It seems that the Private Finance Initiative will continue in its unreformed state despite criticisms from Parliamentary committees and government ministers
Prior to the last general election, senior Conservative politicians – most of whom are now ministers – were giving the impression that they would either abandon the Private Finance Initiative (PFI) when they came into office or radically reform it.
Although this form of procurement and capital financing had been introduced by a previous Conservative Government, for which David Cameron had served as a special adviser at the Treasury, it was assumed that this was another of Gordon Brown’s weirder ideas. It’s true that there were many more PFI schemes under Labour than the Conservatives, but it was wrong to pretend that it was only promoted by left-wing governments. So what were we to expect from the Conservative-led Coalition?
The answer seems to be a new programme of PFI and no major reform. Over the summer two reports from the Public Accounts Committee and the Treasury Select Committee have been highly critical of PFI and the apparent government – both Labour and Conservative – unquestioning commitment to the scheme.
On the PF Blog on 4 July 2011 I set out a proposal for reforming PFI. The core elements of this proposal included:
- focusing PFI on infrastructure, separating out any services
- transparency of the procurement process including the value for money and public sector comparator analysis and procurement and client costs
- transparency and independently audited financial and operational performance with genuine ‘open book’ accounts
- profit-share schemes involving clients 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; or any significant change in the financing arrangements or business
- clear commitments to pay UK taxes
- publication of all senior executive remuneration including pension arrangements and share options
- employee or trade union appointees, and user and community representatives on consortia boards
- 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
These reforms would address some though not all the concerns raised by the Treasury Select Committee and the Public Accounts Committee. However, further change is required. This must include ensuring the public sector bodies are able to decide when and when not to use PFI; with greater opportunities to use alternative sources of investment including ‘prudential borrowing’, asset partnerships and social impact bonds.
There are also more opportunities for new forms of private-public financial partnerships with privately and publicly financed investment.
The really critical issue, however, is for the public sector to genuinely adopt the best value option when considering a major project. As part of the determination of best value in this context, the public sector client should consider the whole-life value of a project and not just the short-term procurement period. It should also take into account the opportunity costs of utilising its own borrowing capacity, which might otherwise be deployed to alternative projects.
There is a case also for taking into consideration wider social, environmental and economic factors in order to ensure that best value also maximises public value avoiding considering a particular project in isolation from wider objectives.
The public sector has to be publicly accountable and therefore any public body considering a major project should be concerned to ensure that whatever model of procurement and investment it adopts should recognise the importance and value of transparency and democratic accountability. The Freedom of Information Act should apply to PFI consortia, providers and client alike.
If by adopting the PFI model these essential conditions are going to be at risk of being compromised then PFI is probably wrong for the project. And there will be alternatives.
In adopting a PFI or similar model of private finance and ownership of public sector infrastructure-based services it is vital to be very clear about risk sharing and risk transfer. It is possible and desirable to transfer the risk of construction costs including the costs of building and implementation delays to the private sector but there will be limits to the transfer of operational risk as high-profile schemes such as London Underground have demonstrated.
There are certain public services that the public sector cannot and certainly politically will not allow to fail. Therefore, the public sector has to ensure that it is not paying a risk premium to the private sector that in practice cannot guarantee risk transfer.
Finally the argument for keeping PFI off-balance sheet surely has passed. Including PFI in the public accounts would in itself place some greater public sector accounting discipline and transparency into the programme. It would also better illustrate the public sector’s liabilities.
Through PFI there are now many more new schools, hospitals, prisons, roads and much more that are benefiting the public and adding value for communities across the country. Undoubtedly some of these projects would and could have been delivered without PFI, but in reality there would have been smaller programmes and less new building.
We should not, however, allow this fact to prevent a serious and informed debate about its role, how it can be reformed and the alternatives.
