Government to give public sector the power to break long-term operating contracts

Break clauses will be included in future PFI forms, allowing the government to terminate a long-term contracts before the end.

The policy will be one of a number of recommendations to be made by the Treasury in the new year (see box). At present, the government can end PFI contracts through “authority voluntary termination orders”, but this can only happen in limited circumstances, and can result in the contractor being well compensated.

The Treasury wants PFI bidders to place a cost on how much it would take to buy them out of at least one stage of a contract. Typically this would be in the second half of a PFI deal, which usually lasts 25-35 years, when government policy or the need for the asset may have changed.

Danny Daniels, PFI financing adviser at the Treasury, said: “This will give improved flexibility in operations and policy. At one or more times during the project’s life there can be a break in the contract. Before selecting a contractor you can ask them to come up with a break price for termination. Few businesses have 25-year business plans – usually they’re five or 10.”

As bidders’ business models differ, so do their repayment structures. This means that some contractors would be more costly to pay back in year 15 than others.

The business model of the contractor, and therefore the price of getting out of the contract, could help the public sector decide which bid provides the best value for money.

Tim Stone, international chairman of PPP advisory services at KPMG, said: “This is a very sensible approach, providing the flexibility the public sector has always wanted. That is, it doesn’t transfer risk back to the public sector.”

Building understands that the future of the Office of Government Commerce, the Treasury procurement advisory body, is under review.

There are suggestions that it could be taken back into the Treasury as a result of the efficiency savings review by Sir Peter Gershon. Gershon proposed £21.5bn of government savings in 2003, when he was chief executive at the OGC.