidence in the UK as an investment destination.
Extensions could also provide the public sector with a greater window of opportunity to develop post-PPP strategies and transition plans, prepare for handback condition surveys, provision appropriately for processes including the buy-back of equipment or final payments which is a feature of some PPP contracts, and ultimately avoid the acute risk of operational disruption to service users and also the avoidance of post-contract financial liabilities. During the course of this parliament, as an example, 15 health sector PFI contracts with a capital expenditure value of nearly £500m are set to expire. The Public Accounts Committee and the NAO have concluded that vital public services such as schools and hospitals face serious disruptions should the government fail to prepare for expiry, and there is an acknowledged lack of preparedness. In this context extensions could create more time for preparation of seamless handback.
PPP estates are also maintained to a significantly higher standard than non-PPP estates. The rigorous and detailed requirements to which performance must adhere, coupled with performance-based payments, ensure that the private sector's primary focus is to sustain operations at the contractually obligated level. Consequently, the structural integrity of these PPP estates, augmented by their continuous and meticulous maintenance to ensure full and timely payments, results in PPP estates consistently surpassing the standards of non-PPP estates. Extensions remain a viable solution to ensuring that these estates are continuing to function efficiently and guaranteeing user satisfaction remains high (3).
Realising these benefits can only be achieved through effective partnership working that is driven by the imperative to address current industry challenges and improve social infrastructure - the role for NISTA in championing this is crucial. The benefits from extensions based on partnership working will drive stronger working relationships and collaboration between the public and private sector that is fundamental to on-going service delivery and the ultimate handing back in fit condition to the public sector of highly functioning assets that have been maintained to a very high standard.
If you would like to know more about the work the AIIP is doing on PPP contract term extensions and particular the specific work on market-led proposals in line with the HMT Green Book and the HMT Business Case Model then please email info@aiip.org.uk.
Sources
Since 2000, investment in public sector assets has averaged 2.5% of GDP – a third lower than the OECD average: https://economy2030.resolutionfoundation.org/reports/cutting-the-cuts/
Estimated by the NAO to be £49bn - Maintaining Public Facilities, 22/01/2025: https://www.nao.org.uk/press-releases/government-building-maintenance-backlog-is-at-least-49-billion-spending-watchdog-says/
https://publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/1146.pdf