HM Treasury has released a new PPP Policy Note on the early termination of PFI contracts, a copy of the note can be accessed here

The note describes HM Treasury’s approach to early termination where neither party is in default under the terms of the project agreement, but where the public authority nevertheless wishes to voluntarily terminate the PFI arrangement.  Public authorities seem to have become more aware of the possibility of using this option since the termination of the Hexham General Hospital PFI in 2014 (see Case Study below).

The publication of this new Policy Note may suggest that Government expects the voluntary termination of PFI projects to become routine, but the tone of the note and approach outlined indicate that this is unlikely, with voluntary termination being described as a novel, contentious and potentially repercussive transaction and the incidence of voluntary termination is anticipated to be low.

Public authorities will need to give detailed consideration to the value for money of terminating a PFI arrangement, not just in respect of itself, but also in relation to the public sector as a whole, bearing in mind that enhanced compensation is usually payable to the private sector on voluntary termination.  The sponsoring department will need to convince HM Treasury of this before voluntary termination will be approved.

The Policy Note envisages that HM Treasury will consider issues such as: the resources required and the ability of the terminating Authority to continue to provide the services provided under the PFI Contract; whether the terminating Authority will be able to secure a public value for money outcome; and the relative priority of the proposed termination against any other possible termination proposal in an environment of constrained resources.

Any PFI asset which was off balance sheet for national accounts purposes will be on balance following termination.  The costs of buying out a PFI project will form part of the public sector net debt.

While a rash of PFI project terminations currently seems unlikely, the Government is continuing to seek savings in operational PFI projects, and some schemes which are not providing value for the public sector may well be considered and approved for termination where a business case and a value for money assessment support that conclusion.

Case Study: Hexham General Hospital

Financial close on the Hexham General Hospital project was reached in 2001, with the hospital being officially opened by Tony Blair in 2004. Northumbria Healthcare NHS Foundation Trust voluntarily terminated the project in autumn 2014, 19 years before the project was due to end. The Trust believes that by operating the facility itself it will save around £3 million a year. The Trust was able to fund the termination by taking a loan in excess of £100 million from Northumberland County Council.