It is very unlikely that the private finance initiative will be abandoned by this or future governments, but it is in serious need of reform
The recent parliamentary and media pressure for greater transparency, stronger accountability and a ‘better deal’ for the public sector from the private finance initiative and similar public private partnerships is unlikely to abate until the industry responds with solutions.
Reform is in the air.
The industry has a choice. It can dig in, resist calls for change and seek to defend every aspect of the programme, which without doubt has delivered major investment in modern infrastructure for education, health, transport and housing; or it can work with government and the wider public sector to reform the system.
Failure by the industry to work with the public sector to reform PFI and PPPs would both fuel opposition to this form of procurement and investment and possibly lead to less use of it and/or government-imposed changes.
Too often the opposition to PFI is more ideologically based than evidence based. Many PFI projects have been delivered to budget and to time with the costs of any overrun on either being met by the private sector. Any value for money comparisons with more traditional publicly procured projects should be based on whole-life costs and benefits. The public sector undoubtedly can borrow more cheaply than the private sector but this is only part of the story.
The scope of PFI schemes needs to be revisited. This is a scheme that works better for buildings and infrastructure and the related services to maintain these structures, but is less appropriate for complex services that require flexibility and will change over time. If such services are to be outsourced they are often better being taken to the market on a more frequent basis than PFI contracts typically allow. Alternatively, they may be better delivered by public sector teams or social enterprises.
There will always be profits when a private sector organisation is involved in public services – whether to build or to run them – unless government is always going to be ready, willing and able to bail out failure. Profit per se is not wrong. What is more difficult to accept is unreasonably high profits that are not shared with the public sector or community and profits that are simply made by some financial or commercial wheeze. It also seems wrong that UK taxpayers should fund schemes that generate profits that are then taken to offshore tax jurisdictions.
It will be more difficult to reform or re-negotiate new project contracts than it will be to set a new rule book for future schemes. However, I suspect that government and the wider public sector will wish to try to re-negotiate in some cases and in many of these the companies involved ultimately will negotiate. It may be in their longer-term interests to do so.
It is very unlikely that this or any future UK government will abandon PFI – the alternative would be higher taxes and charges, less capital investment or probably both. Government will rather wish to reform the system. Such reform could include:
- transparency of the procurement process including the value for money and public sector comparator analysis as far as is compatible with the procurement regulations and open competition
- open publication of the costs of procurement and client management (which itself needs to be enhanced and possibly able to draw on more central government owned and managed resources)
- genuine independently audited ‘open book’ accounts
- profit-share schemes that involve the public sector and local communities
- transparency of ownership and commercial relations, benefits and cash flow within a PFI or PPP consortium
- contractual requirements to secure client approval before any change in ownership of or within a consortium; and indeed such agreement for any significant change in the financing arrangements or business model
- transparency of financial and operational performance
- more independently verified benchmarking of financial and operational performance
- more separation of infrastructure development and maintenance from wider service provision
- clear commitments to pay UK taxes unless agreed prior to contract signing
- focusing PFI on infrastructure not services
More radical ideas could include:
- publication of all senior executive remuneration including pension arrangements and share options
- employee or trade union appointees on consortia boards
- user or community representative appointees on consortia boards
- and/or the establishment of advisory boards comprising user and community representatives, staff/union representatives and independent directors responsible for ensuring public value and protecting the public interest
- a commitment from providers to invest in communities, local social enterprises and voluntary organisations
- minimum employment standards for all staff including those in supply chains and including share ownership schemes
This may be a radical agenda, but a necessary one. The challenge is to reconcile these competing objectives of the private and public sectors. If they can’t be reconciled, PFI has a limited future. What is needed is a PFI model that is accountable, affordable and adds public value.
This post first appeared on Government Opportunities
