Centre for Policy Studies, After PFI, May 2012
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Pointmaker AFTER PFI JESSE NORMAN MP SUMMARY The Private Finance Initiative (PFI) has been or councils on the one hand and one of the costliest experiments in public contractors on the other. policy making ever attempted. It has led to There must be root and branch reform of £200 billion of public debt, the equivalent to infrastructure procurement and finance. If £8,000 for every household in the country. wisely used, private sector capital and Originally introduced by Norman Lamont in expertise can have huge public value. 1992, it was greatly expanded by New Labour The PFI must be replaced by a new approach under whom total debts incurred through PFI to the use of the private sector in the projects rose by ten times in ten years. A procurement of public sector projects. The significant attraction of the PFI for New following reforms should be implemented: Labour was that major capital projects were treated as “off-balance sheet” expenditure. all past and future liabilities should be placed on the government balance There is no substantial body of evidence sheet as soon as possible overall that PFI projects have delivered better value for money for the taxpayer, nor a new central unit should be set up that they have been more innovative or across government to monitor all PFI better designed. style projects, to advise on best practice, to educate actual and The failure of the PFI can be traced to: potential public sector clients on the fact that public sector institutions contract management and to generate are often poor clients greater “shared client power.” a flawed procurement and tendering With over £200 billion of new infrastructure process needed over the next decade, a new model of public procurement of major infrastructure the asymmetry of negotiating power is badly needed – and if well-designed, will between individual hospitals, schools hugely stimulate economic growth. 1 1. INTRODUCTION: 20 YEARS OF PFI £1.21 billion over the 35-year life of its contract, 2012 marks the 20th anniversary of the Private excluding support services. The usual ratio of Finance Initiative (PFI). It has proven to be one lifetime costs to construction costs for a PFI of the boldest, and costliest, experiments in project is three to four times; the ratio for public policy ever conducted. It has resulted in Bromley Hospital is 10.25 times. more than £200 billion of public debt, the cost of which will hang over the British taxpayer for So, 20 years on, we need to ask of the PFI: decades. It has created great private fortunes, What’s gone wrong? How did we get here? Is and fundamentally reshaped the nature of our there any future for private finance in our public services. It has generated huge public public services? outrage, and it raises profound issues of 2. A BRIEF HISTORY OF PFI fairness between this generation and the next. In principle, there ought to be a clear case for Over its two decades, the PFI has become using private sector capital and expertise to notorious for waste and extravagance. Who support the creation of public infrastructure. can forget the 65p light bulbs reportedly After all, the UK had a glorious tradition of th costing £22 each under PFI? The £302 school doing so during the 19 century, with the plug sockets? The £40 Christmas tree billed at creation of the great city centres of £875 to the Treasury? The three locks and Manchester, Birmingham, Leeds and Liverpool, deadlocks, plus maintenance, for which the PFI among others. More recently, the idea was first contractor BAM tried to charge North revisited in the late 1980s with private toll Bromsgrove High School £2,246.25? Or the concessions to build the Skye, Dartford, and £963 cost to install an aerial in the consultants’ second Severn bridges. Private funding had common room at my own local hospital, the also been used in Australia at that time to pay County Hospital in Hereford? for motorways. As well as these horror stories, there have also The PFI itself was introduced by Norman been large-scale PFI scandals. The facts are Lamont in his 1992 Autumn Statement. well known, since they have been exhaustively Essentially it combined a mortgage with a full reviewed by the National Audit Office. They repairing lease; that is, it provided long-term include the M25 road widening project, debt finance with a commitment to maintain estimated to cost £1 billion too much; or the Air the fabric of the infrastructure over the life of Tanker refuelling contract which the MOD the contract. In time, soft services such as commissioned, then tried to cancel, then caretaking, cleaning and catering were fudged the discount rates on, and then finally bundled into PFI contracts. Though costly, the implemented at a cost widely believed to be idea was that PFI would offer a better way to £1.5 billion too