Private finance initiative
Part of the Politics series on Neoliberalism Capitalism portal
The private finance initiative (PFI) is a way of creating "public–private partnerships" (PPPs) by funding public infrastructure projects with private capital. Developed initially by the Australian and United Kingdom governments, PFI and its variants have now been adopted in many countries as part of the wider neo-liberal programme of privatisation and financialisation driven by an increased need for accountability and efficiency for public spending, national governments, and international bodies such as the World Trade Organization, International Monetary Fund, and World Bank. PFI has been controversial in the UK; the National Audit Office felt that it provided good value for money overall. however more recently the Parliamentary Treasury Select Committee found that "Higher borrowing costs since the credit crisis mean that PFI is now an ‘extremely inefficient’ method of financing projects".
- 1 Overview
- 2 History
- 3 Examples
- 4 Impact
- 5 Relationship with government
- 6 Mechanics
- 7 Variants
- 8 See also
- 9 References
- 10 External links
The private finance initiative (PFI) is a procurement method which uses private sector expertise and resources in order to deliver public sector infrastructure and/or services according to a specification defined by the public sector. It is a sub-set of a broader procurement approach termed Public Private Partnership (PPP), with the main defining characteristic being the use of project finance (and in particular, using private sector debt and equity) in order to deliver the public services. Beyond developing the infrastructure and providing finance, private sector companies operate the public facilities, in many cases using former public sector staff who have had their employment contracts transferred to the private sector through a process protecting their entrenched rights designated TUPE. Every PFI deal has got its own particular characteristics.
The PFI is a ultimately a form of project finance, a form of private sector delivery of infrastructure that has been used since the Middle Ages. However, the pedigree of the current private finance initiative (PFI) was in Australia in the late 1980s.
In 1992 PFI was implemented for the first time in the UK by the Conservative government of John Major. It immediately proved controversial, and was attacked by the Labour Party while in opposition. Labour critics such as the future Secretary of State for Health, Patricia Hewitt considered that PFI was really a back-door form of privatisation (House of Commons, December 7, 1993), and the future Chancellor of the Exchequer, Alistair Darling warned that "apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come". Nonetheless, the Treasury considered the scheme advantageous and pushed Tony Blair's Labour government to adopt it after the 1997 General Election. Two months after the party took office, the Health Secretary, Alan Milburn, announced that "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust". PFI continued and, in fact, expanded under Labour, resulting in criticism from many trade unions, elements of the Labour Party, the Scottish National Party (SNP), and the Green Party, as well as commentators such as George Monbiot and academics such as Prof. Allyson Pollock, Mark Hellowell, Prof. Jean Shaoul and Dr Adrian Bell. Proponents of the PFI include the World Bank, IMF and (in the UK) the CBI 
Both Conservative and Labour governments have sought to justify PFI on the practical grounds that the private sector is better at delivering services than the public sector. This position has been supported by the UK National Audit Office with regard to certain projects. However, critics such as Pollock and Monbiot claim that many uses of PFI are ideological rather than practical. In her book NHS plc Allyson Pollock recalls a meeting with the then Chancellor of the Exchequer Gordon Brown who could not provide a rationale for PFI other than to "declare repeatedly that the public sector is bad at management, and that only the private sector is efficient and can manage services well."
