Bye-bye, PFI: UK signals effective end of private finance initiative

Judged to deliver poor value for money, the UK’s once mighty Private Finance Initiative (PFI) has fallen into disuse.

It fuelled the "Blair’s Billions" campaign to build roads, hospitals and schools in the 2000s, but now the UK government has only two large privately financed projects on its books, and has not brought forward any new schemes for 18 months, a House of Commons committee has been told.

At its peak, the use of PFI procurement accounted for more than 60 projects a year, worth £8bn annually.

It was a way of getting cash from the private sector to pay for big, expensive schemes. It kept the capital cost of those schemes off the books of the government, who then paid fees for use of the asset, plus interest on the capital raised, for many years into the future.

Its popularity continued with the 2010 coalition government, in which Chancellor George Osborne approved 61 schemes with a total value of almost £7bn in his first year.

Then it was reformed and renamed the "PF2" in 2013, but it has now all but disappeared from the British construction industry.

The last PF2 scheme to be agreed by the government was in April 2016, and those under way now are limited to a £1.6bn, 2.9km tunnel under the Stonehenge World Heritage Site, and another to build a portion of the lower Thames crossing.

These represent an expenditure of about £2bn, just 4% of the £50bn pipeline of government infrastructure work.

Altogether, only 12 projects have been brought forward under PF2 in the past five-and-a-half years, representing 0.4% of the government’s total capital investment.

This is the picture that emerged from oral evidence given by senior officials to the House of Commons Public Accounts Committee (PAC), which is investigating whether the PFI delivers value for money.

They have been told that it does not.

Their inquiry comes amid deepening public criticism of PFI, which has been blamed for handing huge profits to private-sector owners of the PFI deals and diverting funds from cash-starved public services.

The committee called on senior figures in the Treasury and the Infrastructure and Projects Authority (IPA) to give evidence to its inquiry into the PFI, including Charles Roxburgh, the second permanent secretary at the Treasury, and Tony Meggs, the IPA’s chief executive.

Roxburgh said: "We have not done a new PF2 project since April 2016, which was the last of the schools programmes. We think there are some promising projects on the horizon – some good roads projects – but we are talking of a handful, rather than going back to the days of the 2000s, when it was up to one a week and £8bn a year."

Witnesses said PFI fell into disuse because it got difficult to prove that private funding provided better value for money than public funding.

To validate the choice of PF2 the Treasury checks it against the "public sector comparator" to decide if it would be cheaper.

Roxburgh commented: "PF2 is used only if it gives us better value for money. That is a pretty high bar, particularly when there is an awful lot of other public investment going into infrastructure, and the government has increased that."

However, he denied that the government was planning to abandon the method altogether. "We are using PF2 in a much more focused way than was the case for PFI. [It is now] a very small, specialist approach to financing public investment." In practice, this will be for projects where the advantages of transferring risk to the private sector will outweigh the superior borrowing power of the government.

The IPA’s Tony Meggs added that the public sector’s ability to design and construct projects on time and budget had improved.

"Therefore, the [value of] risk transfer is lower, I believe, than it was when PFIs began, because we have learned a lot along the way. Therefore, the test becomes a much higher hurdle, to prove that you are going to do much better than the public sector."

The decline in enthusiasm for using the PF2 is evident in Whitehall’s unwillingness to mount a defence of it.

Sir Geoffrey Clifton-Brown MP, the deputy chair of the PAC, commented: "When we did our report in 2011, we said that these PFIs had not demonstrated value for money. We asked you to publish the evidence. Our sister committee, the Treasury Committee, asked again in 2012, and you were going to publish it in 2013. You were going to publish new evidence in 2014. You have still not published that evidence."

Other factors behind reduction in PF2 contracts are a fall in the financial attractions for both sides. For the government, the private investment in a public project is no longer "off balance sheet", and so PF2 schemes push up official government debt.

And for the private sector, the chances of making 30% returns from selling their equity shares to offshore buyers once the construction phase was complete was no longer available.

Image: The biggest PFI programme was the £55bn Building Schools for the Future project, scrapped in 2011 (Oldham Schools)

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  1. Whoever the staff writer was who, unwittingly I suspect, penned the article and managed to illustrate it with this particular school, has created a fantastic irony lost on most readers and certainly it would appear lost on the senior officials to the House of Commons Public Accounts Committee.

    The school in provides a fantastic case study into how the PFI procurement strategy and the end user, the staff and children were let down. Let down by both public and private sector partners in an area top of all the wrong leagues socially and economically.

    One of two largely identical schools accommodating 1500 pupils each, a collective construction cost of circa £50M, the school has performed extremely well academically, largely in the main due to the not inconsiderable efforts of the Head Teacher and his staff despite the conditions being experienced in the new building. Over the first few years significant construction defects and non-compliances began to surface. The FM Contractor and the Contractor, being effectively one and the same, bounced the issues between them while the school became frustrated until finally the Contractor sold its stake in the SPV for a profit of circa £5M. Coincidentally the same value that external advisors put on the rectification of the defects. So high was the profit from this one contract that it was highlighted in the company’s annual accounts. A company with a turnover in excess of a billion.

    Fortunately, the PFI contract well drafted by teams of experienced lawyers allowed for the construction failures being experienced. The external advisors, well versed in the nuances of unavailability and notification, began to operate the Project Agreement as envisaged and the deductions ramped up. So significant were the shortcomings affecting teaching and learning that the deductions soon exceeded £8M.

    Nothing wrong with the PFI contract here you may think. Risk transferred to the private sector and the public sector adequately compensated for not having the benefit of something that it was paying for. Unfortunately, as the figures grew so did the commercial and political pressure on the council. New advisors were brought in by the council, advisors more in tune with the SPV’s perception of ‘partnering’. Promises were made to rectify the problems by an ever-changing revolving door of suits from London never to be seen again. As the council bent in the wind, the deductions melted away like the snow on Saddleworth Moor, all the while children sat in coats in their new classroom.

    Unique, not from my experience. As Edinburgh schools and others will demonstrate, although we’ve moved on from this form of PFI the legacy remains. A legacy not as the result of a poorly constructed contract or procurement strategy, but rather the result of private sector greed in partnership with public sector ambivalence. As a parent there told me one day ‘all fur coat and no knickers lad!’

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