THE Labour government has made no secret of its intentions to bring private finance in to pay for public infrastructure, sparking concerned comparisons to the private finance initiatives (PFIs) used heavily under Tony Blair.
Chancellor Rachel Reeves has spoken of delivering “investment through partnership between strategic government and enterprising business,” in comments widely read as opening the door to new PFI-style deals.
READ MORE: Why are we talking about PFI now?
The PFI model sees private money brought in to finance, build, operate, and maintain public infrastructure projects, such as hospitals or schools. Those private investors are then paid back from the public purse over decades, leading to sky-high costs. The National’s Steph Brawn has penned an explainer on exactly how it all works.
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.
So why would Labour be looking to use PFI-style finance again? Here are the pros and cons of the PFI model.
What are the pros of the PFI model?
Arguments for the benefits of the PFI model, which will no doubt be made by the big financial institutions Labour are considering turning to for infrastructure funding, echo many of the arguments made about the benefits of private vs state action. Private finance is more flexible, more efficient, and can be found faster than government money, they will say.
Proponents of PFI – who are harder and harder to find – also claim that it encourages investment by offering reliable returns. This investment may also be in areas that are generally harder to finance with private money, such as roads.
Furthermore, because the PFI scheme leaves the private investors with responsibility over maintenance of the asset, they may be motivated to build to a higher standard – so that maintenance costs over the asset’s lifetime are lower. Private sector expertise and management is then also brought in to help the public sector.
By far the biggest advantage of PFI schemes however, and one which made them so popular under the Blair Labour government, is that the borrowing is accounted for differently and kept off the government books.
The private sector does not begin to take payments until the asset is completed, so the government can point to new infrastructure development without having any costs on its balance sheet.
Mick McAteer, the founder and co-director of The Financial Inclusion Centre who previously sat on the European Commission’s Financial Services User Group, argued this is where any pros end.
“For really important infrastructure, like affordable housing, public buildings in town centres, building roads, things like that, there are no advantages of using private finance,” he said. “There are none. It just doesn't make sense.”
The 2018 NAO report seemed to agree, concluding that the then £10bn annual PFI bill came with no clear benefits to the taxpayer.
What are the cons of the PFI model?
Due to the huge number of PFI schemes created under the previous Labour government, there is a wealth of evidence as to the drawbacks of the model.
In 2018, then-chancellor Philip Hammond announced PFI schemes were being abolished.
He told MPs: “In financing public infrastructure I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector.
“But there is compelling evidence that the Private Finance Initiative does neither.”
Hammond’s announcement came after the Treasury refused to calculate the returns investors made from PFI projects, telling the Public Accounts Committee that the cost of fulfilling a request for the data would be too high.
The outcome is clear though: private investors have made billions from funding PFI contracts, extracting huge returns and leaving public bodies such as NHS trusts with huge bills even today.
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.
In 2019, a report from the Institute for Public Policy Research (IPPR) found that the initial £13bn private sector investment in new hospitals would cost the English NHS £80bn by the time all the PFI contracts had expired.
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McAteer explained that private investors would aim to get returns of three or four percentage points above the gilt rate at which the government can borrow, meaning PFI schemes will always be the more expensive option.
He said: “I hate using household finance analogies, but it doesn't make sense to say to someone: ‘Would you rather have a mortgage that costs you five per cent or a mortgage that costs you nine per cent?’”
Other criticisms of the PFI schemes used by the Blair government were that private sector experts were brought in to negotiate the contracts, which were largely kept secret due to “commercial confidentiality”.
There are also examples of PFI contracts ending in bitter disputes, as private investors have been accused of giving up on building maintenance in the last few years of a given contract, considering the building will soon belong to the government.
As the FT reported in October last year, Lloyds Banking Group, the biggest investor in the PFI scheme behind London’s Whittington Hospital, sued the NHS trust for £56m after it ended payments citing concerns about defects exposed by a fire in the critical care wing.
The FT said there had been a big increase in these types of disputes, reporting: “The Whittington is a rare example of a dispute made public through court action. Most conflicts go to arbitration and are settled confidentially.”
So why would Labour be considering PFI-style deals again?
Giving the Mais lecture earlier in 2024, Reeves spelled out Labour’s fiscal rules – which she essentially adopted from the Tories.
Reeves explained “the rules which will bind the next Labour government: that the current budget must move into balance, so that day-to-day costs are met by revenues, and that debt must be falling as a share of the economy by the fifth year of the forecast”.
Under those rules, there is very little headroom for any government investment. However, PFI spending can be moved off the government books.
As history shows, the money will have to be paid back – and more on top. But it will allow Reeves to appear fiscally responsible in the present, shifting the issues down to future generations and future governments.
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