In our age of Three-Letter Acronyms, there’s a TLA for everything. But few have such a poor reputation as PFI.
First introduced by Norman Lamont in the 1990s, the Private Finance Initiative became a tactic beloved of the Tony Blair/Gordon Brown government, which deployed it to fund schools, hospitals and other public projects.
The attraction was two-fold: first, the upfront cash came from the private sector, not the Exchequer, and second, the debt obligations awarded in return were off-balance sheet, meaning hundreds of billions of pounds of new liabilities could be incurred without technically increasing the national debt.
With a manifesto pledge to limit debt to bear in mind, it was a characteristically New Labour way forward: officially, they could claim to keep their word, while still splurging to claim progress was being made.
One suspects those are the very same reasons why Chancellor Rachel Reeves is reportedly looking at the return of PFIs – since rebranded as Public Private Partnerships (PPPs) – for infrastructure ranging from housing to transport and even defence. The Chancellor is strapped for cash, struggling to find growth and besieged by discontented backbenchers and voters alike.
A promised series of new towns, intended to help sluggish house-building performance catch up with another manifesto pledge, has become bogged down by the fact that Downing Street’s cupboard is bare. At the most fundamental level, the state’s increased borrowing costs and debt interest payments – a verdict by markets that this country is already over-indebted for its wealth and growth rate – mean that the Chancellor is brassic.
So the prospect of deploying other people’s cash to do so is naturally appealing. The state is big, but even with a record-high tax burden, there is more money to be found in the private sector. It’s important that the Chancellor should consider the cautionary tale of the PFI binge. The Blair/Brown government gained new infrastructure from their deals, but at an extremely heavy price.
A 2012 investigation by Conservative MP Jesse Norman – a crusading thorn in the side of the PFI industry – estimated that the cost was an extra £200bn of public liabilities. It wasn’t officially on the national debt, but it still meant £8,000 of additional borrowing for every household. The effective interest rate was up to double the Treasury’s typical borrowing cost.
Beneath those enormous numbers were myriad anecdotes of absurd pricing, particularly for maintenance by PFI contractors. Tales abound of charges of hundreds of pounds for changing lightbulbs or replacing sockets, which beleaguered hospital managers or headteachers were obliged to pay because they were bound to one supplier rather than able to shop around.
The issues were embedded at the outset. The then-government wanted shiny new things fast without having to publicly record the cost, so they lacked due regard for the price they were committing future taxpayers to for decades to come. If anything, they had an active disincentive to explore, still less report to the people and the markets, what they were signing up to.
More broadly, the arms of government negotiating and signing these deals were what Norman called “bad clients”. In his words, they “over‐ specified” the projects, changed the specification en route, lacked the necessary commercial or negotiation skills to manage the procurement, were naïve about using external professional advice, and did not adequately understand the risks involved, the likely future costs or the relevant financing models.” Without that expertise, it’s no wonder that these bad clients got such a bad deal.
There are, to use a hackneyed political term, lessons to be learned. The question for all of us is whether Reeves has learned them before turning to the heir to PFI to dig her out of her political and fiscal hole?
Just as it would be foolish to repeat the PFI errors of the past, it would be absurd to think that this sorry history should mean that deploying private sector capital is inherently unacceptable. The truth is that there’s a lot of it out there, and the private sector is typically more efficient and innovative than the public sector can ever hope to be.
So here are my tests for the Chancellor to prove that she isn’t about to repeat past mistakes.
First, the preference should always be for the state to permit the private sector to build projects of its own before asking it to build them for the state. If the profit is to be private, then the risk should be too. I’ve written before about the frustration of, for example, pension funds which want to build profitable infrastructure but find there are too many regulatory obstacles. Reduce those barriers and see if we can get that money flowing of its own accord.
Second, the projects the Chancellor does opt for should be financed down the line by their own revenues and profits, not by an endless obligation placed upon the taxpayer. No more school budgets pillaged for overpriced handyman tasks.
And third, any new liabilities – for example, future debts – that are placed upon the taxpayer through this scheme must be fully and publicly accounted for as part of the national debt. If the Chancellor believes these initiatives are worthwhile, then let her show them to us transparently, to rule out any prospect of another accounting trick to massage a political message.
As Norman wrote in his definitive post mortem of the last PFI adventure: “Whether it is on- or off balance sheet, debt is debt. It always has to be paid back in the end, out of taxpayers’ money.” Words the Chancellor should have inscribed on her desk.
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