The biggest PFI programme was the £55bn Building Schools for the Future project, scrapped in 2011 (Oldham Schools)

Bye-bye, PFI: UK signals effective end of private finance initiative

11 May 2018 | By GCR Staff 1 Comment

Judged to deliver poor value for money, the UK’s once mighty Private Finance Initiative (PFI) has fallen into disuse.

It fuelled the “Blair’s Billions” campaign to build roads, hospitals and schools in the 2000s, but now the UK government has only two large privately financed projects on its books, and has not brought forward any new schemes for 18 months, a House of Commons committee has been told.

At its peak, the use of PFI procurement accounted for more than 60 projects a year, worth £8bn annually.

It was a way of getting cash from the private sector to pay for big, expensive schemes. It kept the capital cost of those schemes off the books of the government, who then paid fees for use of the asset, plus interest on the capital raised, for many years into the future.

Its popularity continued with the 2010 coalition government, in which Chancellor George Osborne approved 61 schemes with a total value of almost £7bn in his first year.

Then it was reformed and renamed the “PF2” in 2013, but it has now all but disappeared from the British construction industry.

The last PF2 scheme to be agreed by the government was in April 2016, and those under way now are limited to a £1.6bn, 2.9km tunnel under the Stonehenge World Heritage Site, and another to build a portion of the lower Thames crossing.

These represent an expenditure of about £2bn, just 4% of the £50bn pipeline of government infrastructure work.

Altogether, only 12 projects have been brought forward under PF2 in the past five-and-a-half years, representing 0.4% of the government’s total capital investment.

This is the picture that emerged from oral evidence given by senior officials to the House of Commons Public Accounts Committee (PAC), which is investigating whether the PFI delivers value for money.

They have been told that it does not.

Their inquiry comes amid deepening public criticism of PFI, which has been blamed for handing huge profits to private-sector owners of the PFI deals and diverting funds from cash-starved public services.

The committee called on senior figures in the Treasury and the Infrastructure and Projects Authority (IPA) to give evidence to its inquiry into the PFI, including Charles Roxburgh, the second permanent secretary at the Treasury, and Tony Meggs, the IPA’s chief executive.

Roxburgh said: “We have not done a new PF2 project since April 2016, which was the last of the schools programmes. We think there are some promising projects on the horizon – some good roads projects – but we are talking of a handful, rather than going back to the days of the 2000s, when it was up to one a week and £8bn a year.”

Witnesses said PFI fell into disuse because it got difficult to prove that private funding provided better value for money than public funding.

To validate the choice of PF2 the Treasury checks it against the “public sector comparator” to decide if it would be cheaper.

Roxburgh commented: “PF2 is used only if it gives us better value for money. That is a pretty high bar, particularly when there is an awful lot of other public investment going into infrastructure, and the government has increased that.”

However, he denied that the government was planning to abandon the method altogether. “We are using PF2 in a much more focused way than was the case for PFI. [It is now] a very small, specialist approach to financing public investment.” In practice, this will be for projects where the advantages of transferring risk to the private sector will outweigh the superior borrowing power of the government.

The IPA’s Tony Meggs added that the public sector’s ability to design and construct projects on time and budget had improved.

“Therefore, the [value of] risk transfer is lower, I believe, than it was when PFIs began, because we have learned a lot along the way. Therefore, the test becomes a much higher hurdle, to prove that you are going to do much better than the public sector.”

The decline in enthusiasm for using the PF2 is evident in Whitehall’s unwillingness to mount a defence of it.

Sir Geoffrey Clifton-Brown MP, the deputy chair of the PAC, commented: “When we did our report in 2011, we said that these PFIs had not demonstrated value for money. We asked you to publish the evidence. Our sister committee, the Treasury Committee, asked again in 2012, and you were going to publish it in 2013. You were going to publish new evidence in 2014. You have still not published that evidence.”

Other factors behind reduction in PF2 contracts are a fall in the financial attractions for both sides. For the government, the private investment in a public project is no longer “off balance sheet”, and so PF2 schemes push up official government debt.

And for the private sector, the chances of making 30% returns from selling their equity shares to offshore buyers once the construction phase was complete was no longer available.

Image: The biggest PFI programme was the £55bn Building Schools for the Future project, scrapped in 2011 (Oldham Schools)

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