Carillion carnage masks PFI malaise

What the long-term fallout of the Carillion debacle will be is hard to predict, but it has at least shone a spotlight on the Private Finance Initiative (PFI), as well as the associated large, long term contracts that can bring contractors down if they go wrong.

PFI and Public Private Partnerships (PPPs) generally demand to be given a continuous hard look as there are about 700 live contracts under way with a capital value of some £60,000 million, generating annual charges of over £1 billion to the public purse. These are long term contracts which will generate almost £2 billion of charges over the next 25 years or so. PFI has been in decline over the past eight or nine years, after peaking in 2007–08 when deals worth £8.6 billion were struck.

The Carillion collapse has so far however probably taken away some of the attention that should have been devoted to the findings of a National Audit Office (NAO) report into private finance that was prepared before Carillion’s fate was clear but was published three days later, and where the above statistics come from.

The NAO, often called the public finance watchdog, set out to examine the rationale, costs and benefits of PFI; the use and impact of PFI, and its ability to make savings from operational contracts; and the introduction of its successor PF2.

The report points out that over 90% of the government’s capital investment is publicly financed but since the 1990s the public sector has also used private finance – the PFI and its successor PF2, which are both forms of PPPs – to build assets.

The government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased while Parliament became increasingly critical of its use.

The NAO’s headline finding was that thanks to PFI the UK has incurred extra costs running into billions of pounds for no clear benefit. Borrowing costs for recent school, hospital and other projects have been up to four per cent more expensive than government costs, and also incurred additional fees.

Views on PFI often split along party political lines, and often depending which party is in power, but both Conservative and opposition MPs have recently become more critical. Labour has promised to bring many PFI contracts back in-house, which might prove prohibitively expensive due to the fact that there are seldom any clauses in the contracts to allow for easy early termination. The NAO says breaking the largest 75 PFI schemes would cost £2,000 million, plus compensation to shareholders.

PFI contracts might not in fact have played a great role in the downfall of Carillion, but the fact that the company was a key supplier under PFI and was awarded additional public sector contracts despite being in financial difficulties will bring government commercial capabilities into question.

Which leaves the question of what contractual or other relationship would be better as yet unanswered. Along with the question whether the government commercial service is up to the task of devising or overseeing the operation of a suitable alternative.

Nick Barrett
Editor