How bad a deal is PFI?
Feb 2012 07

PFI has been associated with some of the worst excesses of Gordon Brown’s irresponsibility with the public finances.  Along with other debts like the bill for decommissioning early nuclear plants it is a part of our total liabilities that was hidden off the balance sheet.  The amount at stake is substantial, tens of billions of pounds, though tiny compared to the biggest hidden liability: public sector pensions.

The release of the Whole of Government Accounts has led to fresh scrutiny of the PFI programme with the Independent, for example, reporting that there was a liability of “£131.5bn on the private finance initiative (PFI) such as hospital and school building – four times more than the assets secured by the deals”.

It doesn’t sound good.  But does that mean PFI is an inherently bad way of paying for worthwhile investments?  Not necessarily.

The Whole of Government Accounts mention that the lifetime of a PFI contract is typically 25-30 years.  That is a long commitment that the firms investing in PFI projects are making.  Based on current gilt rates, it would cost even the Government nearly £70 billion to borrow the £30.9 billion book value of the PFI assets.  That is more than double and therefore – just on the basis of that very rough calculation – the risk free cost of capital can account for about half of the difference between the asset value and cost figures.  If you want to invest a pile of capital in something then one way or another you are going to pay a price for that, however you finance it.

This isn’t a simple, risk free investment.  The point of PFI is to transfer risk and management responsibility to private sector firms, who are generally required to turn over a quality hospital or something like that at the end of the process.  That way you avoid the mismanagement that has seen too many major projects go way over budget and arrive late.  In 2009, the National Audit Office found that most PFI projects are “built close to the agreed time, price and specification”.  But again private sector firms have to be paid a price for taking that risk on their investment and managing the project.  If the interest rate goes up to about 5 or 6 per cent then that can explain what looks like a quadrupling in costs.

All that doesn’t mean that PFI is always, or even generally, good value.  There have been some ridiculous stories about the cost of replacing lightbulbs or electrical sockets which suggest something funny could be going on in the contract.  This wouldn’t be the first time politicians and bureaucrats have let canny operators rip off the taxpayer.  And it is important that we have a more honest account of the real liabilities that politicians have been racking up on taxpayers’ behalf.  Mike Denham explains the issue in a video below.  But let’s be realistic about the cost of PFI and how that compares to other ways of financing major investments.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)

  • Steve Collins

    This is classic TPA.

    ‘Our funders are heavily invloved in PFI, therefore we should write this article saying that it’s not a bad thing, despite much evidence to the contrary.’

    • MooG

      This is classic Steve Collins.

      ‘I’ve no interest in engaging with the article, therefore I’ll write a tired slur against the TPA’s backers, despite no evidence to substantiate anything.’

  • Anonymous

    Re the recent £50 billion quantative easing. We already know from history that giving this money to the banks and the City means that nobody but them benefits, so why not give that amount to all those 18 yrs or over, it woul;d soon have the economy buzzing as everyone went out and bought new for their homes. It would then filter up the system to the banks and the city having first done something useful. We would still have the same amount of debt but we would all have received some benefit from the debt. I am not an economist, but however stupid this may seem, it can’t be any worse than what happens now.

  • Kobi

    In the world of local authority politics, historically when budget pressures became acute, it was always easier for councillors to slash spending on capital projects or on maintenance of buildings (who don’t have a voice) than to reduce headcount of employees (who certainly do).  Thus “local democracy” meant that money was rarely spent on infrastructure, and for unsexy areas such as water and drainage (pre privatisation/mutualisation/quangoisation), there was no chance of competing against school kids studying in wet classrooms for the small amount of cash there was to spend on capital and maintenance works.  

    Similarly, Enoch Powell when Secretary of State for Health in the early 1960s devised a plan to rebuild/renovate every hospital in the UK, most of which had seen little serious maintenance since the NHS was formed.  However, budget pressures over the next few years saw that ambitious plan slashed, as again it was easier for the politicians to spend money on revenue projects that employed people than long term capital projects, for which the next government would get the credit anyway.The glorious thing about PFI/PPP contracts is that once signed, that is it.  Number one in the list of things that councils have to budget for every year is paying these contract charges, and they almost always include maintenance of the buildings involved. Local councillors cannot slash this expenditure to provide an extra classroom assistant in their local schools, or similar.  This means that at last we will have a public sector building asset register that is reasonably well maintained.

  • Lionkiller99

    I’m with Steve Collins here. And I’m also with Private Eye, who regularly hammer PFI initiatives as an utter waste of money and a way of fudging govt debt figures.  I am very very sceptical of the TPA’s assertion that there is anything good about PFI whatsoever. (I had no idea that the TPA’s funders were heavily involved in PFI but it becomes clear now)

  • Kobi

    Further off-topic, but bear with me.  Until Conservative legislation in the 1980s forced councils to go out to tender for the maintenance of lighting contracts, councils such as Lothian Region in Scotland did not even know how many of them they had, or indeed how many of them were actually working.  Every year they would get a bill from Scottish Power for electricity supplied, and just pay it, no matter if it bore little relation to the service supplied.  Compulsory competitive tendering meant that each lamp-post became individually identified with a code number and a maintenance/operational schedule, so that when faults were identified, if no electricity was supplied to a lamp, then no electricity was paid for.