Chancellor Philip Hammond has surprised few with his Budget announcement that the Private Finance Initiative (PFI) is to be no more – the share prices of contractors and infrastructure funds were untouched by the news.
After 30 years the weight of evidence that the taxpayer is not getting a good deal from PFI or PF2 has finally sunk this particular way of funding procurement of vital infrastructure. A damning National Audit Office (NAO) report and the collapse of key PFI supplier Carillion were reckoned to have already holed PFI below the waterline earlier this year. Carillion had asked the government for a £125 million bail out of a PFI project, the Midland Metropolitan Hospital in Smethwick, just days before its liquidation.
Contracts reportedly contain penalty clauses that make early termination unpalatable, but the Chancellor promises a Centre of Excellence to manage the outstanding contractual commitments under the existing PFI contracts, which will be honoured, and a new way, or ways, of attracting private sector finance for infrastructure projects will be introduced. The Centre will have work to do for about 30 years while existing PFI contracts are worked through, with almost £200,000 million of payments to be made under the contracts. The Centre might also become a hub for managing contracts under whatever replaces PFI.
New ways of using private finance will have to deliver value and transfer risk, the Chancellor says. They will also have to continue to be attractive to lenders as the government needs private finance to build and maintain infrastructure like roads, schools, and hospitals; private finance in whatever form it takes remains at the centre of its plans for infrastructure investment.
Test cases could include the £1,500 million Lower Thames Crossing tunnel or the £1,300 million A303 tunnel under Stonehenge, both of which were to be built using private finance but will probably now not be as Mr Hammond has promised never to sign off on a PFI contract.
PFI has been used extensively over the past 30 years and by March 2017 there were 716 PFI projects under way with a capital value of some £60,000 million. The UK is making payments of around £10,000 million related to PFI this year alone. It does not appear to have all been well spent as the NAO report revealed that using PFI the UK had incurred billions of pounds in additional costs but without any additional benefit.
The danger is that the new model simply duplicates the old. Perhaps what is needed before a Centre for Excellence in managing private finance deals that have already been struck, is a Centre for Excellence in negotiating their terms.
Private funders and their legions of advisers – bankers and lawyers for the most part – have clearly proven to be adroit at running rings round the public sector negotiators they faced when thrashing out PFI deals. They can’t be expected to behave any differently just because the model changes; they will naturally look for their own advantage and public sector negotiators will have to be on their toes to prevent a repeat of PFI.
What are the chances of that, given the lamentable record of the public sector with large scale procurement? We await details of the new model, but old wine in new bottles will have a distinctly vinegarish taste.
Nick Barrett
Editor