PFI - the end of the affair? By Michael Ware

13 Jul 10
For some, the cancellation of the school buildings programme means the fragile marriage of public and private sectors is finally over. So we should tell your mother, split the CDs and go our separate ways. However, I am not so pessimistic. We have completed 700 projects together and shouldn't let the good times go just because you flirted with a Swedish social enterprise model.

For some of you, the cancellation of the Building Schools for the Future programme means that the fragile marriage between the public and private sectors is finally over – so let’s tell your mother, split the CD collection and go our separate ways. However, I am not so pessimistic. Sure we have had difficult times recently, but we have completed over 700 projects together and I don’t think we should let those good times go just because you flirted with a Swedish social enterprise model.

So how can we save this relationship? We need to start by acknowledging we have both made mistakes. Using my O level Biology, the development of the private finance initiative has clunky parallels in evolution. We started with a very simple model (a bit like a fish or a worm), we went like dodos down the blind alley of IT and defence then we tried to make it too big and cumbersome with the dinosaurs of BSF and the London Tube. So what is the PFI equivalent of furs and feathers?

There are three obvious areas to develop further. Firstly, we need to look at capturing the collateral benefits of projects. If we develop a new piece of infrastructure such as a railway station, this will have a predictable and exponential effect on surrounding property prices and the resultant tax take. However, the benefit of those newly renovated Victorian houses and £4.50 coffee shops does not accrue to the developer and hence a lot of projects remain unaffordable at the micro level even though they make a sort of economic sense for the wider community.

Secondly, we need to take a long hard look at costs. The unit costs of developing infrastructure in the UK are in the highest in Europe and nobody knows why. I think it's the three Ps of planning, procurement and project management, but I cannot prove this. You may think it is private sector profits and consultant costs, but you can’t prove it either. And we need to know so we can fix it. And quickly.

Finally, we have to be honest about the need for variable pricing for users of network assets such as roads. We are all taught at school that there is a relationship between supply and demand, but we try to conveniently forget this when it comes to pricing for public assets. So we make them free at the point of use then wonder why they are oversubscribed, overworked and make people unhappy. There is clearly more demand for space on the M25 at 4pm on a Friday night than at 4am on a Sunday morning, but it costs the same for everybody to use ie nothing. This is why I am writing this stuck behind a polish lorry driver on his way home to Mrs Kowalski having cheerfully trundled his 30-tonne truck around our road network for free.

So, in conclusion, it’s not over until its over. Along with beer, pop songs and democracy, the UK leads the world in developing public private partnerships and we have achieved too much to throw it all away now. So, don’t give up on us baby. We can still come through.

Michael Ware is corporate finance partner at BDO

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