The Private Finance Initiative and Intergenerational Equity

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Author:

Professor David Parker

Date:

10 February 2012

Private Finance Initiative (PFI) deals have rapidly proliferated since they were first introduced in autumn 1991 as a means of bringing private sector finance and expertise into public sector asset procurement. There are now estimated to be around 860 active PFI projects in the UK, and the country’s total PFI liabilities to the taxpayer have a present-day value of around £239 billion – enough to fund today’s NHS for nearly 25 years.

This report argues that successive governments have abused PFI contracts, using them as a means of promising high-quality infrastructure to voters while placing the cost of paying for them onto the shoulders of future generations. It shows that signing a PFI deal has two negative impacts upon future generations:

Firstly, it imposes a long-term commitment on the public sector to make a series of repayments to the private sector organisation which develops the original project – often lasting 25 or 30 years. This means that future generations are committed to servicing the cost of these projects even though they played no part in the original negotiations, while there is also a risk that the repayment period may extend beyond the useful lifetime of the project (such as a school or a hospital) – leaving future generations paying for an asset which they can no longer use.

Secondly, the capital cost of building the project is often bundled alongside service and maintenance contracts which force the government to continue buying these services from the project’s original developer, regardless of whether this is cost-effective. As their hands are tied by these deals, future governments will have far less flexibility when it comes to deciding how they want to organise services, such as defence and the NHS, where much of the physical infrastructure has been created through PFI deals.

Governments are able to deceive voters about the true cost of PFI deals because the liabilities are held “off-balance-sheet”; this report argues that if the government was forced to recognise officially all outstanding PFI liabilities in the National Accounts then the national debt would be £35 billion higher. Despite the huge debts which have already been passed on to future generations through PFI deals, the present government has continued to use them. In this report, IF calls for greater transparency on the part of government about PFI deals which have already been signed, while also arguing that the assumptions about value for money which underpin many PFI deals urgently need to be revisited.

Posted on: 10 February, 2012

One thought on “The Private Finance Initiative and Intergenerational Equity

  1. roger steer

    In the past the problem was the hidden problem of backlog maintenance and the unfunded liability to replace fully or almost fully depreciated assets.
    There is nothing new about understating future costs.
    The issue is is there a better way?.
    Perhaps we should allow Scotland to run an experiment for a few years on the question of whether direct borrowing and funding produces better results.

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