A solid foundation? By Joseph McHugh

6 Dec 07
Love it or loathe it, the PFI has been a part of the public sector for more than a decade. But with changes in government policies and in its accounting treatment, what future, if any, does it have? Public Finance convened a round table to debate the options. Joseph McHugh reports

07 December 2007

Love it or loathe it, the PFI has been a part of the public sector for more than a decade. But with changes in government policies and in its accounting treatment, what future, if any, does it have? Public Finance convened a round table to debate the options. Joseph McHugh reports

More than a decade after its birth, the Private Finance Initiative and its various offshoots, responsible for funding a new generation of schools and hospitals, remains controversial.

It's one of the few public policy issues that still provokes a debate over ideology, in an era when all the political parties scrabble over the centre ground and market economics has apparently won the day.

Advocates argue that the PFI brings private sector financial discipline to public sector procurement projects, delivering them on time and to budget – most of the time. Less controversially, they also point out that, without the PFI, much of the public infrastructure built in the past ten years would not exist.

Critics, meanwhile, argue that the rigid nature of standard 30-year contracts means there is no flexibility to respond to the ebb and flow of public policy. They also criticise the PFI's higher borrowing costs and, more fundamentally, argue that notions of profits and competition are at odds with the provision of quality public services.

These arguments were debated by an influential group of PFI experts on November 22, in the latest round table on public policy convened by Public Finance and Deloitte.

The PFI is going through a transitional phase at the moment as developments in public policy affect the infrastructure required. In health, for example, there is a move to carry out more treatments in primary care settings, rather than in hospitals.

This has graphically illustrated the need for more flexibility in contracts, while raising questions over whether less predictable, more elastic contracts will still appeal to the private sector.

At the same time the looming changes to the accounting treatment of PFI projects, due to the adoption of International Financial Reporting Standards, might also reduce the model's appeal. The new rules will put many schemes on to public sector balance sheets for the first time – and, consequently, into the public sector borrowing figures. Critics have long argued that ministers' rationale for embracing the PFI has been the ability to fund infrastructure investment without increasing stated borrowing.

Against this shifting backdrop, public bodies and private contractors are wondering how the PFI will need to evolve and how markets are likely to mature. In particular, they are considering whether it will have an impact on the types of deals signed in the future and whether new models and methods of financing need to be developed to meet changing priorities.

The pro- and anti-PFI lobbies alike are also asking whether Gordon Brown's government, with its striking rhetorical shift away from discussion of competition in public services, remains committed to a mixed economy of provision.

PF's round table brought together distinguished policy-makers, industry representatives and politicians to assess the future of the PFI in the light of these developments.

The event was chaired by Tony Travers, director of the Greater London Group at the London School of Economics. Among the participants were Philip Hammond, shadow chief secretary to the Treasury; James Stewart, chief executive of Partnerships UK; James Fothergill, head of public procurement at the CBI business organisation; and Margie Jaffe, national policy officer for the public sector union Unison.

Other attendees included Chris Saunders, Treasury policy adviser for the Liberal Democrats; Paul Raynes, programme director for the Local Government Association; and Chris Wilson, director of the Public Private Partnerships Programme (the 4Ps.)

Kicking off the debate, Fothergill called on ministers to nail their colours to the mast and show they were committed to giving the private sector a long-term role in providing public services.

He warned that the Department of Health's recent decision to cancel some contracts for independent sector treatment centres had shaken CBI members' faith in that commitment.

'The government needs to champion a public services industry, and at the moment that's not being talked about. There should never be an ideological reason for accepting or rejecting any procurement model,' Fothergill admonished. 'The PFI should be seen as a sub-set in a wider picture of delivering public services in partnership [with the private sector].'

The ISTC decision had put a question mark over 'the government as a customer', he claimed. 'This leads to a smaller market and fewer incentives to innovate and drive efficiencies – and will end up having a negative effect on taxpayers, business and the public.'

In response, Margie Jaffe, who is Unison's senior policy officer for the PFI, took issue with the suggestion that the model helped to provide value for money. Indeed, she argued, it was leading to perverse outcomes, with services being shaped by the demands of contracts, rather than the other way around.

'Projects are affecting public sector policies and rebounding upon them,' she cautioned.

Her comments prefigured the conclusions of the highly critical report on the PFI from the Commons' Public Accounts Committee, published on November 27, which found instances of local services being cut so public bodies could fund repayments on schemes.

The MPs' report also complained of a lack of competition in PFI markets – another point Jaffe anticipated in her round table presentation when she characterised it as being a 'monoculture'.

