The P3 sector in the United Kingdom is due for a “reset” leading to a possible overhaul of relationships between parties says a British authority on the subject.
A large majority of Private Finance Initiatives (PFIs), as P3s are called in the U.K., are on the right track but there has been enough well-publicized acrimony, especially nearing the hand-back stage when the PFI contract comes to an end, that the Infrastructure and Projects Authority commissioned a report last fall to study behaviours and recommend remedies. The White Fraiser report was delivered in July.
A co-author of the report, Barry White, presented his findings on the second day of the Canadian Council for Public-Private Partnerships’ annual conference held Nov. 13 and 14 in Toronto.
White, an infrastructure consultant and former executive with Partnerships UK, took the conference stage alongside Fasken partner Brian Kelsall.
Kelsall noted the U.K.’s PFI sector is more mature than Canada’s with over 600 projects on the books. He called the conclusions of the White Fraiser report “fascinating.”
“It’s prophetic for Canada in this market for obvious reasons,” said Kelsall. “Where the U.K. is today is likely where we’re going to be in the very near future.
“So the report is a roadmap and its conclusions and recommendations should be required reading really for all of us.”
White’s report said the PFI industry, while largely successful, is at a “significant inflexion point.” In recent years, a number of public authorities have started to manage their PFI contracts more rigorously, with owners moving away from a “light touch approach” to contract management that relies on cordial relationships with the private teams, called SPVs (special purpose vehicles) in the U.K.
White said a more rigorous approach to contract management from the owners should be welcomed.
“We received strong feedback from consultees to suggest that the manner in which a number of public authorities have implemented their change in approach has often involved overly draconian (if not forensic) enforcement of the terms of the PFI contract accompanied by, on occasion, unprofessional behaviour,” the report stated.
White said, “We believe that that partnership should be hard edged and have a productive relationship underpinning it. And that might mean sometimes having a dispute or dealing with it in a very professional and timely fashion.
“The overall conclusion we drew was that complacency is the rock on which partnerships founder…So stay on top of it and make those relationships really productive.”
Without intervention, White and his co-author stated, “expect the current trend towards increased disputes and deteriorating relationships to accelerate.”
At the heart of the growing contentiousness, the authors said, is historic under-management of PFI contracts on both sides. And that has led to poor performance of some PFI projects.
“There’s an example given to us of a chief executive in the health care sector who was spending one day a week on a very busy schedule dealing with a big PFI contractual dispute. That is not a good use of her time,” White told the Toronto audience.
The report said while behaviours are generally reasonable and are not the root cause of disputes, there is a need for all parties to invest more in contract management. A clear contract management strategy can minimize the risk of unexpected outcomes.
White said as the hand-back stage approaches, owners are often “really beefing up” the team. A natural reaction of the SPV might be to get its back up in anticipation of mutual shows of strength, White said, but that is misguided.
“Getting stuff done with a counterparty that really understands the structures is actually helpful to the private sector because you have to reach a compromise, and if you have to deal with a tricky commercial issue, having somebody on the public authority team that gets it is actually helpful,” he said.
Another problem lies in the nature of the SPV ownership, the report observed. Some teams are from the industrial sector while others are finance-based. SPVs with strength on the industrial side tend to manage their assets more proactively.
The study observed that the reset approach “represents an opportunity for a more fundamental overhaul of relationships across the PFI sector. Although this may sound bold, we believe such an overhaul is long overdue.”
Added White, “The reset approach will allow you to take stock, get a survey of the asset and have a plan in place to make sure that any actions emerging from that survey are implemented.”