Private Finance Initiative
Encyclopedia
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".
method which uses private sector rapacity and public 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, underwritten by the public) in order to deliver the public services. Beyond developing the infrastructure and providing finance
, private sector companies operate the public facilities at a higher cost, despite in many cases using former public sector staff who have had their employment contracts transferred to the private sector through a process intended to protect their entrenched rights, designated TUPE. Every PFI deal has its own particular one-sided characteristics.
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 union
s, 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, unsurprisingly.
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:
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:
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:
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 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.
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'.
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:
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:
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.
National Health Service (NHS)
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:
, noted that:
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:
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 Trust
s 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:
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.
. 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:
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
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.
, 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".
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".
entitled "What is Wrong with PFI in Schools?" says:
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.
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:
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%".
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.
, 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.
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.
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.
(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 subcontractor
s, again with contracts to match. Often the main subcontractors are companies with the same shareholders as the Topco.
s 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.
(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.
(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.
Government of Australia
The Commonwealth of Australia is a federal constitutional monarchy under a parliamentary democracy. The Commonwealth of Australia was formed in 1901 as a result of an agreement among six self-governing British colonies, which became the six states...
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
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
and financialisation
Financialization
Financialization is a term sometimes used in discussions of financial capitalism which developed over several decades leading up to the 2007-2010 financial crisis, and in which financial leverage tended to override capital and financial markets tended to dominate over the traditional industrial...
driven by an increased need for accountability and efficiency for public spending, national governments, and international bodies such as the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
, International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, and World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
. PFI has been controversial in the UK; the National Audit Office
National Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
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".
Overview
The private finance initiative (PFI) is a procurementProcurement
Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
method which uses private sector rapacity and public 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, underwritten by the public) in order to deliver the public services. Beyond developing the infrastructure and providing finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, private sector companies operate the public facilities at a higher cost, despite in many cases using former public sector staff who have had their employment contracts transferred to the private sector through a process intended to protect their entrenched rights, designated TUPE. Every PFI deal has its own particular one-sided characteristics.
History
The PFI is 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
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
government of John Major
John Major
Sir John Major, is a British Conservative politician, who served as Prime Minister of the United Kingdom and Leader of the Conservative Party from 1990–1997...
. It immediately proved controversial, and was attacked by the Labour Party while in opposition
Official Opposition (UK)
Her Majesty's Most Loyal Opposition, or the Official Opposition, in the United Kingdom is led by the Leader of the Opposition. This is usually the political party with the second-largest number of seats in the House of Commons, as the largest party will usually form Her Majesty's Government...
. Labour critics such as the future Secretary of State for Health
Secretary of State for Health
Secretary of State for Health is a UK cabinet position responsible for the Department of Health.The first Boards of Health were created by Orders in Council dated 21 June, 14 November, and 21 November 1831. In 1848 a General Board of Health was created with the First Commissioner of Woods and...
, Patricia Hewitt
Patricia Hewitt
Patricia Hope Hewitt is an Australian-born British Labour Party politician, who was the Member of Parliament for Leicester West from 1997 until 2010. She served in the Cabinet until 2007, most recently as Health Secretary....
considered that PFI was really a back-door form of privatisation (House of Commons, December 7, 1993), and the future Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
, Alistair Darling
Alistair Darling
Alistair Maclean Darling is a Scottish Labour Party politician who has been a Member of Parliament since 1987, currently for Edinburgh South West. He served as the Chancellor of the Exchequer from 2007 to 2010...
warned that "apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come". Nonetheless, the Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
considered the scheme advantageous and pushed Tony Blair
Tony Blair
Anthony Charles Lynton Blair is a former British Labour Party politician who served as the Prime Minister of the United Kingdom from 2 May 1997 to 27 June 2007. He was the Member of Parliament for Sedgefield from 1983 to 2007 and Leader of the Labour Party from 1994 to 2007...
's Labour government to adopt it after the 1997 General Election
United Kingdom general election, 1997
The United Kingdom general election, 1997 was held on 1 May 1997, more than five years after the previous election on 9 April 1992, to elect 659 members to the British House of Commons. The Labour Party ended its 18 years in opposition under the leadership of Tony Blair, and won the general...
