Practical questions to keep Labour's PFI policy prudent

26 Sep 17

Labour’s break with PFI is exciting and timely but unpicking deals is likely to be difficult and potentially expensive, argues John Tizard

When John McDonnell announced to the Labour Party Conference yesterday that a Labour government would not let one more PFI contract and would bring existing contracts ‘in-house’ you could feel the conference hall rock with delight. This is what many in the Labour Party and beyond had been wanting to hear for many years.

PFI has never been a good deal for the public or for government. It has been pursued for political rather than financial or economic reasons. And it has been expensive, but we have new buildings.

There are numerous NAO reports and other evidence on the costs, some failure and often a lack of value for money.

The shadow chancellor was clear: “The next Labour government will end the scandal of the Private Finance Initiative that has drained money from our public services for years, with billions paid out in dividends to shareholders.

“Labour…commits to signing no new PFI deals, to look to bring existing contracts back in-house and to develop alternative public sector models for funding infrastructure, saving the public money and improving services and working conditions.

“Labour will review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house, while ensuring NHS trusts, local councils and others do not lose out, and there is no detriment to services or staff.

“On top of the billions of pounds paid out to shareholders, an estimated £28bn is being lost through costs incurred by problems associated with PFI, including higher interest rates, bail outs and management fees.”

Although PFI was introduced by John Major’s Conservative government, it was greatly used by the New Labour Blair and Brown administrations. Indeed, when Gordon Brown was at the Treasury, PFI was often regarded as ‘the only game in town’ to fund public sector capital investment. Across the country there are new hospitals, clinics, schools and many other monuments to the Brown PFI programme. Those using these services and local communities rightly welcomed them at the time but may now question the long-term cost.

McDonnell’s announcement is, therefore, a significant departure from the New Labour approach. Of course, circumstances are different today and policy has to change to fit new circumstances.

PFI has increasingly been regarded as an expensive means of funding capital investment not least because the public sector can borrow considerably cheaper than the private sector and PFI contracts are designed with premiums to off-set private sector risks. PFI is a complex and often over-engineered form of public procurement and contracting, with often opaque structures involving several financial investors and contractors – both building and service delivery and the public sector. Many lock the public sector into 15-30 year contracts.

So, PFI is difficult to set up and difficult to unpick.  Large sums of public money have been paid to the major consultancies, accountants and lawyers to set projects up and we should avoid paying them again to review, renegotiate or terminate them.

It is estimated that the programme has cost the public sector a great deal of money that would otherwise have paid for teachers, nurses and other public services. In the NHS alone over the last six years, an estimated £831m of pre-tax profits have been made by companies involved in PFI projects. Following a long period of austerity and cuts it is easy to see why stopping this is attractive.

Some PFI schemes involve the provision of services such as facilities management and, in the case of prisons, custodial services. Staff employed under these contracts often have limited access to trade union protection and may not always have the same terms and conditions as their counterparts in the public sector. 

The shadow chancellor referred to PFI contracts and not the more ubiquitous public service outsourcing. He needs to be careful to draw a distinction between the two as people are already assuming he was calling for all outsourcing contracts to be brought back in house. That is a different challenge.

There is no central database of such PFI or outsourcing contracts and a priority for the next Labour government should be to create a comprehensive one and to commission a wider review of the efficacy of the public service outsourcing and contracting model.

McDonnell has made a significant commitment, which I support in principle. Not letting any new PFI contracts is the right call.

On the other hand, it is going to be very difficult and potentially expensive to exit many existing contracts.  That is not to say that it should not be explored.

Many PFI contracts do not have break or even review clauses, especially those let in the early waves. Some even require the public sector to pay off the debt with interest even when the contractor has severely under-performed. Without legislation – and even with it – simply terminating contracts may be hard and expensive. A ‘windfall tax’ on excessive profits might be an achievable and pragmatic short-term measure.

The Labour Party is committed to reviewing each PFI project and then taking a view on what to do. This makes sense but the public sector will require the necessary skills, competency and capacity to undertake such reviews. It should not wish to rely on the same advisors that helped create the PFI beast. This would have to be a priority for the Labour government.

If I were setting up such a review I would ask some core questions:

  • how long has the contract got to run before it expires
  • what is the current performance of the contract – both in terms of quality of build maintenance and allied service provision
  • what are avoidable and unavoidable financial liabilities for the public sector if the contract is terminated or significantly renegotiated
  • what is the structure of the PFI deal/contract – many are very complex and some even have public sector as well as private financial involvement
  • if there are services involved could the public sector manage these effectively with staff transferring to the public sector
  • how much would it cost and how long would it take to renegotiate or terminate the contract
  • what is the cost benefit of termination

Answers to these questions could determine whether to seek to renegotiate, terminate or leave contracts to run their course.

A Labour government should set conditions for all contractors, including PFI contractors and financing companies. They should:

  • be transparent on financial and service performance; and on ownership
  • be required to provide evidence to parliamentary committees and council scrutiny committees
  • have fair tax policies and practices
  • have fair and reasonable remuneration and employment standards for all staff

It was encouraging to hear McDonnell allude to such measures. He should seek to impose such conditions retrospectively on contracts and contractors. The better ones should be willing to comply.

The conference announcement is both exciting and timely but there is much detail to be addressed, not least so that public and political expectations are not raised only to be disappointed and to ensure that the exercise delivers for the public interest.

Reviewing all PFI contracts to determine whether public value and value for money would be secured by contract renegotiation or termination would be very prudent.

 

  • John Tizard
    John Tizard

    John Tizard is an independent strategic adviser and commentator on public policy and public services. He works with a range of public, private, third and academic organisations. He was the founder director of the Centre for Public Service Partnerships and before then a senior executive at Capita and at Scope.

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