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When a fire broke out at London’s Whittington Hospital in 2018 it not only forced patients to evacuate its critical care wing but irreparably damaged its relationship with the private finance initiative provider that built, financed and maintained the facility for more than three decades.

A dispute over who should bear the costs of repairing defects exposed by the blaze led to the Whittington withholding payments to the provider. This year Lloyds Banking Group, the biggest investor in the PFI scheme, sued the NHS hospital trust for £56mn.

The ongoing litigation is one of a series of clashes between public authorities and private providers as the UK’s decades-long and controversial PFI experiment enters a painful wind-down.

“There has been a big increase in disputes, both in terms of quantity and value,” said Alison Fagan, partner at DLA Piper, which is helping investors lobby for more government support to resolve issues.

“We can’t allow PFI expiry to descend into chaos as it will deter future private investment in UK infrastructure,” she added.

PFI was launched in the UK in the early 1990s to let public sector authorities build schools and hospitals through borrowing from banks and other investors, who would then maintain the assets over decades.

The financing strategy was widely used during the 1997-2010 Labour government, and finally ditched by the Conservatives in 2018 after several NHS trusts required bailouts stemming from the high cost of the PFI schemes. Existing contracts were untouched.

A report by the National Audit Office, the spending watchdog, that year found taxpayers had incurred billions of pounds in extra costs for no clear benefit through PFIs, with yearly fees running at £10bn.

PFI deals are on average 31 years long and generally involve the assets reverting back into public hands at the end. Nearly 71 PFI contracts worth about £4bn are coming to an end in the next four years.

A common trigger for clashes when contracts near expiry is the condition of the assets, and the question of who should pay for any deficiencies.

The Whittington is a rare example of a dispute made public through court action. Most conflicts go to arbitration and are settled confidentially, according to one PFI lawyer.

The disputes can be not just expensive, but bitter and acrimonious.

“Toxic” relationships as well as “shouting and aggressive conduct during meetings” were noted by the Infrastructure and Projects Authority in a July report on the progress of PFI hand-backs.

The document cited reports of “draconian enforcement of contracts” by public authorities, as well as “poor behaviours” by PFI providers including the deliberate withholding of critical health and safety information.

Some of the conflicts begin with seemingly minor infractions. Paul Jarvis, editor of Partnerships Bulletin, which reports on the sector, said he has heard complaints that leaves on the ground represent an obstruction.

Private providers see the disagreements as a ploy by the public sector to claw back payments or withhold them all together.

“If you apply the letter of the contract, you can often keep the deductions at a high level for a prolonged period even where the issues are minor,” said Fagan.

For the public sector, there are serious risks in not taking action, not least that any failure to resolve issues prior to hand-back could lumber them with a powder keg of defective buildings.

Bruce Dalgleish, partner at public sector adviser P2G, pointed to damning surveys of PFI buildings suggesting they could “represent a significant liability for the public sector if they are not rectified prior to expiry”.

A NAO report in 2020 found that PFI investors and subcontractors were not co-operating with authorities to provide information on the asset’s conditions in more than a third of cases, “risking them being returned to the public sector in a worse quality than expected”.

Many PFI contracts, particularly those signed before 2000, contain contractual limitations over what data can be requested from the PFI providers such as maintenance and asset quality, it warned.

PFI deals are structured with a special purpose vehicle that exists solely for the specific contract. The SPV then employs a building contractor as well as maintenance and services providers such as ISS or Serco.

“In many cases, the easiest thing is to fold the contract and leave it to the public sector,” said another PFI lawyer, who often represents public authorities.

“[The PFI investors] have been taking cash out at every opportunity so why would they put money in when they have a few years left on the contract and they have never done so before,” the lawyer added.

Rising costs on PFI deals, which are adjusted for inflation, are raising the stakes. According to the Centre for Health and the Public Interest, a research group, costs have escalated by more than £470mn as a result of the spike in inflation between 2022 and 2024.

“The cost has shot up so the trust will be paying more and it will be eating up a greater chunk of their cash so there is less for healthcare services,” said Philip Lobb, an independent adviser on PFI schemes “That is provoking a lot of difficulty and exacerbating tensions.”

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Source: FT

Date: 25 october

Posted in News on Oct 25, 2023

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