Right thinking on PFI, by Mark Hellowell

5 Aug 09
MARK HELLOWELL | What would the next Conservative government do with the Private Finance Initiative? Would they expand it or cut it, reform it or abolish it?

What would the next Conservative government do with the Private Finance Initiative? Would they expand it or cut it, reform it or abolish it?

Tory policy on this issue, as on many others, is obscure. But a recent policy briefing from the party, Reconstruction: Plan for a strong economy, provides some pointers as to what they have in mind.

It was, of course, John Major’s government that brought in PFI as a routine form of investment in 1992. Since the enthusiastic embrace of PFI by New Labour, however, the Tories have struggled to develop a convincing analysis of the government’s approach.

Now, they have fixed on a specific line of attack. The PFI, they claim, simply doesn’t go far enough. The Tories believe the PFI model involves a relatively modest increase in private involvement when compared to traditional methods of project delivery.

And they have a point.

After all, the substantial elements of PFI – such as the design, construction and operation of public buildings, along with services like cleaning and catering – can be contracted out anyway.

The Reconstruction document outlines an approach to PFI that is based on ‘genuine risk transfer’ to the private sector and a residualised role for public authorities.

They want to make PFI what they had originally intended it to be in the 1990s: not just a means of putting up new public buildings, but a way of expanding private decision-making in the economy.

In 1994, the then Chancellor Ken Clarke (now shadow business secretary) told the CBI: ‘We do not believe that politicians and officials should take key investment decisions.’

Fifteen years later, in June, Shadow Chancellor George Osborne told the Association of British Insurers that any public sector role in such decisions will be seen as a last resort under the Tories.

But how exactly this is to be achieved for public building projects is not exactly clear.

The Reconstruction report states: ‘All contracts with private promoters will include a few simple and clear outcomes, and the private promoters will pay liquidated damages if those outcomes are not delivered.’
The inclusion of the phrase ‘liquidated damages’ – that is to say, compensation payable to the public sector in the event that things go wrong - is interesting, if a little confusing.

Under current PFI arrangements, most construction risk is transferred to the project company through fixing its real annual income at the point at which contracts are signed.

Therefore, if it fails to manage the building work properly, for example by overrunning on the costs of construction, it has to bear that risk and lose revenue as a result.

Meanwhile, it doesn’t (usually) get paid until the building is up and running. And if, through a lack of revenue, it cannot pay its creditors, then the banks receive liquidated damages.

But for the public sector to require such compensation clauses is a novel concept. It seems to imply a move away from long-term contracts towards fixed price design-build-transfer contracts.

This would involve private promoters putting up buildings with minimal state involvement, receiving a fixed price for their delivery, and then taking on the ‘whole-life’ management tasks going forward.

This model makes sense in the context of broader Tory policy on public services.

They have made it clear that, in government, they will implement the reforms that they say Tony Blair was unable to deliver because of Gordon Brown’s opposition.

And certainly, the Blairites were never entirely content with the PFI structure.

In 2003, when New Labour began its big reforms in health care and education, it realised that the rigid and long-term nature of PFI could get in the way of more root-and-branch marketisation.

Leading ‘modernisers’ within the Blair Cabinet publicly attacked the PFI.

Alan Milburn, who as health secretary introduced foundation hospitals and Independent Sector Treatment Centres to the NHS, criticised the PFI model as a ‘straightjacket’ in 2004.

And the academic Julian Le Grand briefed against PFI during his time as Blair’s adviser, describing the policy as ‘expensive and inflexible’ in one interview with the Financial Times.

The Tories believe they have found a way of retaining private finance while keeping open the possibility of contracting out key core services – clinical care in hospitals, for example.

In The Guardian recently, John Harris suggested that PFI and related forms of privatisation no longer get the media attention they deserve. Under the Conservatives, that is likely to change.

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