Taking the initiative

The controversial Private Finance Initiative schemes that run our prisons and build our hospitals are coming to an end. Were they a costly mistake – and what’s the exit strategy?

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“Buy now, pay later” is one of the key mantras of contemporary capitalism. It helped produce the financial crash of 2008, generates many of the woes that come with personal debt, and has transformed the UK into a precariously property-obsessed society. The same dogma underpins PFI – Private Finance Initiatives – a concept that might make your eyes glaze over but which underpins, and thus potentially diminishes, many of the most important spheres of public life, from health to justice to education.

Along with the closely related Public Private Partnerships (PPPs), PFIs have allowed profit-seeking companies to build infrastructure and run essential services.

The largest firms absorbed or crushed their rivals and scooped up the bulk of contracts

John Major, prime minister from 1990 to 1997, is credited with launching PFI. In November 1991 his Chancellor Norman Lamont announced: “The government have too often in the past treated proposed projects as either wholly private or wholly public. In future, the government will actively encourage joint ventures with the private sector, where these involve a sensible transfer of risk to the private sector.”

Under a PFI, a private company or consortia of companies built a hospital or other facility and leased it back to the public sector, usually being paid annually. The fees also included the costs of maintenance. The government didn’t have to come up with the capital costs of the project, and its balance sheets looked better. The private sector felt it took on the risk of the projects going wrong and so deserved the profits it could make.

It can be argued that Major, faced with crumbling civic infrastructure – much of it had not been replaced or upgraded since the Second World War – didn’t have much choice. It was either PFI or higher taxes, which Tory voters abhor.

The scheme was enthusiastically extended under Tony Blair and Gordon Brown’s Labour governments, which had discovered that their electoral success was also based on no longer threatening tax rises. When he was health secretary, Andy Burnham, now Greater Manchester mayor, was an advocate who in 2010 approved the PFI deal to redevelop the Royal Liverpool Hospital.

But PFI is at a crossroads. As contracts typically last 25-30 years, the earliest are now expiring and some 200 will be wound up over the next 10 years, accelerating from 2025 onwards. Around 700 such contracts exist, representing public infrastructure assets worth around £60 billion, which come saddled with future costs (maintenance mainly) of around £170 billion. These are massive sums.

It’s time to take stock. Taxpayers – and the government – need to assess what PFI did and didn’t do for us. And what happens as the contracts wind up?

A lot of PFI firms specialise in “facilities management” or “maintenance services” – descriptions that didn’t exist when the state and local councils ran services.

“It’s a case of the old saying: ‘Where there’s muck there’s brass,’” says Robin Carey, head of the school of business at the University of Central Lancashire. “A lot of these firms do the jobs no one else wants to do. Who goes to school dreaming of driving prison vans, running kitchens or cleaning toilets?

“But running maintenance services means you can charge for every bulb change. A lot of these firms made most of their money not on the initial building project but on the ongoing service contracts which governments had locked themselves into.”

The names of the biggest PFI operators are familiar – the likes of Balfour Beatty, Capita, Colas, G4S, Interserve, Kier and Serco. More than half of the 700-odd PFI contracts are owned by the ten largest firms. Like the privatisation sell-offs that created railway, phone and energy monopolies, PFI didn’t lead to competition and any of its supposed efficiencies. The largest firms absorbed or crushed their rivals and scooped up the bulk of contracts.

For PFI contracts generally, construction and facilities management companies teamed up with investors to build roads, hospitals and other public infrastructure at no upfront cost to the public purse. In return, they got 25 or 30 years to maintain the asset, charging for these functions and making a profit while shouldering liability for any defects in their construction work. If you were a local authority or public sector body needing to build new infrastructure in the PFI glory years, you were told it was “the only game in town” and there was no chance of funding it any other way.

The 20-mile section of the A55 between Llanfairpwll and Holyhead is a typical example. Building work began in 1998 on the final link in the dualling of the road linking the port of Holyhead and the English border at Chester, and was completed in March 2001. The PFI winner, a Kent-based company called UK Highways A55, is paid a “shadow toll” by the Welsh Government for every vehicle using the dual carriageway. The 30-year contract for maintenance and operations, arranged by the UK Labour government before devolution in 1999, runs until December 2028. The Welsh Government paid shadow tolls of £16.83 million in 2020, so the taxpayer ends up footing the bill in the end.

Other examples include the PFI Balfour Beatty won in 2010 to build 16 fire stations in the North West. In Yorkshire and Humber, big deals included the construction of 400 homes in the Little London, Beeston Hill and Holbeck areas, and the building of Pinderfields and Pontefract hospitals – which brought Balfour Beatty a profit of £42.2m when it sold the contract on.

To be fair to PFI, schools look a lot better than they did in, say, the Portakabin-dominated 1980s. Many new hospitals occupy cutting-edge buildings. Some roads are actually better, too, though massively increased traffic volumes have created new problems.

A lot can – and did – go wrong with PFI contracts, however. Generous salaries for bosses and a bonus culture linked to profits and share price led to cost-cutting – which meant the cutting of services or the building of ugly, functional sites. Although the received opinion is that private firms are leaner than public bodies, there are inherent economic inefficiencies in inviting PLCs to run public services. Critically, private firms can’t borrow money as cheaply as governments, so a lot of money goes to servicing debts. Research by the Yorkshire Post found that £111.5m was paid out in 2016 to service debts for hospital buildings with a capital value of £752.6m.

“There is a fundamental clash between capitalism and delivering public services, and private firms primarily serve the needs of shareholders,” says Carey. “A lot of the firms have also been poorly managed, and many PFI schemes have gone well over budget and failed to meet their own delivery schedules.”