By October 2007 the total capital value of PFI contracts signed throughout the UK was £68bn, committing the British taxpayer to future spending of £215bn over the life of the contracts. The global financial crisis which began in 2007 presented PFI with difficulties because many sources of private capital had dried up. Nevertheless PFI remained the UK government's preferred method for public sector procurement under both Labour and the present coalition. In January 2009 the Labour Secretary of State for Health, Alan Johnson reaffirmed this commitment with regard to the health sector, stating that “PFIs have always been the NHS’s ‘plan A’ for building new hospitals … There was never a ‘plan B’". However, because of banks' unwillingness to lend money for PFI projects, the UK government now had to fund the so-called 'private' finance initiative itself. In March 2009 it was announced that the Treasury would lend £2bn of public money to private firms building schools and other projects under PFI. Labour's Chief Secretary to the Treasury, Yvette Cooper claimed the loans should ensure that projects worth £13bn — including waste treatment projects, environmental schemes and schools — would not be delayed or cancelled. She also promised that the loans would be temporary and would be repaid at a commercial rate. But, at the time, Vince Cable of the Liberal Democrats, subsequently Secretary of State for Business in the coalition, argued in favour of traditional public financing structures instead of propping up PFI with public money:
“ The whole thing has become terribly opaque and dishonest and it's a way of hiding obligations. PFI has now largely broken down and we are in the ludicrous situation where the government is having to provide the funds for the private finance initiative. ”
In opposition at the time, even the Conservative Party considered that, with the taxpayer now funding it directly, PFI had become "ridiculous". Philip Hammond, subsequently Secretary of State for Transport in the coalition, said:
“ If you take the private finance out of PFI, you haven’t got much left . . . if you transfer the financial risk back to the public sector, then that has to be reflected in the structure of the contracts. The public sector cannot simply step in and lend the money to itself, taking more risk so that the PFI structure can be maintained while leaving the private sector with the high returns these projects can bring. That seems to us fairly ridiculous. ”
In an interview in November 2009, Conservative George Osborne, subsequently Chancellor of the Exchequer in the coalition, sought to distance his party from the excesses of PFI by blaming Labour for its misuse, despite it still bearing all the hallmarks of the policy devised by his own party. At the time, Osborne proposed a modified PFI which would preserve the arrangement of private sector investment for public infrastructure projects in return for part-privatisation, but would ensure proper risk transfer to the private sector along with transparent accounting:
“ The government's use of PFI has become totally discredited, so we need new ways to leverage private-sector investment . . . Labour's PFI model is flawed and must be replaced. We need a new system that doesn't pretend that risks have been transferred to the private sector when they can't be, and that genuinely transfers risks when they can be . . . On PFI, we are drawing up alternative models that are more transparent and better value for taxpayers. The first step is transparent accounting, to remove the perverse incentives that result in PFI simply being used to keep liabilities off the balance sheet. The government has been using the same approach as the banks did, with disastrous consequences. We need a more honest and flexible approach to building the hospitals and schools the country needs. For projects such as major transport infrastructure we are developing alternative models that shift risk on to the private sector. The current system – heads the contractor wins, tails the taxpayer loses – will end. ”
Despite being so critical of PFI while in opposition and promising reform, once in power George Osborne progressed 61 PFI schemes worth a total of £6.9bn in his first year as Chancellor. According to Mark Hellowell from the University of Edinburgh:
“ The truth is the coalition government have made a decision that they want to expand PFI at a time when the value for money credentials of the system have never been weaker. The government is very concerned to keep the headline rates of deficit and debt down, so it's looking to use an increasingly expensive form of borrowing through an intermediary knowing the investment costs won't immediately show up on their budgets. ”
The high cost of PFI deals is a major issue, particularly in this time of economic hardship. There are arguments for renegotiating PFI deals in the face of reduced public sector budgets, or even for refusing to pay PFI charges on the grounds that they are a form of odious debt. Critics such as Peter Dixon argue that PFI is fundamentally the wrong model for infrastructure investment, saying that public sector funding is the way forward.
In November 2010 the UK government released spending figures showing that the current total payment obligation for PFI contracts in the UK is £267 billion. Also, research has shown that in 2009 the Treasury failed to negotiate decent PFI deals with publicly owned banks, resulting in £1bn of unnecessary costs. This failure is particularly grave given the coalition's own admission in their national infrastructure plan that a 1% reduction in the cost of capital for infrastructure investment could save the taxpayer £5bn a year.
In February 2011 the Treasury announced a project to examine the £835m Queen’s Hospital PFI deal. Once savings and efficiencies are identified, the hope - as yet unproven - is that the PFI consortium can be persuaded to modify its contract. The same process could potentially be applied across a range of PFI projects.