. Two months after the party took office, the Health Secretary
Secretary of State for Health
Secretary of State for Health is a UK cabinet position responsible for the Department of Health.The first Boards of Health were created by Orders in Council dated 21 June, 14 November, and 21 November 1831. In 1848 a General Board of Health was created with the First Commissioner of Woods and...
, Alan Milburn
Alan Milburn
Alan Milburn is a British Labour Party politician, who was the Member of Parliament for Darlington from 1992 until 2010...
, 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 union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s, elements of the Labour Party, the Scottish National Party
Scottish National Party
The Scottish National Party is a social-democratic political party in Scotland which campaigns for Scottish independence from the United Kingdom....
(SNP), and the Green Party
Green Party of England and Wales
The Green Party of England and Wales is a political party in England and Wales which follows the traditions of Green politics and maintains a strong commitment to social progressivism. It is the largest Green party in the United Kingdom, containing within it various regional divisions including...
, as well as commentators such as George Monbiot
George Monbiot
George Joshua Richard Monbiot is an English writer, known for his environmental and political activism. He lives in Machynlleth, Wales, writes a weekly column for The Guardian, and is the author of a number of books, including Captive State: The Corporate Takeover of Britain and Bring on the...
and academics such as Prof. Allyson Pollock
Allyson Pollock
Allyson Pollock is professor of public health research and policy at Queen Mary, University of London. She was previously director of the Centre for International Public Health Policy at the University of Edinburgh and prior to that was head of the Public Health Policy Unit at University College...
, Mark Hellowell, Prof. Jean Shaoul and Dr Adrian Bell. Proponents of the PFI include the World Bank, IMF and (in the UK) the CBI, unsurprisingly.
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
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
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
Secretary of State for Health
Secretary of State for Health is a UK cabinet position responsible for the Department of Health.The first Boards of Health were created by Orders in Council dated 21 June, 14 November, and 21 November 1831. In 1848 a General Board of Health was created with the First Commissioner of Woods and...
, Alan Johnson
Alan Johnson
Alan Arthur Johnson is a British Labour Party politician who served as Home Secretary from June 2009 to May 2010. Before that, he filled a wide variety of cabinet positions in both the Blair and Brown governments, including Health Secretary and Education Secretary. Until 20 January 2011 he was...
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
Chief Secretary to the Treasury
The Chief Secretary to the Treasury is the third most senior ministerial position in HM Treasury, after the Prime Minister and the Chancellor of the Exchequer . In recent years, the office holder has usually been given a junior position in the British Cabinet...
, Yvette Cooper
Yvette Cooper
Yvette Cooper is a British Labour Party politician who has been the Member of Parliament for Normanton, Pontefract and Castleford since 2010, having previously been MP for Pontefract and Castleford since 1997. She served in the Cabinet between 2008 and 2010. She is the Shadow Home Secretary...
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
Liberal Democrats
The Liberal Democrats are a social liberal political party in the United Kingdom which supports constitutional and electoral reform, progressive taxation, wealth taxation, human rights laws, cultural liberalism, banking reform and civil liberties .The party was formed in 1988 by a merger of the...
, 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:
In opposition at the time, even the Conservative Party
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
considered that, with the taxpayer now funding it directly, PFI had become "ridiculous". Philip Hammond
Philip Hammond
Philip Hammond MP is a British Conservative Party politician. He is the current Defence Secretary in the Coalition government led by David Cameron, having succeeded Liam Fox on 14 October 2011...
, subsequently Secretary of State for Transport
Secretary of State for Transport
The Secretary of State for Transport is the member of the cabinet responsible for the British Department for Transport. The role has had a high turnover as new appointments are blamed for the failures of decades of their predecessors...
in the coalition, said:
In an interview in November 2009, Conservative George Osborne
George Osborne
George Gideon Oliver Osborne, MP is a British Conservative politician. He is the Chancellor of the Exchequer of the United Kingdom, a role to which he was appointed in May 2010, and has been the Member of Parliament for Tatton since 2001.Osborne is part of the old Anglo-Irish aristocracy, known in...
, subsequently Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
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:
University of Edinburgh
The University of Edinburgh, founded in 1583, is a public research university located in Edinburgh, the capital of Scotland, and a UNESCO World Heritage Site. The university is deeply embedded in the fabric of the city, with many of the buildings in the historic Old Town belonging to the university...