The 646-bed Royal Liverpool Hospital project ticks all the bad boxes. Approved in 2013 and budgeted at £429m with a planned opening date of 2017, it is now expected to open this summer and final costs could tip over the £1.1 billion mark.

For Dan Carden, MP for Liverpool Walton and member of the Commons Public Accounts Committee, the hospital fiasco is proof PFI has been a “costly disaster”.

“While the company’s debt soared and suppliers went unpaid, executives protected their generous bonuses and shelled out dividends to shareholders.

“The people of Liverpool desperately needed our new hospital during the pandemic. Instead, we had a monument to corporate greed. Public assets including schools and hospitals should not be used to line the pockets of investors.”

Some PFI firms look like Panama Papers dead-certs. One of the largest so-called infrastructure funds, HICL, has its tax domicile in Guernsey and was set up by HSBC to buy up PFI contracts. Another, Dalmore Holdings, is run by former bankers and accountants in London with shareholders including several Cayman Island investment funds. AMP Capital, an Australian fund manager, is a major investor in PFI deals. Much of the British state has been outsourced and offshored to anonymous and foreign interests. There was money too to be made in refinancing PFI deals – replacing the original borrowing with cheaper loans in an age of low-interest rates.

Sometimes, the whole PFI superstructure collapsed, as happened in January 2018 when Carillion, the massive construction and management services company headquartered in Wolverhampton, went bust – the largest ever trading liquidation in the UK. The company failed with debts of £7bn, more than its annual sales of £5.2bn. More than 3,000 jobs were lost, and the collapse affected 75,000 people working in its supply chain.

Andrew Edkins, professor of the management of complex projects at University College, London – who has worked for PFIs in the prison service – says: “A lot of the problem with PFIs came about when things became too fragmented and commoditised. The contracts became over-complex. Changes to contracts became too costly. When a private firm breaks a contract, it pays damages.”

The Royal Liverpool was one of Carillion’s major over-runs. The company’s failure is widely regarded as the death knell of PFI.

“At its best, PFI can be world class and should be adopted and promoted,” argues Edkins. “But industry has been appalling at communicating its PFI successes. Once the redtops got hold of stories about ridiculous charges made for changing a blackboard, say, at a school, the whole idea of PFI became toxic.”

In October 2018, Chancellor Philip Hammond announced that the government would no longer use PFI or PF2 (George Osborne’s 2012 rehash of PFI), but said he remained “committed to the use of public-private partnership where it delivers value for the taxpayer”. Earlier that year the National Audit Office analysed PFI schools projects in the North West and said they’d cost 40 per cent more than if the public sector had built them. But whatever comes next, the winding up of the original PFI contracts is fraught with difficulties.

Above: former Carillion chief executive Richard Howson. The company failed with £7bn debt. Main image: Royal Liverpool Hospital, “a monument to corporate greed”. Photos: Jack Taylor/Getty/Alamy

Meg Hillier MP, chair of the Public Accounts Committee, says: “We are about to see a wave of PFI contracts come to an end. These require careful and advance challenge to ensure that the asset is handed to its public sector owner in good order. These include schools and hospitals.

“The taxpayer could end up with a huge bill if PFI companies are not challenged and held to account.”

The Infrastructure and Projects Authority, the government body charged with overseeing the wind-down, estimates it takes seven years to adequately prepare for expiry. But only last year the IPA said it didn’t have the data it needs to fully understand the challenges of managing the expiry of PFI contracts.

As a headline on industry website the Construction Index puts it, “200 PFI contracts facing expiry: consultants, fill ya boots!” Construction consultants, lawyers and surveyors are “in for a field day”, claim the authors, as local authorities managing PFI contracts report that they expect legal disputes, while more than half admitted they need more knowledge about the condition of their assets – for which they will need to recruit external consultants.

Gareth Davies, head of the National Audit Office, had this warning in 2020: “With the bulk of PFI contracts expiring from 2025 onwards, there is still time for government to make changes that will help public sector bodies to exit from contracts successfully.

“If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.”

Another problem is short-termism, says Carey. “Governments work on two, three, at most five-year cycles. What we need is a long-term financial strategy to move on from PFI. But any Tory or Labour government that’s in power – both have been deeply involved in PFI – is going to be tempted to fix the books and knock any serious issues on for a future government to deal with.

“The taxpayer could end up with a huge bill if PFI companies are not challenged.”

“They will want to keep schtum about their own mistakes. Labour, in particular, which took the baton handed on by John Major and ran with it, is not going to want to reveal the real truth about the mistakes Tony Blair’s government made with PFI.”

As contracts close, buildings and services will fall back into public ownership. Edkins is confident that the government and local authorities will be handed back assets in better shape than if the public sector had run them for the past 30-plus years.

“Local authorities should also find themselves able to keep costs down, as the bulk of the capital investment will have been completed.”

But, he says, the weak link is the personnel. “The public sector has haemorrhaged skills. This is a serious problem as contracts end and plant and buildings are handed back. Take the nuclear sector as a prime example. What we really need to know is that a nuclear reactor is safe. We will have to rely on private contractors where we haven’t retained skills.”

There is a solution, he says, “though I’m not sure it’s on anyone’s radar right now,” and that is to reimagine PFI in the light of all that we have learned.

“The opportunity is there for the public sector to lead on this. Perhaps now is the time for the city mayors to take the lead, raise bonds and takeover the management of many of the PFI operations.

“The running of public services is always going to be complex and problematic but there’s no option – it has to be done. What we need is true partnerships – long term, happy marriages of the private and public sectors, where the taxpayer gets the best value out of the service.”

The controversial Private Finance Initiative schemes that run our prisons and build our hospitals are coming to an end. Were they a costly mistake – and what’s the exit strategy? Chris Moss reviews the evidence on PFI

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