Inside Labour's obsession with controversial PFIs

In 1997, it looked like New Labour’s magical solution to the chronic underinvestment in public services found after Thatcher.

The argument was that Labour had inherited such a terrible state of affairs from the Tories (cough cough, Chancellor Rachel Reeves' announcement yesterday) that private financing was the only alternative.

Chancellor Rachel Reeves has hinted at a new PFI-style scheme (Image: TREASURY)

Tony Blair’s party would deliver new schools, hospitals, roads, railways and prisons without the inefficiency and debt of the public sector. It was a persuasive idea, if not entirely original.

The idea for PFI began life just months after John Major stunned the country by winning a surprise Tory election victory over the Labour Party led by Neil Kinnock in 1992.

READ MORE: PFI series: Will Labour revive controversial funding method?

The Private Eye claimed that it was Tory frontbencher David Willets, in a pamphlet in 1993 called The Opportunities for Private Funding in the NHS, who first argued for this type of public-private partnership – that instead of paying for hospitals with public funds, you could get a private enterprise to build and run them and inherit them at the end.

A PFI panel was then set up by then Chancellor Ken Clarke, but it never really took off amid opposition from senior party members.

Since then, it’s Labour that have been the party obsessed with PFIs.

At the turn of the millennium under New Labour, more than 60 new projects were being signed-off every year – funding public infrastructure projects, such as hospitals, schools and prisons.

Of course, it didn’t play out entirely as planned. The benefits for Labour were that PFI investment could be hidden “off-balance-sheet” with the true cost of debt not crystalising until the asset was handed back to the public sector in the far future.

“That was the attraction for Blair (below) back in the 1990s and 2000s,” Professor Mark Wickham from the University of Bristol said, whose academic focus is on the development of the Labour Party since 1945.

Tony Blair 

He told The National that another key aspect of PFI was Labour’s relationship with business.

“New Labour had this kind of connection to the private sector or capital. It wanted to develop a good relationship with private firms, with private finance,” Wickham-Jones said.

“Even with the City of London. They absolutely went out of their way, even Neil Kinnock and Smith between 1989 and 1992. But, of course, Blair took that to a new level with the sort of meetings he would have with private firms and major corporations. Blair’s first major overseas trip as Labour leader was to Rupert Murdoch in Australia.”

He added: “Of course, the downside [with PFI] was that there was then a lease back that made it very expensive, and the risk on these projects was still remaining in the public sector.”

And expensive it was – and still is. According to a 2018 report from the National Audit Office (NAO), more than 700 PFI deals in total had a capital value of £60 billion – but payments to investors will have totalled around £199bn by the time those deals expire in the 2040s.

There have been notable scandals and consequences. In 2012, the South London Healthcare Trust became the first NHS trust to go bankrupt due to the sky-high PFI costs it was expected to pay.

Another notable collapse was that of Carillion in 2018, with the loss of more than 3000 jobs at a firm that made an enormous amount off PFI. Such was the furore that then Tory Chancellor declared in his 2018 Budget that PFI was done for good.

But PFI – or Labour’s preferred (more generic and less politically charged) term during the Blair years of public-private partnership (PPP) – appears to be rearing its head again. Or something resembling it.

(Image: PA)

Chancellor Rachel Reeves (above) has made it abundantly clear that day-to-day government costs have to be met by revenues and that debt has to fall as a share of the economy. It comes amid what she has called a 20 billion blackhole in the country’s finances.

There could be very little headroom for any public investment under those conditions and the benefit of PFI or PFI-style agreements is that they can be moved off the government books.

It comes as Labour have made no secret of their intention to have private financial institutions help pay for infrastructure spending.

In her Mais lecture in March this year, Reeves said: “Public investment is one important lever available to governments … but it is only one lever, and it must be used judiciously.”

Wickham-Jones said her speeches from the last few years have closely resembled Blair’s Mais lecture from 1995 (entitled The Economic Framework for New Labour), which he said was itself “hugely significant” as a statement of Labour's goals and intentions.

Earlier this month, Reeves also launched a £7.3bn national wealth fund as part of a drive to attract billions of private sector cash for big infrastructure projects.

Designed to help projects such as ports attract a mix of investment, it is aiming for roughly £3 of private funds for every £1 of taxpayer cash.

Health Secretary Wes Streeting (below), meanwhile, has said he is planning to use the private sector “as long as it takes” to cut the NHS care backlog.

(Image: PA)

Alan Milburn is notably one of his key advisers. The Blair-era health secretary was described by Private Eye as an “almost maniacal convert to PFI” and once coined the famous slogan “It’s PFI or bust.”

Does all of this signal a return for PFIs or a variant thereof?

“I would have thought if they did, they would try to do so in a way that labelled it as something different,” said Wickham-Jones.

‘The only thing we can say is there's clearly huge constraints on public finance. Covid mismanagement and Liz Truss’s premiership have left public finances very vulnerable,” he added.

“And PFI provides a potential solution for Labour to some of those dilemmas.”

The academic added that he believes PFI sits within a broader “ethos or norm” that Labour can work with the private sector.

“Labour has been at times absolutely driven by this determination that bad relations with business would not get in the way,” he said.

“I think PFI is kind of a pragmatic turn in terms of how to deal with infrastructure issues, but clearly it's a very controversial one in terms of bringing it back.”