Reform of the working of the private finance initiative (PFI) and related public private partnerships is expected at any time following an internal government review. It is badly needed, and it will not be easy. Since its introduction to the UK in 1992 by Chancellor Norman Lamont, PFI has been controversial.
Critics have always pointed to higher financing costs inevitably following the private sector being unable to borrow at less than the public sector, and claimed that risks were not in fact transferred to the private sector. The private sector counters that it shoulders a fair burden of risk and the increased efficiencies it brings in project delivery over the life of the projects overcomes higher funding costs.
PFI became popular with both Labour and Conservative governments and large parts of the UK’s infrastructure building of the past two decades have been PFI or PPP funded. Total payment obligations for PFI projects now stands at some £167,000 million according to government figures released late last year.
The banking crisis of the past few years has brought increasing strains to the use of PFI – partly because for a spell banks would not lend to each other let alone put up funding for construction phases of projects. Even Conservative party supporters balked at the public sector having to lend money to supposedly privately financed projects, as has had to be done. In opposition the current Chancellor George Osborne was highly critical of the way PFI operated under the Labour government; reform would involve proper transfer of risk and ending the use of PFI as simply a way to get government spending off the public sector balance sheet.
The reform follows the recent publication of the UK’s first National Infrastructure Plan, with £200,000 million to be invested over the next five years, and it is hard to see how these plans can be delivered by a government committed to deficit reduction without substantial input from the private sector. On the other hand, cost savings are being sought as a matter of national urgency, which seems to imply that PFI cannot go on being the expensive option.
What shape might the reforms take? Government ministers have been recently reported acknowledging that PFI is an expensive procurement route, yet it is the one that must be followed. One minister, Mark Prisk, whose brief takes in construction, has criticised PFI for an over-legal approach; this is certainly a criticism that will strike a chord with anyone from construction who has sat in on PFI negotiations. The lenders call all of the shots at this stage in the proceedings and the fees for the lenders’ lawyers is being met by those undertaking the project, not from the pockets of the lenders themselves; so there is little incentive to de-legalise the process.
Another suggestion has been to have shorter contracts, perhaps for five years rather than 25 to 30 years. Which might just mean the tortuous negotiations have to be undertaken all over again, duplicating the expense. PFI is crucial to the UK’s future, so we can only wish the government well as it seeks ways to improve its cost effectiveness.
Nick Barrett
Editor