A full list of PFI projects in the UK (920 projects as of May 2010) can be found on the Partnerships UK website. The following PFI deals are referred to in this article:
Some PFI cases Location Project Name Cost Authority Sector References Berlin British Embassy Foreign Office Central Government Coventry University Hospital Coventry £410m University Hospitals Coventry and Warwickshire NHS Trust Health  Essex Colchester Garrison £549.4m Colchester Borough Council Housing/Defence  Essex Queen's Hospital £835m Barking, Havering and Redbridge University Hospitals NHS Trust Health  Herefordshire Whitecross High School £18m Herefordshire County Council Education Kent Medway Police HQ £30m Kent Police Blue Light  Kent Princess Royal University Hospital Bromley NHS Trust Health  Leeds Newsam Centre at Seacroft Hospital £47m Leeds Mental Health Teaching NHS Trust Health  London National Physical Laboratory Department of Trade & Industry Central Government  London Queen Elizabeth Hospital Queen Elizabeth Hospital NHS Trust Health  National Future Strategic Tanker Aircraft £10bn Royal Air Force Defence  National The STEPS Deal Inland Revenue Central Government  Northern Ireland Balmoral High School £17m Belfast Education and Library Board Education  Worcester Worcestershire Royal Hospital £95m Worcestershire Hospitals NHS Trust Health 
As well as the UK, PFI has also been adopted, under various guises, in many other countries including: Australia, Canada, the Czech Republic, Finland, France, Greece, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, Spain and the United States.
Examples of PFI projects in Spain include Parque de Valdebebas in Madrid, Ciutat de la Justicia in Barcelona, the Autovia de Noroeste in Murcia, and the Hospital Puerta de Hierro in Majadahonda. The translation of 'private finance initiative' in Spanish is 'la financiación privada de infraestructuras públicas'.
According to HM Treasury and National Audit Office reports, PFI deals are very much more likely to be delivered on time and on budget — a study by the Treasury in July 2003 showed that the only deals in its sample which were over budget were those where the public sector changed their minds after deciding what they wanted and from whom they wanted to buy it.
Many PFI projects have delivered clear benefits. The Economist reports that:
“ Getting the private sector to build and run prisons has brought tangible benefits. One is speed: private jails are built in as little as two years, rather than the seven that they used to take when the government did the building. Running costs are lower too, mainly because staff are paid a quarter less than in the public sector (though senior managers are paid more) and get fewer benefits. ”
On the other hand, Monbiot argues that the specifications of many public infrastructure projects have been distorted to increase their profitability for PFI contractors, specifically:
“ A hospital scheme in Coventry was reverse-engineered by health chiefs to attract private capital. The city’s two hospitals were to have been renovated by the public sector for £30m. Instead they were demolished and one was rebuilt for £410m ... Like the hospital in Coventry, the M25 widening scheme appears to been designed to maximise corporate profits. The Campaign for Better Transport points out that if the whole scheme had used existing hard shoulders rather than building new lanes, the total cost would have been £478m – not £5bn. ”
PFI projects allowed the Ministry of Defence to gain many useful resources "on a shoestring"; PFI deals were signed for barracks, headquarters buildings, training for pilots and sailors, and an aerial refuelling service, amongst other things.
Individuals have speculated that some PFI projects have been shoddily specified and executed. For example, in 2005 a confidential government report condemned the PFI-funded Newsam Centre at Seacroft Hospital for jeopardising the lives of 300 patients and staff. The Newsam Centre is for people with lifelong learning difficulties and the mentally ill. The report said that there were shortcomings "in each of the five key areas of documentation, design, construction, operation and management" at the hospital, which cost £47m. Between 2001-5 there were four patient suicides, including one which was left undiscovered for four days in an out-of-order bathroom. The coroner said that Leeds Mental Health Teaching NHS Trust, which is responsible for the facility, had failed to keep patients under proper observation. The government report said that the design and construction of the building did not meet the requirements for a facility for mental patients. The building has curving corridors which make patient observation and quick evacuation difficult. The report said that the building also constituted a fire hazard, as it was constructed without proper fire protection materials in the wall and floor joints. In addition, mattresses and chairs used below-standard fire-retardant materials. Patients were allowed to smoke in rooms where they could not be easily observed. The fire-safety manual was described as "very poor", and the fire-safety procedure consisted of a post-it note marked "to be provided by the Trust". Unsurprisingly the report concluded that "every section of the fire safety code" had been breached.
On the other hand, the building of two new PFI Police Stations on behalf of Kent Police serving the Medway area and the North Kent area (Gravesend and Dartford) is credited as a successful PFI project. Supporters say that the new buildings take into account the modern needs of the police better than the 60s/70s building, and that another advantage is that the old buildings can be sold for income or redeveloped into the police estate.
