Are we really going to get PFI version 3.0 with a new Labour government?

Rumours abound that Labour is considering bringing back the infamous Private Finance Initiative (PFI) model. Liz Emerson, IF Co-founder, explains why this would be a very poor decision for younger and future generations on intergenerational fairness grounds.

 What is PFI?

A Private Finance Initiative (PFI) is a long-term contract that runs for around 25–30 years between a private party and a government entity where the private sector designs, builds, finances and operates a public asset and related services.

It involves: primary investors – largely developers and contractors – that invest around 10% of the finance of a PFI project; secondary investors, who acquire shares in operational PFI projects and PFI investment funds who manage a portfolio of PFI contracts, and which are seeking an annual return of around 8-10% per year. The asset is handed back to the public sector at the end of the contractual period. There is nothing to stop international speculation and off-shoring of gains over the period off the back of taxpayer-funded interest payments.

Why PFI?

To answer that question we need to go back to late 80s and early 90s when the United Kingdom (UK) was in recession and driven by a political ideology that believed that privatisation would bring greater investment, higher production standards and more efficiency into the public sector. As Professor David Parker, official government historian to privatisation and author of IF’s paper on PFI and intergenerational equity, wrote, PFI offered “to protect infrastructure investments at a time of fiscal constraint.”

PFI seemed to offer the best of all worlds: It would bring private sector investment, knowledge and management skills into the public sector; it would encourage business to take the risk of investing in public buildings, transport, tunnels and tracks; it would incentivise the private sector to build better upfront in order to reduce servicing and maintenance costs down the line; it would deliver buildings and infrastructure on time and on budget with the private sector not paid until the asset had been delivered; it would encourage innovation, and help to seed new private sector industries.

Of course there were disadvantages too: Governments can borrow at lower rates than the private sector so PFI started off being more expensive; banks require long loan-term repayments which led to very long service agreements; there was increased commercial risk and ultimately the risk of default falling back on the taxpayer; the government did not have experts within the public sector to negotiate the contracts – instead it seconded private sector investment specialists to write, negotiate, agree and reward themselves; and finally the contracts were opaque and hidden from scrutiny because of “commercial confidentiality”.

The far too tempting truth

Aside from the obvious benefits outlined, there was a far bigger political temptation for politicians and it was this: PFI investment could be hidden “off-balance-sheet” with the true cost of debt not crystalising until the asset was handed back to the public sector in the far future. It meant that the public could see new schools and hospitals being built and refurbished in the 90s and noughties and think positively of their political representatives at the time while the real cost of that spending was being pushed 25 to 30 years into the future for today’s taxpayers to pay.

So enamoured was the Labour government with PFI that close to 40% of capital spending in 2003/4 was on PFI schemes. By 2005, half of all PFI projects were estimated to be off-balance sheet. By 2021, there were 700 PFI contracts. In 2025, the bulk of these contracts are starting to expire, with 200 expiring in the next 10 years. That is particularly bad news for younger and future taxpayers facing the economic cost of Brexit, half a trillion pounds of pandemic spending, plus inflation and a cost-of-living crisis not seen since the last world war.

So, what’s the problem with PFI?

To PFI champions, the finance model has delivered £60 billion in capital value of buildings and infrastructure. To private investors, PFI has delivered “a fair return” with around 10% annual yields. To government, buildings have been built for yesterday’s generations to use with the bill passed to generations today to pay. To younger taxpayers in 2024? They have received a bill of around £240 billion in liabilities with the PFI buildings used by previous generations now coming to the end of their useful lives today.

As Margaret Hodge, Chairperson for the Public Accounts Committee wrote in the foreword to IF’s report on PFI,

“What started as a means of bringing private sector investment and management skills into the public sector has allowed private companies to make huge profits while leaving us with a mountain of debt.”

Just how “bad” was PFI for intergenerational fairness?

It was not until 2019 that time was called on PFI. Sadly by then, some of the PFI suppliers had gone bankrupt leaving their liabilities to the government and ultimately current and future taxpayers.

Example 1: Carillion

According to The Guardian, “The demise of Carillion was the UK’s biggest corporate failure in decades, affecting hundreds of thousands of people across the country. More than 3,000 jobs were lost at the company and the collapse affected 75,000 people working in its supply chain. It failed with debts of £7 billion, more than its annual sales of £5.2 billion.” Thirty percent of Carillion debt was PFI debt; the company worked on 450 public sector projects. Meanwhile, senior managers were apparently pocketing more than £1 million in pay and perks, feeding off the carcass that younger taxpayers will be bailing out for decades to come.

Example 2: Metronet

Another collapse occurred back in 2009, and still no alarm bells, this time in the London Underground, which lost the taxpayer around £400 million, according to the National Audit Office (NAO).

Example 3: 17 Scottish schools

In another example, 17 Scottish schools had to close suddenly due to “potentially fatal safety defects at PFI schools.”

There are scores of other examples from fire safety remediation falling back on younger taxpayers due to Whittington hospital’s PFI firm liquidating or Grenfell Tower refurbishment company, Rydon, provider of PFI-funded cladding to other residential blocks in the borough, under scrutiny for potential sub-standard cladding.

Interest rates, repayment rates and service agreements

For PFI contracts that did not stall, feeding off public institutions continued, and particularly in hospital PFIs. The repayments in English NHS trusts increased by nearly £200 million in two years from £460 million in 2009/10 to £628 million in 2011/12.

According to the NAO, the post-2007/8 global financial crisis cost of debt financing increased by 20-33%. By 2018, the Centre for Health and Public Interest estimated the legacy of PFI debt then stood at £306 billion – that is well before the COVID-19 pandemic hit. One PFI hospital was apparently charged £333 for a new light bulb. Then there is the infamous story of the costs of pots of marmalade on patients’ breakfast trays. By 2020/21, hospital groups were spending £2.3bn on legacy PFI; £1 billion of that was on costs for essential services such as cleaning and maintenance. A third of the remaining PFI spend – £457m – went purely on paying off interest charges.

The Infrastructure Project Authority (IPA)

So poor has the PFI legacy been to today’s taxpayers that the government has had to set up an organisation to deal with the unwinding of contracts that, according to experts, will take around 7 years to unpick. The NAO has even come across a case where 300 PFI schools have become academies, and still a local authority could find itself in a position that it has to manage the PFI contract, even though on expiry, each school would be transferred over to the academy trust. The elephant in the room here is that Freedom of Information (FOI) requests cannot be used to quantify the true cost to taxpayers because PFI companies are not subject to FOIs. The IPA has gone as far as to state that it is “aware of “difficult” investors who are not sharing important information that authorities need to successfully manage the expiry process.”

Bundling debts in to the future

It may be tempting for Labour, if it inheriting an economy in crisis, to think about stealing from the future once again to pay for today. So I suggest their finance wizards heed these words from back on 1999 from then Chancellor, Norman Lamont, who introduced PFIs:

“I suspect that in the long run some of these projects will go wrong and appear again on the Government’s balance sheet, adding to public spending. We shall see.”

Norman Lamont recognised the harm he could be doing to younger and future generations. Hopefully Labour will do too and not repeat his mistake.

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