School repairs left unfinished as firm behind huge PFI contract goes into liquidation
School repairs left unfinished as firm behind huge PFI contract goes into liquidation
A firm responsible for a significant Private Finance Initiative (PFI) contract has entered liquidation, halting repair and maintenance work across 88 schools in Stoke-on-Trent. This event raises critical questions about the financial stability of PFI contractors and the resilience of public-private partnership models for delivering essential public services. The failure directly impacts the schools' operations and places a potential financial burden on the public sector to rectify the situation.
Context & What Changed
The Private Finance Initiative (PFI), and its 2012 successor PF2, was a form of public-private partnership (PPP) used extensively in the United Kingdom from the late 1990s to deliver major capital investment projects across sectors like education, health, and transport. The model involved a private sector consortium designing, building, financing, and operating an asset (e.g., a school or hospital) over a long-term concession period, typically 25-30 years. In return, the public authority makes regular, inflation-linked payments, known as the unitary charge, contingent on the asset's availability and performance. The stated policy goals were to transfer significant risks—including construction overruns and operational performance—to the private sector, leverage private sector management efficiency, and, critically, to keep the large capital expenditures off the government's balance sheet.
However, the PFI model has been subject to sustained criticism for decades. Reports by the UK's National Audit Office (NAO) and parliamentary committees have consistently highlighted issues of poor value for money due to high financing costs, contract inflexibility that hinders adaptation to changing public needs, and a lack of transparency (source: nao.org.uk). These concerns culminated in the UK government's announcement in 2018 that it would abolish the PFI and PF2 models for all new projects, acknowledging that the model was “inflexible and overly complex” (source: gov.uk).
Despite this policy shift, the government and taxpayers remain bound by a vast legacy portfolio of over 700 active PFI projects. The total capital value of these projects is approximately £57 billion, with future unitary payments owed by the public sector amounting to £155.5 billion as of March 2023 (source: Infrastructure and Projects Authority, IPA). This portfolio represents a long-term, material obligation for the UK Exchequer and numerous local authorities.
What has changed with the liquidation of the contractor for 88 schools in Stoke-on-Trent is the materialization of a core, systemic risk that has long been a theoretical concern: the operational and financial failure of a key private sector partner mid-contract. This is not a minor contractual dispute; it is a complete breakdown of the service delivery mechanism for a large portfolio of critical public assets. The event moves the PFI problem from a debate about long-term value for money to an immediate crisis of service continuity. It directly challenges the central premise of risk transfer, as the public sector is invariably left to pick up the pieces when essential services like education are at stake. This failure serves as a stark, real-world stress test of the resilience of the PFI framework and the public sector's ability to respond.
Stakeholders
This contractor failure creates a complex web of affected stakeholders, each with distinct interests and exposures:
Public Sector Authorities: The primary stakeholders are the Stoke-on-Trent City Council and the central government's Department for Education (DfE). They are the ultimate guarantors of educational services. They face the immediate operational challenge of ensuring the 88 schools are safe and functional, the financial burden of emergency repairs and re-procurement, and significant political and reputational damage. Their legal position is defined by the PFI contract's step-in rights and termination clauses, which are often complex and costly to exercise.
Service Users: Students, parents, and staff at the 88 schools are the most directly and immediately impacted. They face disruptions to education and potential health and safety risks from deteriorating building conditions. Their welfare is the primary driver for urgent public sector intervention.
PFI Project Company (ProjectCo): The Special Purpose Vehicle (SPV) that holds the PFI contract with the local authority. The liquidation of its key subcontractor (the facilities management provider) represents a major default under its project agreements. The SPV's equity investors, typically large infrastructure funds, are at risk of losing their entire investment. The SPV's lenders (senior debt holders, often banks or bondholders) have security over the project but face payment interruptions and a potential haircut on their loans if the project is terminated.
The Liquidated Contractor: The failed facilities management (FM) firm. Its employees face job losses, its suppliers become unsecured creditors with little prospect of full payment, and its owners are wiped out. The liquidator's primary duty is to maximize returns for creditors, which may not align with the public interest of seamless service continuity.
Wider PFI/Infrastructure Market: The failure has significant contagion potential. Other PFI investors, lenders, and contractors will face heightened scrutiny. This event will likely lead to a repricing of risk for similar projects, particularly those reliant on a single, highly-leveraged FM provider. It could increase the cost of capital and insurance for the entire PPP sector and may cause investors to question the stability of long-term, fixed-price FM contracts in an inflationary environment.
Oversight Bodies: The National Audit Office (NAO) and the Infrastructure and Projects Authority (IPA) will be mandated to investigate the failure. Their reports will inform future government policy on managing the legacy PFI portfolio and will likely be critical of any perceived lack of foresight or preparedness from the contracting public authority.