A recent study by University College London, studying data at hospitals built since 1995, supports the argument that private-sector providers are more accountable to provide quality services: It showed that hospitals operating under PFI have better patient environment ratings than conventionally funded hospitals of similar age. The PFI hospitals also have higher cleanliness scores than non-PFI hospitals of similar age, according to data collected by the NHS.
There is evidence that the cost of hospitals ordered through PFI is adversely affecting the UK's National Health Service. Jonathan Fielden, chair of the British Medical Association's consultants' committee has said that PFI debts are "distorting clinical priorities" and impacting the treatment given to patients. Fielden cited the example of University Hospital Coventry where the NHS Trust was forced to borrow money in order to make the first £54m payment owed to the PFI contractor. He said that the trust was in the ignominious position of struggling for money before the hospital's doors even opened. The trust could not afford to run all the services that it had commissioned, and was having to mothball services and close wards.
The high cost of hospitals built under PFI is forcing service cuts at neighbouring hospitals built with public money. For example, overspending at the PFI-funded Worcestershire Royal Hospital has put a question mark over services at neighbouring hospitals. A Strategic Health Authority paper in 2007 noted debts at two hospitals in south-east London: Princess Royal University Hospital and Queen Elizabeth Hospital. The paper attributed the debts in part to their high fixed PFI costs, and suggested that the same would soon apply at a third hospital in the area, Lewisham Hospital.
Because PFI costs are fixed, with big penalties for terminating contracts, the effect of these regional debts is to increase the risk of services being closed at nearby hospitals built with public money, such as Guy's, St Thomas', King's College and Queen Mary's. Peter Dixon, Chairman of University College Hospital, the largest PFI-built hospital in England, has gone on the record to say:
“ We now have indexed payments for the next 35 years which at a time of growing concern over NHS budgets can only be a millstone. It isn't just that our scheme was expensive. Its very existence distorts whatever else needs to happen in this part of London and beyond. And that is before we get to paying for the much larger scheme at Bart's and the London in a few years' time. ”
In the past, when spending was tight and budgets were cut, hospitals preferred to retain doctors and nurses and kept services running by spending less on building maintenance. Nowadays, under PFI, hospitals are forced to prioritise the contractual payments for their buildings over jobs and, according to figures published by the Department of Health, these committed payments can account for up to 20% of operating budget. Nigel Edwards, head of policy for the NHS Confederation, noted that:
“ "A hospital with a PFI scheme [is] contractually bound to keep the maintenance up – and if you are spending 10 or 15 per cent on your buildings it means all the other efficiency and productivity gains you need have to come out of only 85 or 90 per cent of your budget." ”
Dr Jonathan Fielden, chair of the British Medical Association's consultants' committee has said that as a result of the high costs of a PFI scheme in Coventry "they are potentially reducing jobs". In fact by 2005 the hospital trust in Coventry was anticipating a deficit of £13m due to PFI and “drastic measures” were required to plug the gap including shutting one ward, removing eight beds from another, shortening the opening hours of the Surgical Assessment Unit, and the “rationalisation of certain posts” – which meant cutting 116 jobs.
Under PFI, many staff have their employment contracts automatically transferred to the private sector, using a process known as TUPE. In many cases this results in worse terms of employment and pension rights. Heather Wakefield, UNISON's national secretary for local government, has said:
“ Local authorities and health authorities have very good final-salary pension schemes. We have surveyed contractors in 'best value' [contracting out] deals. At only one company in the past three years was any pension provided. And that is the pattern [in transfers] across the public sector – not just in local government, and not just 'best value'. It happens in PFI too. TUPE does not apply to pensions. The Government is supposed to have revised TUPE, integrating the Acquired Rights Directive from the EU. That has not happened. ”
The debt created by PFI has a significant impact on the finances of public bodies. As of October 2007 the total capital value of PFI contracts signed throughout the UK was £68bn. However, this figure pales into insignificance compared with the commitment of central and local government to pay a further £267bn over the lifetime of these contracts. To give regional examples, the £5.2bn of PFI investment in Scotland up to 2007 has created a public sector cash liability of £22.3bn and the investment of just £618m via PFI in Wales up to 2007 has created a public sector cash liability of £3.3bn. However, these debts are small compared to other public-sector liabilities.