Consequently, she claimed, weaknesses inherent in the model were left unchecked. Not the least of these was the failure to achieve meaningful transfer of risk from the public body to the contractor as a means of providing incentives for high performance.

'Risks have never been passed on,' Jaffe told participants. 'The government has underwritten PFI schemes and the public picks up the bill.'

She also criticised the model's lack of flexibility and responsiveness – a theme that recurred throughout the debate. The typical 30-year lifespan of a contract makes it exceedingly difficult to respond to changes in the public policy zeitgeist, raising the prospect of public bodies continuing to pay for buildings that have long since become white elephants.

'There is an inability to respond to a rapidly changing policy environment. The Treasury is looking at how to build in more flexibility, but I would argue that it is inimical to the very model of the PFI.'

This point about flexibility – although not Jaffe's assertion that it could not be resolved – drew murmurs of agreement from around the table.

CIPFA's policy and technical director, Ian Carruthers, pointed out that it would be difficult to apply the lessons being learnt in relation to the PFI when in many cases local bodies were already tied into projects.

'We can learn about what makes a good PFI scheme, but how do you get that flexibility back into a market where you've got a lot of individual bodies committed to 30-year deals?' he asked.

Meanwhile, transport expert Christian Wolmar spelt out what the monolithic structure of most PFI contracts really means. 'The difference between the PFI and other contracts is that if you want to change the contract there are huge costs involved.'

Alongside the critique of the model as a concept, the discussion also revealed more prosaic concerns about the ability of those responsible for procurement in the public sector to master the commercial disciplines it requires. It transpired that such shortcomings were another concern raised by the MPs in their subsequent report.

Again, Wolmar put it in stark terms: 'We have to ensure the public sector has procurement ability. Without that, it's very difficult to see how it's possible to achieve value for money. If we're really saying that the public sector cannot be intelligent procurers, then we are in complete disaster territory.'

Nick Prior, partner in the government and infrastructure team at Deloitte, took up the theme. He warned of the temptation felt by public servants to put forward the most optimistic scenario when drawing up the business case for a project.

'When civil servants need to push a project through, they have to attach numbers to it that will be acceptable to their political masters.'

This point led on to a discussion around the difficulties of assessing PFI projects to determine whether they have been robustly costed – and, crucially, whether they represent good value for money.

There was general agreement among round table participants, both pro- and anti-PFI, that it was necessary to have clear data on the value for money of projects and their performance.

The move to on-balance sheet accounting treatment of projects received broad endorsement. Fothergill said the CBI fully supported the move, triggered by the government's decision to adopt international standards from 2008.

He said ministers should now publish for consultation the guidance on how the PFI should be treated under the new regime. 'The CBI fully supports the adoption of IFRS because it will put to rest the suggestion that the PFI is just an accounting trick,' he said. 'The government needs to issue its guidance on the new accountancy treatment as soon as possible. We know progress is being made but, as time goes on, concerns and confusion will mount.'

The Conservatives' Philip Hammond argued that the move to on-balance sheet accounting was crucial to the long-term viability of the PFI. 'The present government has made itself vulnerable to the accusation of Enron-style accounting. If we had clear, comparable data, I think the debate would become much clearer.'

Other participants endorsed this need for proper performance data, which would allow PFI projects to be compared against other forms of procurement to establish which delivered the best outcomes. The National Audit Office was suggested as a possible candidate to take on the role.

Justin Slater, director of programme and policy at Partnerships for Schools, which is responsible for the UK-wide school refurbishment programme, said this process was now starting to happen. 'We are now integrating the collation of data in contracts, which will give us this information in the future. In a few years' time, we should have answers to many of these questions.'

A clearer picture of what works and what doesn't will emerge, as more information of this sort becomes available. At the moment, several participants agreed, it is difficult to demonstrate conclusively the benefits of the PFI, even though its strengths are becoming more apparent.

The LGA's Paul Raynes reminded everyone of the model's antecedents, and pointed out that reliable data would allow for more sophisticated analysis of its good and bad points. 'The PFI started up under the shadow of the Jubilee Line Extension as an example of conventional procurement,' he said. 'Now we need to get into the granularity of what works and what doesn't.'

That theme was taken up by Chris Wilson from the 4Ps, which works with local authorities on the PFI and public-private partnerships. 'Local authorities would want a panoply of funding options ideally, but the PFI brings discipline and due diligence. It brings that focus, so you can manage and cost the risk of very complex projects.'

