PFI Handback - The view from both sides

(5 min read)

With the first generation of the UKs operational PFI/PPP projects expiring, and hundreds more set to follow suit over the next few years, vital lessons are being learned on best practice for the Handback process – and how to avoid the many pitfalls that can arise.

Addleshaw Goddard's series of 'Handback' events has gathered industry specialists around the UK and beyond to look at how best to handle the return of schools, health facilities and more to public ownership.

At a recent event in Scotland, we heard from parties on either side – public and private sector - of completed Handback projects to gather intelligence on what the process involved, what recurring issues arose … and what to do about them.

Handback - Public sector perspective

The handback of HMP Kilmarnock from Serco to the Scottish Prison Service (SPS) concluded in March 2024. Lorraine Roughan, Deputy Governor at the SPS, led that process and joined a panel looking at Handback from the public sector perspective. As the first SPS facility to go through the process, Lorraine and her team were breaking new ground. Key things that they learned from the process were:

Preparation for the Handback of HMP Kilmarnock started in 2016, looking at what would be involved and what the options were for the facility to operate post expiry. This work was separate from business as usual (BAU) contract management and it was only towards the end of the process that these two things converged.
The SPS took some pragmatic decisions about the contract management piece during the process, and one huge positive was the help it received from Serco, who had run the facility for 25 years and who were involved in the process from the start, even although SPS's legal contract was with the Special Purpose Vehicle (SPV) set up for the creation of the prison.
The scale of managing a Handback process is huge and there needed to be a sizeable Handback team over a long period, one that can actually extend post transition.
A proper governance process, one that allowed both scrutiny and quick decision making to take place, was crucial. The SPS team had regular reviews and also met with the SFT on a regular basis. There was a risk management and audit committee in place, but at the same time there was an element of latitude as this was the first SPS handback to take place.
There may be a resource issue and knowledge gap, as many people who were involved in the original PFI process may have retired over the past 20 years.
Surveys are an area in which it would be easy to 'run out of track' as the expiry date approached. For HMP Kilmarnock, the contract only provided for one final survey one year before handback, though it did allow for regular condition surveys. The survey process, however, can take a long time - not only carrying out the survey but agreeing its scope and agreeing on the results. That's before allowing time for any significant works to be carried out.
Don't forget the impact on people affected by the transition from private to public management. The employee transfer focus takes time, even for simple internal processes such as getting hundreds of new staff photos taken or setting up new email addresses. Parties really need to consider what decisions mean for the people at any given facility.

Handback - Private sector perspective

Walker Healthcare handed back The Meadows, which provides specialist mental health and care services for older people, to Stockport NHS Foundation Trust in October 2024. Key lessons learned were:

As this was a first generation PFI project, the team at Walker Healthcare began looking at the Handback process five years out. Initially, there was a prospect that the contract may have been extended but that was subsequently ruled out by the Trust. In hindsight, having clarity on that decision even earlier would have allowed both parties to map out the Handback process better.
The Walker Healthcare team identified three key elements of the process from their perspective:
- Service delivery and continuity
- Living up to the contract
- Achieving a clean break at the date of Handback
Surveys were an issue. The team received a survey around 18 months from the date of Handback but had little involvement in the scope of that survey. Looking back, a joint appointment and agreement of the scope of the survey would have been preferable.
Data gathering was another pain point, with the sheer amount of paper ("there were still faxes in 1999!"), and the importance of good internal communication. A key lesson learned was the need to instil an information gathering process from the year you sign an agreement, otherwise everything can drift. Having a library so you can see what the requirements were at the time you entered the contract, and how things stood then, can pay huge dividends and things can look a lot different 25 years later when you are trying to ascertain what was expected.
Another key aspect of information gathering was thinking about the decisions you are going to make on the back of the information you gather not just doing it for the sake of it. What are you trying to achieve?
The Dispute Resolution Process. Walker Heatlhcare had an escalation process that provided a way to prioritise and solve issues and worked well, with accountable individuals able to cut through the minutiae. They tried to reach compromise solutions and, in the end, the main problems were actually more about time constraints.

Key takeaways on carrying out a Handback process

Insights into disputes and dispute avoidance

Viv Welsh, Sarah Wilson, and Peter Clyde from Addleshaw Goddard led a session on dispute resolution, focusing on Handback-related case law. This session aimed to unravel the complexities of disputes and provide strategies for dispute avoidance.

Key takeaways: Practical tips for dispute resolution

Your legal team can be your secret weapon, as most of our time is spend helping to avoid disputes arising in the first place.

Dispute Resolution process (DRP):

Have a clear picture of what your DRP clause in your key contract says, and what it means. You also need to check other project contract DRPs, and check for hidden conditions precedent
Is it fit for purpose? The quality of the contract drafting varies widely and you need to work with what you have got in the contract. If there are issues in it that you need resolved the best time to do this is before any disputes arise.
Understand your position with regard to: contractual rights and obligations; factual and technical aspects; commercial and financial considerations. You want to get your DRP to support what you need it to do. You can raise all of this with the other side in advance, as it allows you to show that your intentions are good and helps with collaboration.
Carve outs for certain types of disputes can be useful, for example technical or financial disputes. These can save time by using processes such as adjudication. You can agree with the other side what type of issues you want to go to a fast-track process and what won't. You don't need to bundle all disputes together.

Decision maker:

You want to agree who your decision maker for disputes will be and focus on finding a good quality one with a good reputation. This is easier to do if you are carving out different types of dispute.

Experts:

Experts can be relied on by decision makers. Parties can also rely on them to resolve and defuse potential disputes. Commonly parties will each appoint their own experts, but that can lead to an adversarial process which can lead to more entrenchment. There are some benefits of having your own experts, but it's never guaranteed that the decision maker will follow what your expert has found. The alternative is to agree joint experts, which can be done before disputes get going and even as part of the survey process. That can lead to more collaboration between the parties.
Finding good experts is difficult, so it pays to think about it well in advance.

Hot topics for disputes:

Payment mechanisms including deductions.
Contract interpretation – the courts have moved away from a rigid set of contract interpretation rules over recent years and now try to balance out principle. So they will look at the meaning of the words used and the contract as a whole, the context and reasonableness.
Termination – process and substance are key. If you are going down this route, the contractual procedure has to be followed to the letter. You need solid grounds for termination, with supporting evidence.