Is this the End for PFI?
Byon August 14, 2018
Is this the end for PFI? In May this year an interesting article came out in the GCR (Global Construction Review) on the CIOB (Chartered Institute of Building) website, titled ‘Bye-bye, PFI: UK signals effective end of private finance initiative’.
The opening paragraph stated: “Judged to deliver poor value for money, the UK’s once mighty Private Finance Initiative (PFI) has fallen into disuse.” But is this a fair assessment of the state of PFI in the UK today?
PFIs have a bit of a PR problem because it is constantly being reported in the media that they are “toxic”, “underperforming”, and “crises-hit”. And, while there is no doubt that some legacy PFIs which were created years ago and that we now find ourselves as a country locked into paying an ever-increasing sum for year after year, may make you wonder at the financial skills of those who agreed to them in the first place, not all PFIs are like that, so can we really tar them all with the same brush?
The Origin of the PFI
As is well known in our circles, PFIs are private finance initiatives, the funding mechanisms through which private organisations take on the commercial and operational risks to build major infrastructure projects. These initiatives cover all manner of major projects, from roads to hospitals. The PFI finance structure was originally designed to keep such major costs ‘off the Government balance sheet’. Private companies would cover the cost of construction and would be paid back with significant interest over the next few decades (some for up to over 125 years – yes, really), usually through some form of core (unitary) and maintenance charges.
PFIs were created by the John Major government in 1992, but they were only utilised in a limited form. Surprisingly, if you listen to the regular use of anti-PFI rhetoric as a political tool of the opposition, it was in fact the Labour party under Tony Blair, with Gordon Brown as the then Chancellor, that ramped up PFI use throughout the late 1990s. Of course, successive Conservative governments have continued this trend and public opinion now considers it to be an entirely Tory policy.
Now Labour have well and truly lumped PFI into the evils of privatisation bucket and made their position fairly clear on what they intend to do with PFI should they one day be in government. In an FT article penned earlier this year titled ‘Labour’s PFI proposals risk endangering business confidence’, the case is made for Corbyn and McDonnell’s stance on ending all new and existing PFIs and their “increasingly hostile attitude towards a mixed economy” as being led by ideology rather than economics.
Is it the End for PFI?
According to the CIOB article, which gained much of its information from the House of Common Oral Evidence report of March 2018, in its heyday over 60 projects a year were being approved, worth somewhere in the region of £8bn. However, today just two major PFI projects are in the pipeline for consideration – a 2.9km A303 tunnel under the Stonehenge World Heritage Site and a portion of the Lower Thames Crossing in East London. So, could this be the slow, quiet death of PFI?
The NAO (National Audit Office) wrote a report on PFI earlier this year in which it stated that after the 2008 financial crisis, the government reduced its use of PFIs. With growing criticism of the model, HM Treasury consulted on its reform into PF2 in 2011.
There is no doubt that PFI has been unpopular in some arenas, and there is an argument that while traditional means of funding such infrastructure projects are more likely to be effective at restricting government spending to what the country can afford, PFI encourages a ‘spend now, pay for it later attitude’ which has got so many households in trouble with their credit card companies in the past.
But equally there is the argument that ‘mixed economy’ projects have an opportunity to achieve the best of both worlds, with the most skilled people in the industry on projects where greater economies and better outcomes are possible. After all, the Infrastructure and Projects Authority (IPA) has determined that over the next five years, the government will need to find more than £300bn to invest in social and economic infrastructure. So the money will need to come from somewhere.
Current State of the PFI Market
According to the NAO report mentioned earlier, there are currently over 700 operational PFI and PF2 projects running with annual charges of over £10bn, a draw on the public purse that is likely to continue for many years. The impact of PFI is, therefore, something that is likely to be felt for some time to come.
However, this report also restates the findings of an earlier NAO report by saying “project managers reported that PFI projects were delivered within budget more often than non-PFI projects.” In fact this report titled ‘Performance of PFI Construction’ gathered information from 114 projects and 69% reported delivering to the contracted timetable as opposed to 63% of non-PFI projects, and 65% reported delivering to the contracted price as opposed to 54% of non-PFI projects. This seems to fly in the face of public opinion that all PFIs are bad.
The CIOB article also does seem to over-egg the point by stating that only two major PFI projects are in the pipeline and that no new ones have been put forward in the last year and a half. When reading through the House of Commons Oral Evidence report Charles Roxburgh, Second Permanent Secretary to the Treasury, says that “there may be others but these were the ones that came to mind” when asked about PFI projects. And, of course, over the last 18 months there’s been the small matter of Brexit to keep many of the government’s departments busy, so it would not be at all surprising if major infrastructure projects were not top of the agenda.
I would truly like to have a pithy argument for or against PFI, but the evidence that has been gathered to date simply does not show a clear enough argument one way or the other. Maybe that’s reason enough for the government to undertake more research. We have always said that in the vacuum of ideal world thinking, PFIs could well offer greater efficiencies and outcomes, delivering projects on time and saving the public purse a significant sum. But there are plenty of high-profile projects which did not deliver either on time or budget, that people on the other side of the argument could confidently point towards.
The reality, therefore, in my view is that it is not just the financial mechanism that is flawed, it’s the application of it and the operational management that can allow things to spin out of control on some of these complex service delivery relationships. The risk of this happening can be mitigated with better control through the development of more ‘intelligent’ clients working with more ‘intelligent’ suppliers to achieve the results all are aiming towards.
For support and advice on PFI financial issues, including how to achieve cost savings, contact us on T. 0845 345 0130 or email: email@example.com. Further information on driving maximum performance from PFI contracts can be found by downloading our free white paper.