Annual payments to the private owners of the PFI schemes are due to peak at £10bn in 2017 and are already stretching constricted public sector budgets. Many NHS Trusts are now experiencing serious financial difficulties and, if the level of government spending falls, may become insolvent. In some cases Trusts are having to 'rationalise' spending by closing wards and laying off staff, but they are not allowed to default on their PFI payments: "In September 1997 the government declared that these payments would be legally guaranteed: beds, doctors, nurses and managers could be sacrificed, but not the annual donation to the Fat Cats Protection League". Should certain Trusts fail because they cannot meet their PFI payments, this will provide further opportunities for privatisation if the government brings in private healthcare corporations to run the hospitals instead.
Mark Porter, of the British Medical Association said: "Locking the NHS into long-term contracts with the private sector has made entire local health economies more vulnerable to changing conditions. Now the financial crisis has changed conditions beyond recognition, so trusts tied into PFI deals have even less freedom to make business decisions that protect services, making cuts and closures more likely." John Appleby, chief economist at the King's Fund health think-tank, said:
“ "It is a bit like taking out a pretty big mortgage in the expectation your income is going to rise, but the NHS is facing a period where that is not going to happen. Money is being squeezed and the size of the repayments will make it harder for some to make the savings it needs to. I don't see why the NHS can't go back to its lenders to renegotiate the deals, just as we would with our own mortgages." ”
Officials at the Treasury have also admitted that they may have to attempt to renegotiate certain PFI contracts in order to reduce payments, although it is far from certain that the private financiers will play ball.
Internationally, PFI contracts are generally off-balance-sheet, meaning that they do not show up as part of the national debt. This fiscal technicality can be convenient for governments. In his paper on PFI in Spain, José Francisco Bellod Redondo notes that one of the main drivers for PFI in Spain is compliance with the fiscal restrictions imposed under the Maastricht Treaty and Stability and Growth Pact, which set concrete limits to the national debt.
In the UK, the technical reason why PFI debts are off-balance-sheet is that the government authority taking out the PFI theoretically transfers one or more of the following risks to the private sector: risk associated with demand for the facility (e.g. under-utilisation); risk associated with construction of the facility (e.g. overspend and delay); or risk associated with the 'availability' of the facility. The PFI contract bundles the payment to the private sector as a single ('unitary') charge for both the initial capital spend and the on-going maintenance and operation costs. Because of supposed risk transfer, the entire contract is deemed to be revenue rather than capital spending. As a result, no capital spend appears on the government's balance sheet (the revenue expenditure would not have been on the government balance sheet in any event). Public accounting standards are being changed to bring these numbers back onto the balance sheet. For example, in 2007 Neil Bentley, the CBI's Director of Public Services, told a conference that the CBI was keen for the government to press ahead with accounting rule changes that would put large numbers of PFI projects onto the government's books. He was concerned that accusations of "accounting tricks" were delaying PFI projects.
Supporters of PFI claim that risk is successfully transferred from public to private sectors as a result of PFI, and that the private sector is better at risk management. As an example of successful risk transfer they cite the case of the National Physical Laboratory. This deal ultimately caused the collapse of the building contractor Laser (a joint venture between Serco Group and John Laing) when the cost of the complex scientific laboratory, which was ultimately built, was very much larger than estimated.
