What is the Private Finance Initiative really about?

The ostensible reasons for the PFI programme are well known. It is supposed to reduce the cost of big projects to the public sector by transferring some of the risks to private companies; it keeps these big projects off the government’s balance sheet, allowing an increase in capital spending; and it ‘incentivises’ private companies to be more efficient because the level of payments are related to perform.

All these so-called advantages are the subject of protracted disputes which are difficult, even for those of us with some understanding of government financing methods, to understand, let alone adjudicate on. As I wrote in this column in the December issue of PSLG, much of this argument has consisted of unfounded statements prompted more by the ideological stance of the protagonists than by an honest elaboration of the facts.

But at last the PFI is coming of age and firm evidence is beginning to emerge about the successes and failings of the first PFI schemes. The Audit Commission report, PFI in schools, published in January on the early school PFI schemes is probably the best impartial assessment of the PFI so far and it does not offer much comfort to the supporters of the concept.

Its most damning finding was that the schools that were being produced were not the beacons of architectural excellence which had been promised, but often the kind of cheap shoddy jobs that sprung up in the 1960s and whose problems are one of the reasons we need so much investment in school buildings today. Of course people liked having new schools, but as the report put it, ‘they were less happy with some specific aspects of their buildings, for example size, lay out and environmental control’. The architecture was unimaginative, and, surprisingly given that PFI contracts are supposed to ensure that there is a long term incentive to keep costs down, not always easily maintainable.

The problem is this: PFI projects are only as good as the people who have specified the contracts and they can are always under the same financial constraints that has always constrained public sector procurement. Therefore, if, say, a good lay out has not been specified, the PFI contractor will not take it into account. They are under a duty to their shareholders to maximise profits and that will condition their behaviour.

The Commission goes on to suggest that those procuring the new schools may have underplayed design aspects which have important implications for the education of the children in the school, such as good acoustics (so you can’t hear the playground noise the whole time) or more mundane requirements such as having sufficient storage facilities which may be vital in ensuring teachers’ do not have to lug around vast bags.

One of the fundamental contradictions of the PFI is that it is based on the premise that the public sector is lousy at procurement which is why so many schemes, big and small, have ended up costing far more than anticipated. But the PFI places an enormous onus on those same people to draw up long term contracts which not only are far more complex than conventional schemes, but also have to stand the test of time.

The suggestion in the report is that secondary performance indicators, such as exam success or drop out rates, should perhaps be built in to PFI contracts. And this gets to the nub of what the PFI seems to be really about.

Conventional procurement practices have failed, runs the argument, because the specification has only focussed on the immediate requirement of say, a new school or hospital. The PFI, then, is seen as a way of improving public services by making those procuring services think of long term outcomes rather than immediate physical needs. And this is where the PFI begins to go off the rails. The Audit Commission’s suggestion that PFI companies should be paid on the basis of exam results or that prison providers should be fined if the former inmates reoffend is the path to a legal and logistical nightmare.

The main thing wrong with the PFI programme is its complexity. When schemes are kept reasonably simple, such as the construction of a bridge or office block, then they remain manageable. Once all kinds of complex equations are needed to determine payment levels, the scheme becomes a lawyer’s paradise and the contractors begin to focus on how to work the system rather than on any tangible outcome.

This is most apparent with the Tube PPP where the contracts cost £500m to draw up and are replete with compex formula which no lay person can understand. If the Audit Commission thinks that the way forward for the PFI is to load schemes with more complexity, then it is making a fundamental mistake.

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