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Why PFI contracts are less flexible than non-PFI contracts

Stephen Wise

A key difference between long-term PFI and non-PFI contracts related to the provision of financial support. Under a PFI contract, the Government provided financial assistance in the form of PFI credits.

To gain PFI credits, the local authority had to submit a business case to Defra. It had to demonstrate the benefits of the project including financial, environmental and attainment of recycling and recovery targets. If the business case was approved, this would enable the start of the procurement process.

The process also sought to provide a more standardised approach to the procurement of long-term waste treatment infrastructure, and provided templates that could then be used to support the different aspects of the procurement process. This approach also sought to pass the risk to the private sector for the design, delivery and operation of the infrastructure.

Under a PFI contract, the selected private sector organisation would be responsible for the design, delivery and operation of the infrastructure. Typically, this would be structured with a special purpose vehicle (SPV) to manage the contract, an engineering, procurement and construction (EPC) contractor to design and deliver the infrastructure, and an operations and maintenance (O&M) contractor to operate it. On some projects the SPV, EPC and O&M may be the same organisations while on others it may be a mixture of organisations.

The EPC contractor would design and deliver the infrastructure. Once the infrastructure had been commissioned, the O&M contractor would then assume responsibility for the operational period of the contract.

One of the challenges has been that as policy has changed, for example removal of the Landfill Allowance Trading Scheme, introduction of different collection regimes the economic and technical rationale has changed from when the infrastructure was first conceived.

Depending on the technical solution developed, this has presented greater or lesser challenges for both the local authority and the contractor. For example, it may mean that the economics are no longer suitable. Under certain conditions there is the ability for variations to be discussed and agreed between the parties.

However, under extreme changes such as those being seen in the market currently, termination of the contract by either party may be the ultimate outcome. Whether the termination is the default of the local authority or the operator has potentially significant financial implications for either party.

Non-PFI contracts may be structured more collaboratively or may mean that the local authority is the owner of the infrastructure. Therefore, this may provide greater flexibility when looking at changing the contract.

Stephen Wise, waste sector director and waste technical lead, Wood plc

 

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