PFI may not have the best reputation but it is very important that government sorts out a steady flow of schemes and hones its structure
How much does it cost to change a lightbulb? It might not be an Edinburgh fringe festival-standard quip, but for years the punchline - £300, thanks to reported charges faced by one NHS hospital under a PFI contract - was the go-to material used to attack the funding mechanism as a flagrant waste of public money; a gravy train fuelling a culture of private sector profiteering at taxpayers’ expense.
Following its inception in the early 1990s, and particularly since New Labour supercharged it to fund a new generation of schools and hospitals, the private finance initiative has been the bête noir of public procurement. Anger at perceived excessive profits for contractors - even those not charging hundreds above the odds for changing a bulb - has undermined the benefits of a programme that has funded more than 700 projects in the UK since the 1990s.
But suddenly, the tide seems to have turned. Over recent months, some of the UK’s biggest contractors have been forced to make huge writedowns over PFI contracts. In January, Laing O’Rourke confirmed a £93m writedown in relation to a Canadian PFI hospital; and last month Carillion pinned a £375m hit to its UK business largely on three PFI schemes. As we report on pages 22-26, the public sector’s fear of being taken for a ride has led to a swing in the risk profile of projects, which, combined with a race to the bottom on price from some contractors, has left margins with little room for error.
Some of the UK’s biggest contractors have been forced to make huge writedowns over PFI contracts
The person in the street - or on the backbenches - may well think this is comeuppance for the private sector; poetic justice after years of big returns under the same programme. But while there’s no question that the early days of PFI saw reward out of kilter with the risk the schemes involved, the balance on some schemes has now gone too far the other way. And that fact, if it is not addressed, presents a huge threat to the UK’s future delivery of social and economic infrastructure.
The UK has an enormous - and still growing - need for public building projects: schools, hospitals, transport and energy schemes, on top of somehow finding the means to house its burgeoning population. And while the Conservatives, under Theresa May, have loosened the reins slightly on public spending, abandoning George Osborne’s plan to restore government finances to a surplus by 2020, we remain in an era where public borrowing is high, and the government is steadfast in refusing to return to the largesse of previous decades.
With this underlying narrative to public spending, the government needs to draw on the private sector to fund projects to get anywhere even near to meeting demand. But while it has thrown a huge amount of time, effort and money striking deals on one-off mega projects such as Hinkley Point C - where, ironically, the long-term cost to UK bill and taxpayers could well dwarf that previously associated with individual PFI schemes - it is seemingly allowing the funding of more run-of-the-mill schemes to fall off the agenda.
Contractors are starting to conclude that being involved in PFI could be more trouble than it’s worth
Since the government launched its revamped form of PFI, known as PF2, in 2012, just six deals have been signed: five batches of schools, and the Midland Metropolitan hospital, which is widely believed to be one of Carillion’s problem schemes. A pipeline of further projects, which chancellor Philip Hammond promised would be released in “early 2017”, has yet to materialise.
Contractors are looking at this uncertainty over future workload, and appraising the risks involved in schemes that are coming to market, and starting to conclude that being involved in PFI could be more trouble than it’s worth. Carillion has recently announced its withdrawal from bidding on PPP construction projects, and this week, Balfour Beatty chief executive Leo Quinn said firms shouldn’t get involved in areas of PPP they “didn’t understand”. Meanwhile, Mark Baxter, managing director of investments at Galliford Try, told Building: “The risks in construction and bid costs for PFI make it quite a hard sell” internally.
Of course, if May’s government could conjure up the means - and the political will - to build an entire new generation of schools, healthcare facilities and infrastructure schemes by funding them directly, the private finance initiative could find itself consigned to history. But until pigs are soaring over the scaffold around Big Ben, the government needs to wake up to the fact that it needs to both sort out a steady pipeline of PF2 schemes, and work with the private sector to hone how PFI deals are structured. If not, it will be not just changing lightbulbs, but building hospitals and schools, with one hand tied behind its back.
Sarah Richardson, editor