If past mistakes can be avoided, some kind of private finance initiative may be the best way to build promised new public sector facilities and also solve the £49bn maintenance backlog, writes Denise Chevin.
It’s a few years back now, but I can still recall the moment when a US state department press secretary tried very hard not to burst out laughing when news broke that Boris Johnson was to be our new foreign secretary. I shared that same sense of incredulity when I heard from the chair of a contractor a few months back that they were working with the Treasury to come up with a variation of the private finance initiative (PFI) to fund new public buildings. They cannot be serious, can they?
The reaction to Boris’s elevation to the Foreign Office was surely justified, but can the same be said for reviving a widely discredited funding model where the private sector provides the capital to build and maintain public sector facilities in return for a long-term income stream?
After delivering more than 700 public projects at a cost of around £60bn, the model was scrapped by then chancellor Philip Hammond in 2018. A string of damning headlines, withering official reports and the collapse of Carillion, a major PFI contractor that left chaos in its wake, sealed the fate of the financial model that under New Labour had been “the only game in town” but had, by then, become synonymous with exorbitant costs and inflexible contracts that heavily favoured contractor over client.
PFI projects and those who owed, built and maintained them had become the media’s favourite pinata – akin to the water companies of today. And rightly so: for a school in Swindon to be charged £25,000 to install three fixed parasols and another in St Helens to be billed nearly £10,000 for a dividing curtain in its drama area was utterly absurd.
A report published this January by the National Institute of Economic and Social Research (NIESR) found that £1bn has been made by companies in pre-tax profits from all the UK’s PFI contracts. Of this, £300m has been distributed as dividends. Eight companies own 80% of all PFI schools projects, with five of them registered offshore.
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>> Also read: PFI: Do the numbers add up?
The NIESR report also notes that the average charges over 25 years amount to 3.3 times the value of the asset they built – and in some cases far more.
But political life is often cyclical and, seven years on from spreadsheet Phil giving PFI the boot, the public finances are once again threadbare and temptation hangs heavy in the air. If it is a choice between sending kids to school in crumbling RAAC buildings or paying for repairs on the government’s off-balance sheet credit card knowing it will cost more, then the bank of a Balfour Beatty or Amey starts to look more attractive than breaking solemnly given commitments to public sector spending limits.
A National Audit Office report in January estimated the cost of maintenance backlogs across key public services including schools, hospitals and prisons to be at least £49bn. When crumbling buildings pose a serious risk to public safety, it is understandable why the Treasury may once again play a get-out-of-jail card, even though the means of escape is very much not for free.
It goes without saying that any new wave of deals must be designed to avoid the problems and excesses which dogged PFI the first time around. Taking an equity stake or capping contractor payments is a sine qua non.
The Treasury is said to be considering the Welsh mutual investment model, whereby the government takes up to a 20% equity stake in MIM projects, giving it a direct share in profits and greater oversight than in traditional PFI deals. The UK government’s £28bn national wealth fund could provide some of the downpayment should it decide to go for PFI-light.
It should not be beyond human ingenuity to develop a framework both public and private can be confident about, having firmly learnt lessons from the past
Geoffrey Spence, a former head of the Treasury’s PFI policy and private finance unit, returned to the department in December 2024 as an advisor on project finance. And, as I said, behind the scenes contractors are being tapped up for their ideas. A number of schemes are being looked at (and over the coming weeks will be highlighted by Building) and, with a will from both sides, it should not be beyond human ingenuity to develop a framework that both public and private sectors can be confident about, having firmly learnt lessons from the past.
There is undoubtedly an appetite from contracting firms to get stuck into PFI-type arrangements. Most projects were profitable, as one PFI veteran whose company won more than 30 contracts back in the day, assured me. The contrast with a traditional contracting portfolio is obvious.
With PFI version one, some contractors came unstuck when their accounting became too creative and they stated profits in their accounts from PFI projects before the ink on the contract was dry. This artificially boosted their bottom line and masked problems elsewhere – again adding to the PFI infamy. Auditors must be wiser to this ruse in future.
Both sides would no doubt like to incorporate 25-year maintenance contracts into the deals but, even if that does not transpire, contractors will see the benefit of contracting to a special purpose vehicle, which can deliver a very heathy return in the region of 5%.
As investors in the water industry have found, profit has become an unpalatable word for delivering a public service. But, without profit, there is no service
And here is the rub: that may sound a tad generous to some, but there must be a profit in it for the private sector commensurate with risk – or why would they bother? As investors in the water industry have found, profit has become an unpalatable word for delivering a public service. But, without profit, there is no service.
Given the chequered history of PFI, Labour will meet a wave of opposition from well-armed critics. All the more so as any deals done will be against a backdrop of current PFI deals expiring as their 25-year terms come to an end and clients worrying that the hand-backs will get contractually messy, financially painful and the condition of the buildings turn out to be less than promised.
Getting a new PFI model working at scale, if it does get the go-ahead, will not be plain sailing. Nor is it likely to provide an engine for growth in this parliament. Labour would most likely only see the benefits during a second term.
Will Keir Starmer and Rachel Reeves think it worth the inevitable political fallout – not least from many within their own party? Former transport minister Louise Haigh, for one, has said that her party should ditch its “self-imposed tax rules” preventing the government raising income tax, VAT or national insurance, to give it more freedom to spend.
One thing is for sure: construction urgently needs some optimism to cling to. When NISTA (the National Infrastructure and Service Transformation Authority), the body formed in April from merging the National Infrastructure Commission and the Infrastructure Projects Authority, sets out a promised 10-year infrastructure delivery roadmap next month, it should explain how Britain’s dilapidated hospitals and crumbling schools, roads and court rooms can be replaced or repaired. Not to do so risks its main contribution to mending broken infrastructure being the provision of a fanciful wishlist of the kind that we have seen far too often before.
Denise Chevin is a writer and policy advisor in the built environment, utilities and technology. She is the former editor of Building and Housing Today
Building’s Funding the Future campaign seeks to examine fresh ways of attracting and using finance to boost construction projects at a time of constrained public finances.
It will examine options for public-private partnerships that can draw on private capital to pay for large infrastructure projects, schools, prisons, hospitals and housing.
It will also look at existing models for private and public funding and examine how these can be optimised to ensure funding is efficiently spent and leads to more shovels in the ground as Keir Starmer looks to construction to boost flagging economic growth.
Over the next few months we will share learning, consult with industry and collect ideas from readers. This will culminate in a special report to be published at our Building the Future Live Conference in London on 2 October - click here to book your tickets now.
To share your ideas of new funding models, email carl.brown@assemblemediagroup.co.uk. To find the campaign on social media follow #Buildingfundfuture.
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