The government appears to have accepted that the UK needs a continuing investment in its transport, education, healthcare and other infrastructure if it is to be in a position to thrive as a modern economy. Yet the economic background is unfavourable in what looks like being at least a few more years of austerity as deficit reducing policies are followed.
How to fund investment against this background? Some means of tapping private sector funding looks like being essential, yet if the tone of recent parliamentary reports is anything to go by it will not involve the Private Finance Initiative (PFI).
The PFI has taken quite a caning recently from Parliament’s Treasury Select Committee and from the Public Accounts Committee. MPs point out that using the PFI as a financing method has become ‘extremely inefficient’ as the weighted average cost of capital for a PFI is double that of government gilts. It has often been pointed out that government can raise funds cheaper than the private sector, but PFI supporters could always argue that this was outweighed by long term savings from operational efficiencies. But with this magnitude of difference in funding costs to be overcome that argument is getting harder to back up.
The evidence from the MPs undermines these traditional supporters’ claims. The main benefit highlighted to the Treasury Select Committee’s MPs by PFI providers was the transfer of construction risk. The MPs say however that a PFI contract which lasts for 30 years is not necessary to transfer this risk. Turnkey contracts, for example, can promote the same ends.
They argue that the alleged benefit of allocating risk to the private sector is only worthwhile if the private sector is better able to manage the risk and can pass on any subsequent savings to the client. The MPs say they have seen evidence that PFI has not provided good value from risk transfer and in some cases inappropriate risks have been given to the private sector to manage.
Some of the claimed risk transfer may also be illusory – since the government is ultimately accountable for the delivery of public services it would not be able to allow a number of services provided under a PFI contract to stop for any length of time.
The MPs are equally dismissive about the benefits to whole life costing. Whole life costing should encourage the use of innovative designs to deliver buildings of better quality, providing cost savings over the life of the building that can off set PFI’s higher financing costs.
The long term nature of PFI contracts should mean that buildings are maintained to a higher quality, reducing future cost. The MPs say they saw no clear evidence to support this. The MPs found ‘no convincing evidence’ that PFI projects are delivered more quickly and at a lower out-turn cost than projects using conventional procurement methods.
There may be a stronger case for PFI than its supporters have so far managed to mount. If there is a case to be made they had better get on with it – a lot is riding on the UK being able to fund the construction investment that it desperately needs.
Nick Barrett
Editor