Anne Stafford 18 June 2018

Taking accountability for the Private Finance Initiative

Taking accountability for the Private Finance Initiative image

When launched in 1992 PFI was viewed as a policy that would see the country gain new infrastructure at a lower cost. Private finance deals would cost the taxpayer less than traditional public procurement and boost infrastructure projects in sectors such as transport, education and healthcare – those that needed it most.

The rationale? While government could borrow money more cheaply than the private sector, the private sector would deliver infrastructure projects more efficiently and at a lower cost.

Fast forward to 2018, and PFI remains a highly contentious policy. Indeed, just as Carillion was collapsing, the National Audit Office published a report which stated very clearly that overall cash spending on PFI and PF2 (the successor policy launched by the coalition government) was higher than publicly financed alternatives. For one group of PF2 schools this was 40% higher, and for hospitals 70%.

Value for money?

This certainly doesn’t look like value for money for the taxpayer, a theme close to the heart of our own research at Alliance Manchester Business School. Yet, PFI is still big business and PF2 is little different. The most notable difference being that the government now takes an equity stake in projects.

In total more than 700 PFI projects have now delivered some £60bn of capital expenditure, mainly for hospitals, roads and schools, with expected future payments between now and 2050 totalling around £200bn.

As the Carillion case shows, the government is now the risk holder of last resort. So, when projects hit problems and private companies walk away or go bust, the government must stand in to keep services operating at a cost to the taxpayer.

The PFI business model is complex. The public sector effectively contracts out to an intermediary – a shell company which is financed by a consortium of debt and equity holders – and this in turn subcontracts construction and operations management.

The private sector company therefore diffuses risks and profits in ways which run counter to the claims presumed by PFI policy. Rather than delivering rational market efficiency through reduced cost to the public sector, the reality is reduced control and higher cost for the public sector. This is accompanied by the retention of responsibility for infrastructure and service delivery, particularly when things go wrong.

Research

Our research shows that there is a lack of clear, consistent and complete information about the costs and returns of PFI at all levels of both public and private sectors. The public sector has adopted a framework for reporting which is intended to meet the needs of shareholders as investors. As a result this lacks relevance for taxpayers and users, while the web of subcontracting by the private sector makes it impossible to see where and how public money is being spent.

The lack of transparency surrounding the contractual arrangements disguises the presence of implicit government guarantees whose impact on public finance may not become apparent for many years. It may be that PFI leads to better maintained assets, although this remains to be demonstrated, but these come at a high cost and at the expense of providing other assets and services as affordability becomes a challenge.

What now?

Over the years we have made many calls for improvements, including the need for more and better disclosure, and scrutiny of financial information by both the public and private sectors, especially in relation to government guarantees and contingencies. In addition, when the private sector is delivering public services with public money it should be designated as a public authority for Freedom of Information purposes.

In an era of continued austerity getting the right deal for the public and the taxpayer is even more important. So, could better written contracts have avoided the problems of high costs and poor risk transfer? Possibly. But our argument here is not that the ‘good old days’ ever existed or that the problems are the result of poor contracts, although some may be. Instead, our social sciences approach shows that using the private sector as a financial intermediary adds cost, complexity and bureaucracy. It shows that the real effect of PFI has been the redistribution of wealth to the financial and corporate sectors and the diffusion of risk away from these players.

Outsourcing

The same effects can be seen with outsourcing. Although investment in PF2 is much lower than in the heyday of PFI, outsourcing contracts - frequently with the same companies as those involved in PF2 - cost the government around £100bn a year, or 15% of public spending.

These contracts carry the same concerns about inflexibility, high costs, lack of transparency and poor value for money. And they matter. Whether we’re talking about hospitals, schools or repairing roads, these are the things that really matter to the general public, and the public and private sectors both need to improve their governance and accountability so that the public can see their money is being well spent.

Anne Stafford is Professor of Accounting and Finance at Alliance Manchester Business School

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