As we come to the end of a year of financial turmoil and get ready to embrace a new year of political upheaval, it seems timely to draw some conclusions about public sector spending and the past and possible future role of the Private Finance Initiative compared with other models of development funding.
In recent weeks the opposition party has made very clear its views on the Private Finance Initiative. Shadow chancellor George Osborne declared that the Labour party model of the PFI had been totally discredited. This has led to striking headlines, such as ‘Tories to scrap PFI’, which make great copy but are likely to prove misleading.
The Conservatives are naturally keen to point to the economic failings of the PFI, with some alarming recent figures supporting their position. For example, public sector organisations will have to pay almost £1bn extra to banks on PFI deals established in 2008/09 following severe credit crunch margin hikes. But is the party really declaring an end to private funding of public sector development? Unlikely I think, particularly as we enter a period of significant public sector budget cutting, with organisations such as the NHS being asked to identify cost savings of £15bn–£20bn by 2014.
In reality, what we are likely to see is a new form of the PFI; a leaner and more transparent model that offers the private sector proportionate reward for the investment, expertise and transfer of risk, without warranting extortionate fees from the public purse. It will put greater emphasis on the word ‘transparent’, to ensure that when the PFI is used it is because it is the right procurement method and can provide long-term value for money, not just an off balance sheet and financially scalable solution for the next £300m hospital.
The credit crunch has ultimately forced both the public and private sector to develop caution and conservatism as escalating costs and risks can no longer be covered by tightening margins and shrinking budgets. On the upside, it does mean that other more lean and scalable vehicles such as NHS Lift (Local Improvement Finance Trust) and Procure 21 in the health sector, for example, are able to offer both lenders and public sector procurers safer alternative routes for development. This doesn’t mean that these initiatives haven’t been slowed by the credit crunch, they have. However, a £5m health centre that has been developed by an experienced stable long-term partnership, with shared ownership of assets, offers a far less risky investment than the £300m PFI hospital. So the banks and funds are still lending for NHS Lift and third party developers with a relative degree of confidence.
Both political parties have heralded these as successful delivery mechanisms. The current government has shown its faith by developing Express Lift and shadow health minister Mark Simmonds has acknowledged that Lift schemes are making a significant impact, and confirmed that a future Conservative government would support the programme. These leaner, quicker procurement routes are going to be the way to get new buildings developed in 2010 during a period of budget tightening and cost cutting.
I think the New Year is also likely to mark a new era as the ‘make do and mend’ mentality of former generations could well come into its own. This will not be about patching up unfit buildings, but about really looking at the full range of assets under a trust or authority’s control and looking at ways to best use what is available before pursuing new development. The Commissioners' Investment & Asset Management Strategy, being undertaken by NHS trusts, will go a long way to making this possible and should underpin a new, more conservative way, to refurbish and reuse buildings alongside a programme of necessary strategic new development.
Richard Laing is group chief executive of specialist public sector developer Prime Plc