The potential political benefits of the PFI were acknowledged by the LibDems' Chris Saunders. He conceded that part of its appeal lay in political pragmatism – particularly because it allowed for investment in public services without the need to put up taxes. And he intimated that parties of any stripe were unlikely to give up this major plus point any time soon.

'Politicians want things to happen in five years and they don't want to be spending huge amounts of money upfront for them. Rightly or wrongly, they believe there is little appetite among the taxpayer to pay large upfront costs. In that sense, the PFI has been highly successful,' Saunders said.

'The PFI has built hospitals and schools, which I suspect without [it] would simply never have been built,' he added. 'What we have to concentrate on is how do we make the PFI work best, most of the time.'

Hammond later echoed that view, saying the PFI reflected the 'reality of a globalising economy and the need for free-at-the-point-of-use public services'.

'There needs to be some tacit consensus in this area because of the long-term interests of the country,' he added. 'There's no political dogma in our approach to this. The next government of whatever colour will be judged on its ability to deliver improvements without putting up the tax burden.'

And that bottom line remains, according to James Stewart from Partnerships UK, the Treasury agency charged with fostering PFIs and PPPs – and itself a PPP. Any suggestion that the PFI is falling out of favour ignores reality, he said. 'When you have people talking about declining volumes, it's just not borne out by the figures. It's worth £22bn over the next three years – the demand is still there.'

As a consequence of that continuing demand, the PFI model is beginning to evolve in a number of ways in response to the changing policy environment. A new generation of PFI-style procurement procedures is springing up, beyond the existing offshoots of, in health, Local Improvement Finance Trusts, and in education, Local Education Partnerships. Under these, primary care trusts and local education authorities form joint ventures with private contractors and bundle together small individual projects.

Stewart cited other innovations, including the integrator model, where a series of competitions are held and the results combined, and a non-profit-making model emerging in Scotland. But he said that the public sector should not see such changes as threats.

'There are interesting developments in welfare, probation, community care and community health services. But it does not mean that everything will automatically go to the private sector: it means improving public sector providers too.'

Even so, he said, the classic PFI model would continue. 'It still has a role to play. It's worth £11bn – it's not going anywhere.'

Stewart said that, although public sector procurement was getting better, there still needed to be an effort to analyse previous projects and learn from them.

He highlighted a number of areas to focus attention on, such as the development of client expertise within the public sector; the benefits of independent review processes for projects; and the need for strong support from central government.

'There is a responsibility for the centre to manage the overall programme and to deliver efficiencies. They can give supplier markets confidence, because they [can] present the programme as a whole.'

But Corin Taylor, research director for lobby group the Taxpayers' Alliance, put forward a much bolder means of developing the market. 'If parents and patients don't make perfect decisions, why should we think that a big government department will? You don't need to manage everything for the future. Suppliers know they will have a revenue stream if they provide a good service.'

Such a radical increase in the use of market forces to shape public services remains unlikely for the foreseeable future. But – just maybe – it could point to the long-term future of the PFI.

It caught the imagination of Hammond for one, raising a tantalising glimpse of how the model might develop under a Conservative administration.

'In a world where we're talking about individual choice, isn't the individual the mechanism for that? A taxpayer-funded genuine market – now that would be a genuinely radical option.'


Tony Travers (chair)
Director, Greater London Group, London School of Economics

Graham Beazley-Long
Director, PPP Forum

Ian Carruthers
Policy and technical director, CIPFA

Janet Chamberlain
Managing director, Land Securities Trillium

James Fothergill
Head of public procurement, CBI

Barry Francis
Partner, Pinsent Masons

Philip Hammond MP
Shadow chief secretary to the Treasury

David Hobbs
Accountancy adviser, Office for National Statistics

Margie Jaffe
Senior policy officer, Unison

Mark Mead
Managing director, Serco Group

Nick Prior
Partner, government and infrastructure team, Deloitte

Paul Raynes
Programme director, Local Government Association

Chris Saunders
Treasury adviser, Liberal Democrats

Justin Slater
Director of programme and policy, Partnerships for Schools

James Stewart
Chief executive, Partnerships UK

Corin Taylor
Research director, Taxpayers' Alliance

Richard Wade
Private finance practice, National Audit Office

Paul Webster
Private finance unit, Department of Health

Chris Whitehouse
Chair, Lift Liaison Organisation for Business Investors

Chris Wilson
Director, Public Private Partnerships Programme

Christian Wolmar
Writer and broadcaster


Did you enjoy this article?