Evidence & Data
The risks inherent in the PFI model are well-documented. The collapse of construction and services giant Carillion in January 2018 was a watershed moment. Carillion was a contractor on numerous PFI projects, and its liquidation forced the government into a costly and complex intervention to maintain public services, including at hospitals and schools (source: NAO report, "Investigation into the government’s handling of the collapse of Carillion"). The NAO found that the government's contingency planning was inadequate and the true cost to the taxpayer was substantial. The current failure in Stoke-on-Trent echoes the Carillion crisis, albeit on a smaller scale, and proves that the underlying vulnerabilities in the supply chain persist.
The financial structure of PFI projects is a key contributing factor. Projects are typically financed with a high degree of leverage (80-90% debt) and a thin slice of equity. This makes the ProjectCo highly sensitive to any disruption in its revenue (the unitary charge) or an unexpected increase in its costs. The FM contract is often a fixed-price, long-term agreement. While intended to provide cost certainty for the ProjectCo, it places immense pressure on the FM provider. If costs for labour, materials, or energy rise significantly above the levels forecasted at the contract's inception—as has been the case with recent high inflation—the FM provider's margins are eroded, potentially leading to insolvency.
Data from the IPA's 2023 report on the PFI portfolio indicates that operational PFI projects are, on average, 16 years into their concessions. This means many are now facing significant lifecycle maintenance requirements ("hand-back risk"), where the private partner must ensure the asset meets a specified condition at the end of the contract. This creates an incentive for distressed contractors to cut corners on maintenance, exacerbating the physical degradation of assets and increasing the ultimate cost to the public sector.
The Stoke-on-Trent case involves 88 schools, indicating it is part of a large, bundled PFI contract, likely originating from the 'Building Schools for the Future' (BSF) programme. Such bundled contracts create concentrated points of failure; the insolvency of a single contractor can simultaneously paralyze dozens of institutions, magnifying the impact and the complexity of the public sector's response.
Scenarios (3) with probabilities
Scenario 1: Contained Failure & Orderly Resolution (Probability: 50%)
In this scenario, the local authority, with financial and technical support from the DfE, successfully exercises its contractual step-in rights. An established, financially stable Tier 1 FM provider is appointed on an interim basis, possibly under a cost-plus arrangement, to stabilize services and conduct an urgent survey of all 88 schools. Within 6-12 months, a permanent replacement FM subcontract is procured. The financial losses are largely contained within the PFI structure, wiping out the SPV’s equity holders and potentially imposing some losses on junior creditors. The wider market treats this as an isolated case of poor performance by a specific contractor, and systemic contagion is avoided. The primary public cost is limited to advisory fees and a temporary increase in service charges.
Scenario 2: Systemic Stress & Portfolio-Wide Re-evaluation (Probability: 40%)
The investigation into the failure reveals that the root causes—systemic underbidding on FM contracts, the unmanageable impact of multi-year high inflation on fixed-price agreements, and fragile supply chains—are widespread across the PFI portfolio. This triggers a portfolio-wide review by the IPA and Treasury of all projects deemed ‘at-risk’. Several other FM providers signal financial distress, and lenders to PFI projects begin to tighten credit conditions and increase pricing on refinancing. The government is forced to create a dedicated unit to manage failing contracts and may have to provide financial support to stabilize other critical projects. This leads to a significant, unbudgeted call on public funds and a fundamental re-evaluation of the state’s contingent liabilities.
Scenario 3: Cascading Failures & Forced Nationalization (Probability: 10%)
The Stoke-on-Trent failure is the first domino in a series of collapses. One or more major, multi-project FM providers enter administration, impacting hundreds of schools, hospitals, and other critical infrastructure sites simultaneously. The private sector, spooked by the risk, is unwilling or unable to step in at a reasonable cost. The government is forced into a large-scale intervention, effectively nationalizing the operational management of a significant portion of the PFI estate. This results in a major financial crisis for the infrastructure sector, substantial losses for investors and banks, and the transfer of billions of pounds of operational risk and liability directly onto the public balance sheet. This would represent a full-circle failure of the PFI policy, with the state ultimately bearing the risks it sought to transfer.
Timelines
Immediate (0-3 Months): The local authority and DfE execute an emergency response plan. This involves ensuring the immediate safety of all 88 schools, funding urgent repairs, and appointing liquidators for the failed firm. Legal teams will be engaged to formally notify the ProjectCo of the default and prepare for exercising step-in rights.
Short-Term (3-12 Months): A temporary FM provider is put in place to maintain service continuity. A full structural and M&E audit of the school portfolio is conducted to assess the extent of under-maintenance. The procurement process for a long-term replacement contractor begins. The NAO and/or a parliamentary committee will likely launch an official inquiry.
Medium-Term (1-3 Years): A new, long-term FM provider is appointed, likely at a significantly higher cost. Complex negotiations and potential litigation between the public authority, the ProjectCo, and its lenders will conclude. The inquiry's findings are published, leading to new central government guidance on managing PFI contract risk.