On the other hand, Allyson Pollock argues that in many PFI projects risks are not in fact transferred to the private sector and, based on the research findings of Pollock and others, George Monbiot argues that the calculation of risk in PFI projects is highly subjective, and is skewed to favour the private sector:
“ When private companies take on a PFI project, they are deemed to acquire risks the state would otherwise have carried. These risks carry a price, which proves to be remarkably responsive to the outcome you want. A paper in the British Medical Journal shows that before risk was costed, the hospital schemes it studied would have been built much more cheaply with public funds. After the risk was costed, they all tipped the other way; in several cases by less than 0.1%. ”
Value for money
A National Audit Office study in 2003 endorsed the view that PFI projects represent good value for taxpayers' money, but some commentators have criticised PFI for allowing excessive profits for private companies at the expense of the taxpayer. An investigation by Professor Jean Shaoul of Manchester Business School into the profitability of PFI deals based on accounts filed at Companies House revealed that the rate of return for the companies on twelve large PFI Hospitals was 58%. Excessive profits can be made when PFI projects are refinanced. An article in the Financial Times recalls the
“ acute embarrassment of the early days of PFI, when investors in projects made millions of pounds from refinancings and it turned out that the taxpayer had no right to any share in the gains ... Investors in one of the early prison projects, for example, made a £14m windfall gain and hugely increased rates of return when they used falling interest rates to refinance. ”
Writing in the New Statesman, John Pilger said: "With scant media attention, the Blair government has transferred billions of pounds' worth of public services into private hands under the private finance initiative (PFI). The "fees", or rake-off, for PFI projects in 2006-2007 will be in the order of £6.3bn, more than the cost of many of the projects: a historic act of corporate piracy."
Although supporters claim that the majority of PFI projects come in on budget and on time or early, a number of PFI projects have cost considerably more than originally anticipated.
Some PFI deals have also been associated with tax avoidance, including a deal to sell properties belonging to the UK government's own tax authority. The House of Commons Public Accounts Committee criticised HM Revenue and Customs over the PFI STEPS deal to sell about 600 properties to a company called Mapeley, based in the tax haven of Bermuda. The committee said it was "a very serious blow indeed" for the government's own tax-collecting services to have entered into the contract with Mapeley, whom they described as "tax avoiders". Conservative MP Edward Leigh said there were "significant weaknesses" in the way the contract was negotiated. The government agencies had failed to clarify Mapeley's tax plans until a late stage in the negotiations. Leigh said: "It is incredible that the Inland Revenue, of all departments, did not, during contract negotiations, find out more about Mapeley's structure".
The National Audit Office has accused the government's PFI dogma of ruining a £10bn Ministry of Defence project. The Future Strategic Tanker Aircraft project to develop a fleet of multi-role RAF tanker and passenger aircraft was delayed for over 5 years while, in the meantime, old and unreliable planes continue to be used for air-to-air refuelling, and for transporting troops to and from Afghanistan. Edward Leigh, Conservative chair of the Public Accounts Committee which oversees the work of the NAO, said: "By introducing a private finance element to the deal, the MoD managed to turn what should have been a relatively straightforward procurement into a bureaucratic nightmare". The NAO criticised the MoD for failing to carry out a "sound evaluation of alternative procurement routes" because there had been the "assumption" in the ministry that the aircraft must be provided through a PFI deal in order to keep the numbers off the balance sheet, due to "affordability pressures and the prevailing policy to use PFI wherever possible".
Critics claim that the complexity of many PFI projects is a barrier to accountability. For example, a report by the Trade Union UNISON entitled "What is Wrong with PFI in Schools?" says:
“ LEAs often seek to withhold crucially important financial information about matters such as affordability and value for money. In addition, the complexity of many PFI projects means that governors, teachers and support staff are often asked to “take on trust” assurances about proposals which have important implications for them. ”
Malcolm Trobe, the President of the Association of School and College Leaders has said that the idea that contracting out the school building process via PFI would free up head teachers to concentrate on education has turned out to be a myth. In many cases it has in fact increased the workload on already stretched staff.
A BBC Radio 4 investigation into PFI noted the case of Balmoral High School in Northern Ireland which cost £17m to build in 2002. In 2007 the decision was made to close the school because of lack of pupils. But the PFI contract is due to run for another 20 years, so the taxpayer will be paying millions of pounds for an unused facility.
