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Wed November 21 2018

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Hammond hammers nail into coffin of PFI

30 Oct The private finance initiative procurement route has been declared dead by chancellor of the exchequer Philip Hammond.

The accounting dodge that got billions of pounds worth of construction work off the government’s books over the past 30 years but left us all repaying much, much more from revenue is being officially abolished, the chancellor promised.

PFI, and its genetically modified spawn PF2, will not be used for any more government projects, Philip Hammond said.

It was not a surprise. It has been out of favour for several years now. Politicians long ago woke up to the con hoisted upon them by bankers and financial consultants who gorged on the fat of PFI but left the taxpayer with inflated 30-year bills.

Back in 2012 the National Audit Office reported that equity investors in PFI schemes bear hardly any risks for quick-buck returns of up to 30%. Most of the risk is born by contractors on fixed price contracts.

“Our findings suggest that the public sector may often be paying more than is necessary for using equity investment,” the NAO said. It attributed the failings to an inability of civil servants to stand up to bankers on complex financial issues.

The Office for Budget Responsibility has also identified private finance initiatives as a fiscal risk to government.

Philip Hammond told the House of Commons in his 2018 budget address: “I have never signed off a PFI contract as chancellor and I can confirm today that I never will. I can announce that the government will abolish the use of PFI and PF2 for future projects.”

Existing contracts will be honoured, however.

The origins of PFI were sound: placing the risks associated with a construction project with those best able to manage it – the builders. It emerged out of DBFO – design, build, finance, operate. The Dartford Bridge and the Channel Tunnel showed the good and the bad of privately finance infrastructure and provided the template for early PFI. Projects were required to have a natural revenue stream on completion – a bridge toll, for example.

Treasury ministers extended the concept to get hospitals, prisons, military housing and other public service facilities built. But being unable to charge patients for hospital beds or prisoners for porridge, there was no revenue stream. Instead, government entered long-term ‘facilities management’ contracts with the PFI consortia, creating an artificial revenue stream with inflated costs. In due course, buying construction on the tick eventually unravelled.

However, despite PFI being declared officially dead, the Treasury remains wedded to private financed infrastructure. The road network may be in the private sector for the time being, but energy and utilities have long been privatised.

The Treasury yesterday published its Interim Response to the National Infrastructure Assessment, which says: “The private sector has a critical role in delivering our infrastructure and investing to meet future challenges. Almost half of the investment in our £600bn infrastructure pipeline is projected to come from the private sector.”

The government said that ti would continue to support private investment in infrastructure through a range of successful established tools, such as Contracts for Difference, the Regulated Asset Base Model and the UK Guarantee Scheme.

Simon Rawlinson, head of strategic research and insight at engineering consultant Arcadis, said: “The end to the use of the PFI for social and economic infrastructure is good politics as no deal has been signed since 2016.  However, finding the finance to plug the gaps left by the European Investment Bank – which the budget does not address – along with public sector expertise to deliver publicly funded programmes, may prove to be longer-term liabilities.”

On this topic the Treasury's Interim Response to the National Infrastructure Assessment says: "The European Investment Bank (EIB) has been a major lender to UK projects, and the government will continue to explore options for a future relationship with the EIB Group. But we will be prepared in case we do not maintain that relationship. Starting in late 2018, we will review how the government supports infrastructure finance, to ensure we continue to have the right tools in place."

MPU

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