:
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
Odious debt
In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
. 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
Queen's Hospital
Queen's Hospital is a new hospital in Romford, in the London Borough of Havering in London, England. It was built on the former Oldchurch Park, a short distance south of the town centre...
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.
Examples
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:| Location | Project Name | Cost | Authority | Sector | References |
|---|---|---|---|---|---|
| Berlin | British Embassy British Embassy in Berlin The British Embassy in Berlin is the United Kingdom's diplomatic mission to Germany. It is located on 70-71 Wilhelmstraße, near the Hotel Adlon. The current ambassador is Simon McDonald.- Palais Strousberg :... |
Foreign Office Foreign and Commonwealth Office The Foreign and Commonwealth Office, commonly called the Foreign Office or the FCO is a British government department responsible for promoting the interests of the United Kingdom overseas, created in 1968 by merging the Foreign Office and the Commonwealth Office.The head of the FCO is the... |
Central Government | ||
| Coventry | University Hospital Coventry University Hospital Coventry University Hospital Coventry is a large National Health Service hospital situated in the Walsgrave area of Coventry, West Midlands, England, from the city centre. It is part of the University Hospitals Coventry and Warwickshire NHS Trust... |
£410m | University Hospitals Coventry and Warwickshire NHS Trust | Health | |
| Essex | Colchester Garrison Colchester Garrison Colchester Garrison is located in Colchester in the county of Essex. It has been an important military base since the Roman era. The first permanent military garrison in Colchester was established by Legio XX Valeria Victrix in 43 AD following the Claudian invasion of Britain. Colchester was an... |
£549.4m | Colchester Borough Council | Housing/Defence | |
| Essex | Queen's Hospital Queen's Hospital Queen's Hospital is a new hospital in Romford, in the London Borough of Havering in London, England. It was built on the former Oldchurch Park, a short distance south of the town centre... |
£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 Kent Police Kent Police is the territorial police force for Kent in England, including the unitary authority of Medway.-Area and organisation:The force covers an area of with an approximate population of 1,660,588 . The Chief Constable is currently Ian Learmonth, who was appointed in 2010 and is the former... |
Blue Light | |
| Kent | Princess Royal University Hospital Princess Royal University Hospital Princess Royal University Hospital is an acute district general hospital situated in Farnborough, in the London Borough of Bromley. It was opened on the 1st April 2003 on the site of the former Farnborough Hospital, where it was built to house the services previously provided by Bromley and... |
Bromley NHS Trust | Health | ||
| Leeds | Newsam Centre at Seacroft Hospital Seacroft Hospital Seacroft Hospital is based in York Road in the area of Seacroft, Leeds, LS14 West Yorkshire, England and is operated by the Leeds Teaching Hospitals NHS Trust. The hospital was founded in 1904, originally to care for people with infectious diseases. It celebrated its centenary on 29 September 2004... |
£47m | Leeds Mental Health Teaching NHS Trust | Health | |
| London | National Physical Laboratory National Physical Laboratory, UK The National Physical Laboratory is the national measurement standards laboratory for the United Kingdom, based at Bushy Park in Teddington, London, England. It is the largest applied physics organisation in the UK.-Description:... |
Department of Trade & Industry | Central Government | ||
| London | Queen Elizabeth Hospital Queen Elizabeth Hospital, Woolwich The Queen Elizabeth Hospital is located on Woolwich Common in London, England, was opened in March 2001 and serves patients from the London Borough of Greenwich and the London Borough of Bexley. The hospital was built to accommodate the services previously provided at Greenwich District Hospital,... |
Queen Elizabeth Hospital NHS Trust | Health | ||
| National | Future Strategic Tanker Aircraft Future Strategic Tanker Aircraft Future Strategic Tanker Aircraft is a British project to procure aerial refuelling and air transport for the Royal Air Force to replace VC10 and Lockheed TriStars then in service. After evaluation of bids the RAF selected the AirTanker consortium who had offered the Airbus A330 MRTT. AirTanker... |
£10bn | Royal Air Force Royal Air Force The Royal Air Force is the aerial warfare service branch of the British Armed Forces. Formed on 1 April 1918, it is the oldest independent air force in the world... |
Defence | |
| National | The STEPS Deal | Inland Revenue Inland Revenue The Inland Revenue was, until April 2005, a department of the British Government responsible for the collection of direct taxation, including income tax, national insurance contributions, capital gains tax, inheritance tax, corporation tax, petroleum revenue tax and stamp duty... |
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
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, the Czech Republic
Czech Republic
The Czech Republic is a landlocked country in Central Europe. The country is bordered by Poland to the northeast, Slovakia to the east, Austria to the south, and Germany to the west and northwest....
, Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
, India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Israel
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, Malaysia, the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, Portugal
Portugal
Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
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'.
Projects
According to HM TreasuryHM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
and National Audit Office
National Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
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
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
reports that:
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:
PFI projects allowed the Ministry of Defence
Ministry of Defence (United Kingdom)
The Ministry of Defence is the United Kingdom government department responsible for implementation of government defence policy and is the headquarters of the British Armed Forces....
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
Future Strategic Tanker Aircraft
Future Strategic Tanker Aircraft is a British project to procure aerial refuelling and air transport for the Royal Air Force to replace VC10 and Lockheed TriStars then in service. After evaluation of bids the RAF selected the AirTanker consortium who had offered the Airbus A330 MRTT. AirTanker...
, 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
Seacroft Hospital
Seacroft Hospital is based in York Road in the area of Seacroft, Leeds, LS14 West Yorkshire, England and is operated by the Leeds Teaching Hospitals NHS Trust. The hospital was founded in 1904, originally to care for people with infectious diseases. It celebrated its centenary on 29 September 2004...
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.
National Health Service (NHS)National Health ServiceThe National Health Service is the shared name of three of the four publicly funded healthcare systems in the United Kingdom. They provide a comprehensive range of health services, the vast majority of which are free at the point of use to residents of the United Kingdom...
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
National Health Service
The National Health Service is the shared name of three of the four publicly funded healthcare systems in the United Kingdom. They provide a comprehensive range of health services, the vast majority of which are free at the point of use to residents of the United Kingdom...
. Jonathan Fielden, chair of the British Medical Association
British Medical Association
The British Medical Association is the professional association and registered trade union for doctors in the United Kingdom. The association does not regulate or certify doctors, a responsibility which lies with the General Medical Council. The association’s headquarters are located in BMA House,...
'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
University Hospital Coventry
University Hospital Coventry is a large National Health Service hospital situated in the Walsgrave area of Coventry, West Midlands, England, from the city centre. It is part of the University Hospitals Coventry and Warwickshire NHS Trust...
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.
Queen Elizabeth Hospital, Woolwich
The Queen Elizabeth Hospital is located on Woolwich Common in London, England, was opened in March 2001 and serves patients from the London Borough of Greenwich and the London Borough of Bexley. The hospital was built to accommodate the services previously provided at Greenwich District 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
Guy's Hospital
Guy's Hospital is a large NHS hospital in the borough of Southwark in south east London, England. It is administratively a part of Guy's and St Thomas' NHS Foundation Trust. It is a large teaching hospital and is home to the King's College London School of Medicine...
, St Thomas'
St Thomas' Hospital
St Thomas' Hospital is a large NHS hospital in London, England. It is administratively a part of Guy's & St Thomas' NHS Foundation Trust. It has provided health care freely or under charitable auspices since the 12th century and was originally located in Southwark.St Thomas' Hospital is accessible...
, King's College
King's College Hospital
King's College Hospital is an acute care facility in the London Borough of Lambeth, referred to locally and by staff simply as "King's" or abbreviated internally to "KCH"...
and Queen Mary's
Queen Mary's Hospital
Queen Mary's Hospital Roehampton is a hospital in the United Kingdom. It was founded in 1915 to provide care for wounded soldiers, it became a world renowned limb fitting and amputee rehabilitation centre. Recently rebuilt and modernized it has become a unit of the Wandsworth Primary Care Trust...
. Peter Dixon, Chairman of University College Hospital
University College Hospital
University College Hospital is a teaching hospital located in London, United Kingdom. It is part of the University College London Hospitals NHS Foundation Trust and is closely associated with University College London ....