high. transfer substantial construction and maintenance risks from the taxpayer to the Finally, there has been the effect of PFI on private sector, enabling better infrastructure to whole sectors of our economy and public be built on time and on budget. services, notably the NHS. For example, the But try as it might, the Major Government could Princess Royal University Hospital in Bromley, not make the PFI work effectively. The opened in 2003, cost an estimated £118 million Government insisted on judging each deal on to build and equip. Taxpayers will pay a total of its merits, and the merits were sometimes very 2 thin indeed. A great deal of work was done in bolster his chances to win a second term by looking at how private finance and expertise showing that he could build them. That meant could be brought into the public services. But a huge ramp up in public spending, fast. At the there were deep concerns as to whether the Treasury, Gordon Brown and Ed Balls also PFI could be made cost-effective. A year wanted a “legacy”. But they were hampered by before the 1997 general election only £6 billion two inconvenient commitments: their promise of PFI projects had been signed off. Not one to stick to Conservative spending plans for the PFI hospital had been built. first two years of the government, and by Gordon Brown’s Sustainable Investment Rule, For its part, the Labour Party was divided over which required them to keep government net the issue. Old Labourites denounced PFI in debt below 40% of national income over the traditional terms as “creeping privatisation”. But – economic cycle. and this point is often forgotten, or conveniently ignored – the new Labour position was the exact For them the solution was PFI. PFI projects opposite of that. New Labour thought that the PFI seemed to offer a way out of this dilemma, was a good thing; the problem was simply that since their capital costs could be treated as the Tories had not gone ahead with it fast off-balance sheet, and so never appear either enough. In a speech in Parliament on 28 within departmental budgets, or within the November 1995, Tony Blair rammed the point national debt overall. For spending home repeatedly. His position was perfectly departments under Labour this was a clear: “The PFI is right in principle. We have godsend, since it meant that they only needed supported it, and in many ways we have been to account for the unitary charges, and not the advocating it.” At that point, John Prescott total capital commitment. So Gordon Brown helpfully chipped in with, “We initiated it.” And commissioned a very hurried report; relaxed Blair was perfectly clear about one further point: the rules; removed officials and independent “The PFI should not be manipulated to cook the experts who might inhibit the escalation of PFI; books of public finance.” Gordon Brown agreed. discouraged the use of alternative financing As he put it at the time, the “PFI is a cynical methods by government; set up a new joint distortion of the public accounts.” venture vehicle, Partnerships UK; wooed the finance and construction industries; and As events quickly proved, these remarks were ramped up the debt. breathtakingly cynical. Over the next decade Labour would use PFI to manipulate the public It spoke volumes about the new government accounts on a hitherto unimagined scale. that almost its first action was to fire Alastair Under Labour, PFI significantly changed and Ross Goobey, the Chair of the Private Finance massively grew in size over that period. Indeed, Panel – and it was “fired”, not “resigned” or “let John Prescott spoke truer than he knew. In go”, at his own insistence. Ross Goobey was many ways, Labour was in fact the real responsible then and afterwards for the vast originator of the PFI in its current form. pool of combined BT, Post Office and Royal Mail pension funds, now called Hermes. A man This was made clear directly after the 1997 of impeccable character and public service election. Labour had identified a clear need for ethos, he went on to revolutionise British new infrastructure, especially schools and corporate governance as a leader in active hospitals, and Tony Blair was desperate to shareholder ownership. 3 Over time, the push for PFI was aided by the PFI liabilities in new unaudited Whole of introduction of PFI Credits, which distorted the Government Accounts to improve transparency; capital budgets of spending departments and and a “deep dive” investigation of the PFI allowed them to evade responsibility for PFI contract at the Queen’s Hospital in Romford, spending by local authorities; by the use of the first time in 15 years thhat government has high official project discount rates, which taken a long,, hard forensic look at the artificially privileged the PFI over other forms of workings and costs of a sspecific current PFI procurement; and by the unwillingnness of both project.