Insight
Scottish Futures Trust and the wider Scottish infrastructure market have recently celebrated a decade of hub projects – new community based infrastructure projects predominantly across the education and health sectors. As the saying goes however, what goes around comes around and, as well as focusing on early life, shiny new build facilities, authorities with older PPP projects are now being actively encouraged to focus on expiry and handback preparations.
Scottish Futures Trust has published a paper entitled “PPP Projects Nearing the End of Contract: A Programme Approach”. It identifies that over 20 projects in Scotland will reach expiry in the next 12 years, including major health facilities and schools projects.
The SFT paper recommends a cautious approach to expiry and handback issues. Whilst contractual provisions in relation to handback do not typically kick in until around 24/18 months from expiry, the firm advice is that preparations need to start at least 5 years out and, in the case of more complex facilities, between 8 and 10 years out. Indeed, from our live experience, this is certainly the approach we are seeing being taken and from the array of complex issues that we are advising on we would firmly echo these recommendations. It is also recommended that Authorities form dedicated project teams to manage expiry and handback issues thereby highlighting the importance and potentially arduous task of managing such issues.
When considering expiry options, the key question is how does the Authority want to use the asset post expiry (if at all). A detailed review of the project contracts will then be necessary so as to identify key provisions in relation to expiry and handback which will need to be assessed against the overall goals of the Authority in relation to the asset.
Early PPP contracts often have bespoke requirements in relation to expiry and handback and indeed not all contracts even provide that the asset will automatically revert to the Authority. Contracts may have extension options in them; provide for residual value payments to be made to the project company and have leases in place that need to be collapsed. These are complex issues that must be carefully considered alongside other issues such as condition surveys that will need to be undertaken; the position in relation to employees; equipment and data transfer; and other more practical considerations. If there is any benchmarking/market testing to be undertaken in the final years prior to expiry then this may also have an impact on formulating an overall strategy for dealing with expiry and handback.
The above project specific issues cannot be considered in isolation. Overarching matters such as procurement implications and statistical treatment of the projects must also be considered and then woven into strategy and discussions.
Accordingly, early and constructive engagement among Authorities, project companies and FM providers is advised particularly if an Authority is looking to try and do something unique and potentially outwith the contract parameters. Senior funder involvement should also not be dismissed. Whilst contractual handback provisions may be structured to kick in after the senior debt has been repaid, the early approach to handback matters being mandated means that senior funders may also have to be involved in discussions.
Harper Macleod has already successfully advised NHS Ayrshire and Arran in relation to the handback of the East Ayrshire Community Hospital PPP Project and we have also advised a project company in relation to the voluntary termination by a local authority of a PFI project in Wales. We are also currently advising other public sector bodies in relation to their expiry and handback arrangements.