Private Finance Initiative: the scandal that refuses to break

The PFI scheme puts money from the British taxpayer into the pockets of private companies. Parliament has found it to be expensive and unsound. So why are British people still paying hundreds of billions of pounds to continue the scheme?

The Private Finance Initiative is a way of funding public infrastructure projects with private capital. In the UK, PFI has been heavily criticised, yet this is barely covered in the mainstream media. The latest Treasury Committee report was not a story, despite once more exposing that the PFI scheme is expensive, inflexible, prone to sub-standard building quality and theoretically unsound.

The public should be enraged that they are paying hundreds of billions of pounds for a scheme so riddled with failures in both theory and practice. Parliament knows PFI to be a sham, as the MPs report shows, but will it do anything to halt it?

In Opposition, George Osborne described Labour’s PFI model as “discredited”. (Over £260bn of PFI commitments were accrued by the time Labour left office for buildings valued at around £60bn.) Yet Osborne has taken forward 61 PFI projects worth £6.9bn in just a year.

What happened to the Coalition’s message that spending on the national credit card is the road to ruin and a theft from future generations?

The following from the PFI report could hardly be more damning [my bolds].

“The cost of capital for a typical PFI project is currently over 8%—double the long term government gilt rate of approximately 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project

We have not seen clear evidence of savings and benefits in other areas of PFI projects which are sufficient to offset this significantly higher cost of finance. Evidence we studied suggests that the out-turn costs of construction and service provision are broadly similar between PFI and traditional procured projects, although in some areas PFI seems to perform more poorly. For example we heard that design innovation was worse [and] building quality was of a lower standard in PFI buildings. PFI is also inherently inflexible, especially for NHS projects.”

(House of Commons Treasury Committee, Private Finance Initiative, 19th August, p.3). 

The cost of private finance may now be a staggering double the cost of government borrowing, but it has always been considerably more expensive and for obvious reasons: corporations are a much higher lending risk than governments. The tightness of credit post-2008 is not a new phenomenon afflicting an otherwise sound model, it has merely exacerbated an already glaring fault. 

In evidence submitted by Mark Hellowell the seriousness of the problem is made clear: for just one project, the Royal Liverpool and Broadgreen University Hospital NHS Trust, the higher cost of financing alone will add £175m to the cost of the project as compared to standard procurement: “the government could have secured 71% more investment by borrowing on its own account” (HoC TC, PFI, p.17). PFI financing, the report concludes, is now “extremely inefficient” (ibid, p.18). It has never been otherwise.

The original case for PFI, that private efficiencies would drive value for money, bears not even a passing semblance to reality, and never did. The MPs report, to its credit, goes a long way to confirming just how deep the fantasy goes. 

Risk...

Part of the rationale for the enormous fees paid to PFI providers is that risk is transferred from public to private; if the project fails, the private provider shoulders the cost. That the taxpayer has paid substantially for this risk is not disputed. The problem is that risk has rarely been transferred: it is still the taxpayer who picks up the pieces. On the efficiency of PFI risk transfer, Professor Helm told the Committee that “it is quite hard to think of many other aspects of the British economy that are more inefficient than that risk allocation” (p.19).

Construction risk is the single area where risk has at times been transferred successfully. Andy Friend, for example, cites failures at the National Physics Laboratory project which saw his firm, John Laing Plc, “book £68m of losses”. The PPP (public private partnership) for upgrading the London Underground, in comparison, saw the public book losses of £1.7bn when Metronet folded, coupled with £710m to bailout, and buy-out, the second partner – Tube Lines. Where heavy losses are concerned, public is always the preferred option.

Not only is it unrealistic to expect genuine risk to transfer to the contractor for a public project — “the government is ultimately accountable for the delivery of public services” — but even if risk transfer were the goal PFI is still not necessary; the report finds turnkey contracts could transfer risk equally well, and without the 30 year contract (p.21).

Quality...

On building quality, the Royal Institute of Architects stated that “the quality of the buildings delivered through PFI schemes remained poor in many cases” (p.23). Why? To “maintain the contractor’s preferred levels of profitability”. Citing a study by the Audit Commission in 2003, the report states that though building costs between PFI and non-PFI schools were largely similar, “it did find that the quality of PFI schools was significantly worse than that of the traditionally funded schools” (p.24).

Competition and delivery...

The problems don’t stop there. Contrary to notions of private efficiency, the report finds that 31% of PFI projects are delivered late and 35% run over budget (p.25). MPs found PFI “inherently inflexible”; there was “little evidence of the benefits of these arrangements, but much evidence about the drawbacks, especially for NHS projects” (p.29).

On competition, due to the excessive costs of failed bids - £2m per school and £12m per hospital – PFI is highly uncompetitive. In a third of the projects the NAO assessed, there were only 2 serious bidders (p.30). The section on “assessment bias” is fascinating. In blunt terms, the figures are openly rigged on multiple fronts. Expressing their “surprise” and “concern”, the MPs criticise this widespread “bias to favour PFI” (p.33). In particular, it is assumed that a full 25% of PFI revenues will be paid in corporation tax and hence offset against cost. As for reality, the FT found that “more than 90 PFi projects have been moved offshore” and cites HSBC Infrastructure’s PFI deals where just £100,000 tax was paid on £38m of profits; a rate of less than 0.3%. 

Value for money...

Finally, on value for money, it is found that the financing costs of PFI are now “significantly higher” than standard procurement:

We have not seen evidence to suggest that this inefficient method of financing has been offset by the perceived benefits of PFI from increased risk transfer. On the contrary there is evidence of the opposite.” (p.35)

The real reason... hiding government borrowing?

What then is the attraction to overpriced, late, poor quality, inflexible and uncompetitive procurement? The report suggests PFI has been favoured for its accounting benefits, keeping government borrowing off the balance sheet. Due to changes in accounting methodology in 2009, PFI projects are now on departmental balance sheets but, crucially, not the National Accounts depicting deficits and debt. If our PFI obligations were all brought onto the balance sheet it would add an additional 2.5% GDP, or £35bn, to the national debt (p.12).

Whilst this is clearly an attraction, PFI should be considered in the wider milieu of 21st century England: public services are significantly geared towards private profit.

PFI is now an enormous industry dominated by the big construction firms, banks and accountancy firms. Indeed, so lucrative has it become that there is now a thriving secondary market trading in PFI equity, the average profit margin on which was found to be over 50%.

“As infrastructure funds increase their offshore portfolios of PFI assets, they will use their power to influence decisions affecting the future management and provision of key public facilities.” (Professor Dexter Whitfield)

There is far more keeping PFI rumbling on than just “Enron accounting” perks.

Westminster, once again, seems to have forgotten exactly who it is supposed to represent.

About the author

Oliver Huitson is Co-Editor at OurKingdom and a freelance journalist. He contributed chapters to Jenny Manson's 2012 book, Public Service on the Brink, and NHS SOS (2013). He has written for The Guardian, The New Statesman and the BBC. He is on Twitter as @OllyHuitson