Decarbonisation of Operational PFI Projects

Caroline Mostowfi considers the approach local authorities need to take when it comes to the decarbonisation of PFI projects.

New IPA Guidance

This summer the Infrastructure and Projects Authority issued guidance for decarbonisation of operational PFI projects. Just a couple of months later as the summer sun faded, we received the Prime Minister’s announcements to take a more ‘pragmatic, proportionate and realistic’ approach to reach net zero by 2050. Whatever your political affiliations happen to be the need to address the carbon footprint of our public buildings and infrastructure cannot be ignored and PFI projects form part of many local authorities’ portfolios.

The new guidance is naturally focussed on reducing the operational carbon and energy consumption in the operation, maintenance, repair, refurbishment and use of the assets involved, given that the design and construction phase has already been delivered. The guidance is a handbook of good practice for contracting authorities in developing their plan and the delivery of a net zero change.  

PFI projects are, by their nature, contractually complex and can seem rather unwieldy when it comes to tackling change. Applying new approaches to meticulously drafted 20-30 year contracts may not be easy, particularly when you consider that most PFI Projects were incepted before the advent of the net zero agenda. To progress the objectives of decarbonisation of operational projects, authorities will need to be familiar with their contracts and the practical effect of changes which may impact service delivery. That said, the Project Agreement may not be the starting point when considering change.

Relevance of PFI Expiry

Where PFI projects are approaching expiry, decarbonisation may be a particular consideration when reviewing lifecycle requirements and handback standards – the oft cited example that springs to mind is where a contract specifies the contractor replaces boilers prior to expiry that the authority doesn’t actually want on handback. Decarbonisation is a key plank of considerations as to why authorities should review their projects early ahead of expiry so that they can plan for such eventualities and steer a course to expiry with a view to better outcomes. In some cases, authorities may even be pushing an open door with the contractor.

Assessing the Changes Required

The way the authority proceeds with changes will depend on the project at hand and the scale of changes. They will undoubtedly need to scrutinise existing maintenance and lifecycle requirements to see if changes can be achieved through the current contract, and consider whether there are things that their contractor should already be doing. Beyond that, they will need to consider making a change to the existing contract.

When considering the ways in which to achieve net zero activities a number of toolkits are already in existence and approaches will very likely include data gathering and analysis, contract reviews, engagement of stakeholders (including PFI contractors and sub-contractors) and identifying options.  Once options are identified, honing in on the most appropriate option and how this will be implemented (both in terms of works and services), and who will meet the relevant costs, will be vital in the delivery of the plan.    

The Change Mechanism

Whilst PFI contracts are perceived as complex, most include a change mechanism that can be utilised for such changes needed. The effectiveness of that procedure may depend on the age of your contract with early PFI contracts having light touch mechanisms and, depending on the change at hand with decarbonisation, the mechanism may not adequately cater for this.

In most change mechanisms the procedure is kicked-off by a request for a change issued by the contracting authority. This elicits a response from the contractor with an outline proposal to address the change. There is then a further response from the authority, followed by the contractor submitting detailed proposals. When agreed, the change is then implemented by way of a Deed of Variation. A Deed of Variation will not only impact the overarching Project Agreement but may also trigger requirements for funder consent and variations of sub-contracts. It is therefore wise to consider how far reaching any variations need to be as early as possible, to ensure delivery is achievable.

Engagement and Costs

Before invoking change mechanisms, authorities should engage with their contractors and may well be doing so through other forums outside the PFI sphere to achieve best practice. Private contractors and investors also have their own ESG credentials and targets on decarbonisation to consider so there could be a third way, which can be agreed between the contracting authority and contractors, to bring about decarbonisation of projects and assets. The private sector will have its own motivations which may be leveraged to bring supply chain efficiencies and expertise and, in some cases, retrofit interventions and innovation.

Finally, the funding of costs, and the allocation of such cost and projected savings, will need to be kept in focus on such matters. As with many new technologies capital outlay needs to be offset and justified against the longer-term benefits and savings, with any quantification scrutinised. Contracting authorities continually strive to demonstrate and deliver value for money but, with pressures on funding from every direction, this will become an even greater consideration when approaching any decarbonisation initiatives. This is particularly significant in the PFI context and will need to be borne in mind throughout the change process.

Caroline Mostowfi is a Partner and Head of Infrastructure and Projects at Devonshires Solicitors LLP.