With regard to hospitals, Prof. Nick Bosanquet of Imperial College London has argued that the government commissioned some PFI hospitals without a proper understanding of their costs, resulting in a number of hospitals which are too expensive to be used. He said:
“ There are already one or two PFI hospitals where wards and wings are standing empty because nobody wants to buy their services. There will be a temptation to say 'right we are stuck with these contracts so we will close down older hospitals', which may in fact be lower cost. Just closing down non-PFI hospitals in order to up activity in the PFI ones is not going to be the answer because we may have the wrong kind of services in the wrong places. ”
Relationship with government
In July 1997 a PFI taskforce was established within the Treasury to provide central co-ordination for the roll-out of PFI. Known as the Treasury Taskforce (TTF), its main responsibilities are to standardise the procurement process and train staff throughout government in the ways of PFI, especially in the private finance units of other government departments. The TTF initially consisted of a policy arm staffed by five civil servants, and a projects section employing eight private sector executives led by Adrian Montague, formally co-head of Global Project Finance at investment bank Dresdner Kleinwort Benson. In 1999 the policy arm was moved to the Office of Government Commerce (OGC), but it was subsequently moved back to the Treasury. The projects section was part-privatised and became Partnerships UK (PUK). The Treasury retains a 49% 'golden share', while the majority stake in PUK is owned by private sector investors. PUK is now staffed almost entirely by private sector procurement specialists such as corporate lawyers, investment bankers, consultants and so forth. It takes the lead role in evangelising PFI and its variants within government, and is in control of the policy's day-to-day implementation.
In March 2009, in the face of funding difficulties caused by the global financial crisis, the Treasury established an Infrastructure Finance Unit with a mandate to ensure the continuation of PFI projects. In April 2009, the unit stumped up £120m of public money to ensure that a new waste disposal project in Manchester would go ahead. Andy Rose, the unit head, said: "This is what we were set up to do, to get involved where private sector capital is not available." In May 2009 the unit proposed to provide £30m to bail out a second PFI project, a £700m waste treatment plant in Wakefield. In response, Tony Travers, Director of the Greater London group at the London School of Economics described the use of public money to finance PFI as "Alice in Wonderland economics".
The House of Commons Public Accounts Committee has criticised the Treasury for failing to negotiate better PFI funding deals with banks in 2009. The committee revealed that British taxpayers are liable for an extra £1bn because the Treasury failed to find alternative ways to fund infrastructure projects during the financial crisis. The committee "suggests that the government should have temporarily abandoned PFI to directly fund some projects, instead of allowing the banks – many of which were being bailed out with billions of pounds of public money at the time – to increase their charges . . . by up to 33%".
The House of Commons Liaison Committee has said that claims of commercial confidentiality are making it difficult for MPs to scrutinise the growing number of PFI contracts in the UK. The National Audit Office (NAO) is responsible for scrutinising public spending throughout the UK on behalf of the British Parliament and is independent of Government. It provides reports on the value for money of many PFI transactions and makes recommendations. The Public Accounts Committee and Audit Commission also provide reports on these issues at a UK-wide level. The devolved governments of Scotland, Wales and Northern Ireland have their own equivalents of the NAO such as the Wales Audit Office and the Northern Ireland Audit Office which review PFI projects in their respective localities. In recent years the Finance Committees of the Scottish Parliament and the National Assembly for Wales have held enquiries into whether PFI represents good value for money.
In accordance with the government's own admission that "there is no plan B", the procurement appraisal process for government projects has been rigged in favour of PFI. Thus Jeremy Colman, former deputy general of the National Audit Office and Auditor General for Wales is quoted in the Financial Times saying that many PFI appraisals suffer from "spurious precision" and others are based on "pseudo-scientific mumbo-jumbo". Some, he says, are simply "utter rubbish". He noted government pressures on contracting authorities to weight their appraisals in favour of taking their projects down the PFI route: "If the answer comes out wrong you don't get your project. So the answer doesn't come out wrong very often."
In a paper published in the British Medical Journal a team consisting of two public health specialists and an economist concluded that many PFI appraisals do not correctly calculate the true risks involved. They argued that the appraisal system is highly subjective in its evaluation of risk transferral to the private sector. An example was an NHS project where the risk that clinical cost savings might not be achieved was theoretically transferred to the private sector. In the appraisal this risk was valued at £5m but in practice the private contractor had no responsibility for ensuring clinical cost-savings and faced no penalty if there were none. Therefore the supposed risk transfer was in fact spurious.
PFI is used in both central and local government. In the case of local government projects, the capital element of the funding which enables the local authority to pay the private sector for these projects is given by central government in the form of what are known as PFI "credits". The local authority then selects a private company to perform the work, and transfers detailed control of the project, and in theory the risk, to the company.