, the largest PFI-built hospital in England, has gone on the record to say:
Employment
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 ConfederationNHS Confederation
The NHS Confederation is an independent membership organisation in the United Kingdom that represents all types of providers and commissioners of National Health Service services in England. It is the only body to speak for the whole of the NHS on the issues that matter to all those involved in...
, noted that:
Dr Jonathan Fielden, chair of the British Medical Association
British Medical Association
The British Medical Association is the professional association and registered trade union for doctors in the United Kingdom. The association does not regulate or certify doctors, a responsibility which lies with the General Medical Council. The association’s headquarters are located in BMA House,...
'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
UNISON
UNISON is the largest trade union in the United Kingdom with over 1.3 million members.The union was formed in 1993 when three public sector trade unions, the National and Local Government Officers Association , the National Union of Public Employees and the Confederation of Health Service...
's national secretary for local government, has said:
Debt
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 Trust
NHS Trust
A National Health Service trust provides services on behalf of the National Health Service in England and NHS Wales.The trusts are not trusts in the legal sense but are in effect public sector corporations. Each trust is headed by a board consisting of executive and non-executive directors, and is...
s 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
King's Fund
The King's Fund is a charitable foundation in England. Founded as the Prince of Wales Hospital Fund for London in 1897, the fund changed its name in 1902 to King Edward's Hospital Fund after the accession to the throne of King Edward VII...
health think-tank, said:
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
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
Off-balance-sheet
Off-balance sheet usually means an asset or debt or financing activity not on the company's balance sheet.Some companies may have significant amounts of off-balance sheet assets and liabilities. For example, financial institutions often offer asset management or brokerage services to their clients...
, meaning that they do not show up as part of the national debt. This fiscal
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
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
Compliance (regulation)
In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and...
with the fiscal restrictions imposed under the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
and Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
, 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
Confederation of British Industry
The Confederation of British Industry is a British not for profit organisation incorporated by Royal charter which promotes the interests of its members, some 200,000 British businesses, a figure which includes some 80% of FTSE 100 companies and around 50% of FTSE 350 companies.-Role:The CBI works...
'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.
Risk
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 managementRisk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
. As an example of successful risk transfer they cite the case of the National Physical Laboratory
National Physical Laboratory, UK
The National Physical Laboratory is the national measurement standards laboratory for the United Kingdom, based at Bushy Park in Teddington, London, England. It is the largest applied physics organisation in the UK.-Description:...
. This deal ultimately caused the collapse of the building contractor Laser (a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
between Serco Group
Serco Group
Serco Group plc is a government services company based in Hook, North Hampshire in the United Kingdom. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.-History:...
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:
Value for money
A National Audit OfficeNational Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
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
Companies House
Companies House is the United Kingdom Registrar of Companies and is an Executive Agency of the United Kingdom Government Department for Business, Innovation and Skills . All forms of companies are incorporated and registered with Companies House and file specific details as required by the...
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
Refinancing
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...
. An article in the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
recalls the
Writing in the New Statesman
New Statesman
New Statesman is a British centre-left political and cultural magazine published weekly in London. Founded in 1913, and connected with leading members of the Fabian Society, the magazine reached a circulation peak in the late 1960s....
, John Pilger
John Pilger
John Richard Pilger is an Australian journalist and documentary maker, based in London. He has twice won Britain's Journalist of the Year Award, and his documentaries have received academy awards in Britain and the US....
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.
Tax
Some PFI deals have also been associated with tax avoidanceTax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
, 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
Mapeley
Mapeley Limited is a leading Guernsey-based outsourcing and property investment business. It was formerly listed on the London Stock Exchange and constituent of the FTSE 250 Index.-History:...
, based in the tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
of Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
. 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
Edward Leigh
Edward Julian Egerton Leigh is a British Conservative politician. He has sat in the House of Commons as the Member of Parliament for Gainsborough in Lincolnshire since 1997, and for its predecessor constituency of Gainsborough and Horncastle between 1983 and 1997...
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".