Long-Term (3+ Years): The new arrangements are embedded, but the public authority faces higher annual service costs for the remainder of the concession. The government implements a more robust, proactive strategy for managing the entire legacy PFI portfolio, potentially including the strategic buyout of the most problematic contracts.
Quantified Ranges
Emergency Public Funding: The immediate cost to the public sector to secure the schools and fund emergency works could range from £10 million to £30 million, depending on the level of neglected maintenance.
Increased Annual Service Cost: A re-procured FM contract in the current market is likely to be 20-40% more expensive than the failed contract, reflecting higher labour and material costs and a greater risk premium demanded by the new provider. This could add £5 million to £15 million to the local authority's annual PFI payment.
At-Risk Portfolio Exposure: Of the £155.5 billion in remaining unitary payments, projects with similar risk profiles (e.g., reliant on financially weak FM providers, or with inflexible contracts signed pre-2010) could constitute 15-25% of the portfolio, representing a contingent liability of £23 billion to £39 billion for the UK government.
Risks & Mitigations
Primary Risk: Protracted disruption to education for thousands of children.
Mitigation: Rapid and decisive intervention by the public authority, using pre-established contingency funds. The DfE must provide immediate expert support (commercial, legal, technical) to the local council, which may lack the capacity to manage a crisis of this scale.
Financial Risk: The public sector bears the full cost of the failure, creating a moral hazard for other PFI contractors.
Mitigation: Rigorously enforce the contractual terms to ensure financial penalties are borne by the PFI ProjectCo's investors and lenders to the maximum extent possible. The re-procurement process must be competitive and transparent to ensure value for money.
Contagion Risk: The failure triggers a loss of confidence across the infrastructure market.
Mitigation: Government must communicate a clear and credible strategy for managing the legacy portfolio. This includes proactive engagement with the market and demonstrating that a robust framework is in place to handle future failures in an orderly manner, distinguishing between isolated incidents and systemic threats.
Information Risk: The public authority lacks the operational data and asset condition knowledge held by the failed contractor.
Mitigation: Legal teams must act swiftly to secure all operational data, maintenance logs, and asset information from the liquidator. Commissioning an independent, technology-led survey (e.g., using digital twins, drone surveys) of the entire estate is critical to establishing a new performance baseline.
Sector/Region Impacts
Sectors: The immediate impact is on the Education sector. However, the precedent and the underlying causes will send shockwaves through all sectors with PFI exposure, especially Health (NHS Trusts with PFI hospitals), Defence, and Transport. The entire UK Facilities Management industry will face a period of intense due diligence from clients and financiers. The infrastructure investment fund sector will need to re-evaluate the operational risk in their PFI asset valuations.
Regions: While the direct impact is concentrated in Stoke-on-Trent, PFI projects are geographically dispersed across the UK. Local authorities, many already under severe financial pressure, are particularly vulnerable as they are often the direct counterparty to the contracts but have less financial cushion than central government to manage a major contractor failure.
Recommendations & Outlook
For Public Authorities (Central & Local):
1. Establish a Centralized PFI Crisis Unit: The IPA and Treasury should create a permanent, expert unit to proactively monitor the financial health of key PFI contractors and provide rapid response support to public authorities facing a potential failure.
2. Mandate Financial Health Audits: Require all PFI ProjectCos to provide transparent, audited financial statements for their key subcontractors annually. Develop a traffic-light system to identify at-risk projects for early intervention.
3. Develop a Failure Playbook: Standardize the response to contractor insolvency. This playbook should include template legal actions, pre-vetted emergency contractors, and clear funding mechanisms to avoid ad-hoc and delayed responses.
4. Invest in Public Sector Capability: Rebuild in-house commercial and contract management skills within public bodies to reduce over-reliance on external advisors and create a more intelligent client function.
For Investors & Lenders:
1. Enhance Supply Chain Due Diligence: Move beyond a cursory check of the main FM contractor. Investors must scrutinize the financial resilience of the entire supply chain (Tier 2 and 3) and the terms of their contracts.
2. Stress Test Covenants: Update financial models to stress test assets against prolonged high inflation and the cost of replacing a key contractor mid-concession.
3. Proactive Engagement: Shift from a passive investment posture to active asset management. Engage collaboratively with public sector partners at the first sign of distress within a project to seek consensual restructuring solutions rather than waiting for a catastrophic failure.
Outlook:
(Scenario-based assumption) This event will permanently shift the management of the legacy PFI portfolio from a passive, compliance-based activity to an active, risk-management-focused one. The public sector will become a more interventionist partner.
(Scenario-based assumption) We expect a significant increase in disputes and contract renegotiations across the portfolio as both sides seek to address the latent risks exposed by this failure. The cost of capital for the UK infrastructure market may rise in the short-to-medium term.
(Scenario-based assumption) This failure will accelerate government consideration of strategic buyouts for the most problematic PFI contracts. While expensive upfront, buying out contracts may be judged a better value-for-money proposition than bearing the long-term risk and cost of repeated contractor failures.