A public sector authority signs a contract with a private sector consortium, technically known as a Special Purpose Vehicle (SPV). This consortium is typically formed for the specific purpose of providing the PFI. It is owned by a number of private sector investors, usually including a construction company and a service provider, and often a bank as well. The consortium's funding will be used to build the facility and to undertake maintenance and capital replacement during the life-cycle of the contract. Once the contract is operational, the SPV may be used as a conduit for contract amendment discussions between the customer and the facility operator. SPV's often charge fees for this go-between 'service', which has been criticised by the House of Commons Public Accounts Committee.
PFI contracts are typically for 25–30 years (depending on the type of project); although contracts less than 20 years or more than 40 years exist, they are considerably less common. During the period of the contract the consortium will provide certain services, which were previously provided by the public sector. The consortium is paid for the work over the course of the contract on a "no service no fee" performance basis.
The public authority will design an "output specification" which is a document setting out what the consortium is expected to achieve. If the consortium fails to meet any of the agreed standards it should lose an element of its payment until standards improve. If standards do not improve after an agreed period, the public sector authority is usually entitled to terminate the contract, compensate the consortium where appropriate, and take ownership of the project.
Termination procedures are highly complex, as most projects are not able to secure private financing without assurances that the debt financing of the project will be repaid in the case of termination. In most termination cases the public sector is required to repay the debt and take ownership of the project. In practice, termination is considered a last resort only.
Whether public interest is at all protected by a particular PFI contract is highly dependent on how well or badly the contract was written and the determination (or not) and capacity of the contracting authority to enforce it. Many steps have been taken over the years to standardise the form of PFI contracts to ensure public interests are better protected.
Structure of providers
The typical PFI provider is organized into three parts or legal entities: a holding company (called "Topco") which is the same as the SPV mentioned above, a capital equipment or infrastructure provision company (called "Capco"), and a services or operating company (called "Opco"). The main contract is between the public sector authority and the Topco. Requirements then 'flow down' from the Topco to the Capco and Opco via secondary contracts. Further requirements then flow down to subcontractors, again with contracts to match. Often the main subcontractors are companies with the same shareholders as the Topco.
Method of funding
Prior to the financial crisis of 2007–2010, large PFI projects were funded through the sale of bonds and/or senior debt. Since the crisis, funding by senior debt has become more common. Smaller PFI projects — the majority by number — have typically always been funded directly by banks in the form of senior debt. Senior debt is generally slightly more expensive than bonds, which the banks would argue is due to their more accurate understanding of the credit-worthiness of PFI deals — they may consider that monoline providers underestimate the risk, especially during the construction stage, and hence can offer a better price than the banks are willing to. Since the financial crisis of 2007–2010, senior debt has been provided to UK PFIs by the European Investment Bank (EIB) and the newly founded Treasury Infrastructure Finance Unit (TIFU) alongside banks in some PFIs. A recent example where this has taken place is the Manchester Waste PFI.
Refinancing of PFI deals is common. Once construction is complete, the risk profile of a project can be lower, so cheaper debt can be obtained. This refinancing might in the future be done via bonds — the construction stage is financed using bank debt, and then bonds for the much longer period of operation. In most PFI contracts, the benefits of refinancing must be shared with the government.
The banks who fund PFI projects are repaid by the consortium from the money received from the government during the lifespan of the contract. From the point of view of the private sector, PFI borrowing is considered low risk because public sector authorities are very unlikely to default. Indeed, under IMF rules, national governments are not permitted to go bankrupt (although this is sometimes ignored, as when Argentina 'restructured' its foreign debt). Repayment depends entirely on the ability of the consortium to deliver the services in accordance with the output specified in the contract.
A number of variants of PFI are deployed in the UK and elsewhere. These include:
Public-private partnership (PPP) was a scheme used in the privatisation of London Underground's infrastructure and rolling-stock. The two private companies created under the PPP, Metronet and Tube Lines have now been taken into public ownership due to their financial problems, at significant cost to the UK taxpayer.
Building Schools for the Future
Building Schools for the Future (BSF) is a project for improving the infrastructure of Britain's schools. Of the £2.2 billion funding that the Labour government committed to BSF, £1.2 billion (55.5%) was to be covered by PFI credits. Some local authorities were persuaded to accept Academies in order to secure BSF funding in their area.
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