Bureaucracy
The National Audit OfficeNational Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
has accused the government's PFI dogma
Dogma
Dogma is the established belief or doctrine held by a religion, or a particular group or organization. It is authoritative and not to be disputed, doubted, or diverged from, by the practitioners or believers...
of ruining a £10bn Ministry of Defence
Ministry of Defence (United Kingdom)
The Ministry of Defence is the United Kingdom government department responsible for implementation of government defence policy and is the headquarters of the British Armed Forces....
project. The Future Strategic Tanker Aircraft
Future Strategic Tanker Aircraft
Future Strategic Tanker Aircraft is a British project to procure aerial refuelling and air transport for the Royal Air Force to replace VC10 and Lockheed TriStars then in service. After evaluation of bids the RAF selected the AirTanker consortium who had offered the Airbus A330 MRTT. AirTanker...
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
Edward Leigh
Edward Julian Egerton Leigh is a British Conservative politician. He has sat in the House of Commons as the Member of Parliament for Gainsborough in Lincolnshire since 1997, and for its predecessor constituency of Gainsborough and Horncastle between 1983 and 1997...
, Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
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".
Complexity
Critics claim that the complexity of many PFI projects is a barrier to accountability. For example, a report by the Trade Union UNISONUNISON
UNISON is the largest trade union in the United Kingdom with over 1.3 million members.The union was formed in 1993 when three public sector trade unions, the National and Local Government Officers Association , the National Union of Public Employees and the Confederation of Health Service...
entitled "What is Wrong with PFI in Schools?" says:
Malcolm Trobe, the President of the Association of School and College Leaders
Association of School and College Leaders
The Association of School and College Leaders , formerly the Secondary Heads Association , is the British professional association for leaders of secondary schools and colleges.-History:...
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.
Waste
A BBC Radio 4BBC Radio 4
BBC Radio 4 is a British domestic radio station, operated and owned by the BBC, that broadcasts a wide variety of spoken-word programmes, including news, drama, comedy, science and history. It replaced the BBC Home Service in 1967. The station controller is currently Gwyneth Williams, and the...
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
Imperial College London
Imperial College London is a public research university located in London, United Kingdom, specialising in science, engineering, business and medicine...
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:
Treasury
In July 1997 a PFI taskforce was established within the TreasuryHM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
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
Office of Government Commerce
The Office of Government Commerce is part of the Efficiency and Reform Group of the Cabinet Office, a department of the Government of the United Kingdom...
(OGC), but it was subsequently moved back to the Treasury. The projects section was part-privatised and became Partnerships UK
Partnerships UK
Parnerships UK was an organisation responsible for furthering public-private partnerships in the United Kingdom.-Origins:In July 1997 a private finance initiative taskforce was established within the Treasury to provide central co-ordination for the roll-out of PFI...
(PUK). The Treasury retains a 49% 'golden share
Golden Share
A Golden Share is a nominal share which is able to outvote all other shares in certain specified circumstances, often held by a government organization, in a government company undergoing the process of privatization and transformation into a stock-company....
', 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
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
, 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
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
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
Tony Travers
Tony Travers is a British academic and journalist, specialising in issues affecting local government. He is the director of the Greater London Group at the London School of Economics and Political Science...
, Director of the Greater London group at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
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%".
Scrutiny
The House of Commons Liaison CommitteeLiaison Committee
The Liaison Committee is a topical committee of the British House of Commons, the lower house of the United Kingdom Parliament. The committee consists of the Chairmen of the 32 Commons Select Committees and the chairman of the Joint Committee on Human Rights....
has said that claims of commercial confidentiality
Confidentiality
Confidentiality is an ethical principle associated with several professions . In ethics, and in law and alternative forms of legal resolution such as mediation, some types of communication between a person and one of these professionals are "privileged" and may not be discussed or divulged to...
are making it difficult for MPs to scrutinise the growing number of PFI contracts in the UK. The National Audit Office
National Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
(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
Audit Commission
The Audit Commission is a public corporation in the United Kingdom.The Commission’s primary objective is to improve economy, efficiency and effectiveness in local government, housing and the health service, directly through the audit and inspection process and also through value for money...
also provide reports on these issues at a UK-wide level. The devolved
Devolution
Devolution is the statutory granting of powers from the central government of a sovereign state to government at a subnational level, such as a regional, local, or state level. Devolution can be mainly financial, e.g. giving areas a budget which was formerly administered by central government...
