The construction sector needs to be “wooed” for it to accept a new form of public-private partnership (PPP), experts have said in the wake of the collapse of a PFI contractor.
The warnings come a week after the UK’s biggest private finance initiative (PFI) contractor Transform Schools (Stoke) Ltd (TSSL) announced its intention to appoint liquidators, leaving up to 88 school projects unfinished.
Lawyers who have worked on cases involving PFI contracts told Construction News that clients and contractors would only consider another form of PPP if the government presented them with a “stable and consistent model”.
The warnings come as many PFI contracts – many of them 20- or 25-years long – are ending, with some work incomplete.
The current government has stood by PPPs, last week confirming it will use the model to deliver 250 Neighbourhood Health Centres across England, and to deliver the Lower Thames Crossing project.
A meeting of TSSL’s creditors is scheduled for 5 December at the London offices of business recovery and insolvency specialist Begbies Traynor.
In its most recent accounts for the year to 31 March 2024, TSSL owed creditors £17.6m, repayable within 12 months.
The firm’s demise has left Stoke-on-Trent Council scrambling to find extra funds to complete TSSL’s work.
The case could leave up to 88 schools in Stoke-on-Trent with unfinished projects, according to government documents seen by CN. The council previously told Schools Week that, as of August this year, TSSL had not completed £7.2m worth of the work.
CN understands the council planned for the eventuality and has committed to finishing the necessary work. But the case has reawakened concerns that PFI – and by extension, other PPP formats – can lead to higher costs and unbalanced risk.
Penny Rinta-Suksi, commercial partner at law firm Blake Morgan, told CN a new PPP format could fund the government’s infrastructure plans, particularly if taxes or borrowing were not increased.
“Infrastructure projects like schools and health centres lend themselves well to a PFI-type model, because you have an asset that will be needed well into the future,” she said.
“And if you know that asset will be needed over a good 20-year period, you also know that there will be money available to repay the financing through a dedicated occupier.”
PFI schemes included low-risk building contracts with no upfront payments for the public sector. Special purpose vehicles were guaranteed long-term returns, with the public sector bodies paying back the cost of construction plus interest and service charges for facilities management.
The first model was scrapped by the coalition government in 2012 following criticism that it lacked transparency, was bad value for money and that contract terms were weighted in favour of the private sector. A successor, PFI2, was then introduced but abolished in 2018.
Rinta-Suksi said the sector “needs to be wooed because there was a hell of a lot of investment in PFI”.
She added: “When that market was shut down […], distrust arose and a lot of the know-how moved to countries like Canada.
“The government needs to show a stable and consistent model that will withstand the short termism that we’re currently experiencing.”
Helen Young, principal associate at SA Law, agreed that the concerns around PFI make them a difficult sell.
“One of the usual criticisms is that towards the end of the contract, it is alleged maintenance is not kept up in the same way that it has been historically, with a view to maximising profits,” she said.
Rinta-Suksi said local authorities shouldered too much of the risk on PFIs, meaning “there was a huge amount of pressure on [authorities] to accept the building, even if it was not quite perfect”.
If work is not completed or the PFI contractor goes bust, the council is left to sort it out, she added. Once the money has all been lent to the contractor, the lender is out of the picture, and the council takes on full responsibility.
Councils could also have a tough time reclaiming funds if a PFI contractor goes under, she added, as they would be recorded as unsecured creditors.
Young said authorities were told years ago to reserve funds for PFI-related issues.
But she added: “If you don’t have the reserves to put aside, how are you meant to deal with it is the obvious question.”
Councils up and down the country have long been struggling financially, with Croydon, Thurrock and Nottingham among those to have issued bankruptcy notices in recent years.
But Young added that a lack of funds to repair projects not finished under PFIs could have a big impact. “Let’s say it’s a hospital and repairs have not been kept up to date – you could well find that results in the closure of operating theatres,” she said.
CN approached Stoke-on-Trent Council for comment. The Department for Education declined to comment.