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
Scottish Parliament
The Scottish Parliament is the devolved national, unicameral legislature of Scotland, located in the Holyrood area of the capital, Edinburgh. The Parliament, informally referred to as "Holyrood", is a democratically elected body comprising 129 members known as Members of the Scottish Parliament...
and the National Assembly for Wales
National Assembly for Wales
The National Assembly for Wales is a devolved assembly with power to make legislation in Wales. The Assembly comprises 60 members, who are known as Assembly Members, or AMs...
have held enquiries into whether PFI represents good value for money.
Appraisal process
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 ColmanJeremy Colman
Jeremy Colman was the Auditor General for Wales.He was born in London in April 1948 and educated at The John Lyon School, Peterhouse, Cambridge, where he read Mathematics, and Imperial College, London....
, former deputy general of the National Audit Office
National Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...
and Auditor General for Wales
Auditor General for Wales
The Auditor General for Wales is the public official in charge of the Wales Audit Office, the body responsible for auditing the Welsh Assembly Government, its public bodies, National Health Service bodies and local government in Wales...
is quoted in the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
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
British Medical Journal
BMJ is a partially open-access peer-reviewed medical journal. Originally called the British Medical Journal, the title was officially shortened to BMJ in 1988. The journal is published by the BMJ Group, a wholly owned subsidiary of the British Medical Association...
a team consisting of two public health
Public health
Public health is "the science and art of preventing disease, prolonging life and promoting health through the organized efforts and informed choices of society, organizations, public and private, communities and individuals" . It is concerned with threats to health based on population 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.
Local government
PFI is used in both central and local government. In the case of local government projects, the capitalCapital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
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
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
, to the company.
Contracts
A public sector authority signs a contractContract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
with a private sector consortium
Consortium
A consortium is an association of two or more individuals, companies, organizations or governments with the objective of participating in a common activity or pooling their resources for achieving a common goal....
, technically known as a Special Purpose Vehicle
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
(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
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
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 companyHolding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
(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 subcontractor
Subcontractor
A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract....
s, 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 bondBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s 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
European Investment Bank
The European Investment Bank is the European Union's long-term lending institution established in 1958 under the Treaty of Rome. A policy-driven bank, the EIB supports the EU’s priority objectives, especially European integration and the development of economically weak regions...
(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
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
. Indeed, under IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
rules, national governments are not permitted to go bankrupt (although this is sometimes ignored, as when Argentina 'restructured' its foreign debt
Argentine debt restructuring
Argentina went through an economic crisis beginning in the mid-1990s, with full recession between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003....
). Repayment depends entirely on the ability of the consortium to deliver the services in accordance with the output specified in the contract.
PPP
Public-private partnershipPublic-private partnership
Public–private partnership describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies...
(PPP) was a scheme used in the privatisation of London Underground
London Underground
The London Underground is a rapid transit system serving a large part of Greater London and some parts of Buckinghamshire, Hertfordshire and Essex in England...
's infrastructure and rolling-stock. The two private companies created under the PPP, Metronet
Metronet
Metronet Rail was one of two companies in a public-private partnership with London Underground.Metronet was responsible for the maintenance, renewal, and upgrade of the infrastructure on nine London Underground lines from 2003 to 2008. This included track, trains, signals, civil work and stations...
and Tube Lines
Tube Lines
Tube Lines Limited, initially known as 'Infraco JNP', has been a wholly owned subsidiary of Transport for London since May 2010. Tube Lines is an asset-management company responsible for the maintenance, renewal and upgrade of the infrastructure, including track, trains, signals, civil work and...
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 FutureBuilding Schools for the Future
Building Schools for the Future is the name of the previous UK Government's investment programme in secondary school buildings in England. The program is very ambitious in its costs, timescales and objectives, with politicians from all English political parties supportive of the principle but...
(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.
External links
- House of Commons Library research paper on PFI (2001) http://www.parliament.uk/commons/lib/research/rp2001/rp01-117.pdf
- Northern Ireland Audit Office report (2004) into PFI in the health sector http://www.niauditoffice.gov.uk/pubs/onereport.asp?arc=False&id=144&dm=0&dy=0.