Review hinges on more PFI

16 Jul 98
The Comprehensive Spending Review underlines the government's commitment to continue along the path of the Private Finance Initiative and Public Private Partnerships (PPPs).

17 July 1998

Indeed the review relies on the further development of PFIs especially in local government, with support for schemes of £500m this year and £800m over the next three years.

The focus of local authority PFI investment will be in education, where the private sector has already been involved in funding one school and a further education project.

Councils are also exploring ways in which to attract much-needed private funding to renovate their housing assets. The ability to borrow against the £3.6bn of capital receipts should relieve some immediate pressure, but at least £20bn needs to be spent to meet backlog investment in council housing stock.

PFI schemes announced for hospitals to date will attract over £2.3bn of private money. Public sector investment in these projects alone on an annual basis will have more than doubled in four years from £310m in 1998/99 to £690m in 2001/02.

Other areas where PPPs are being strenuously encouraged include defence and transport. In transport, for example, the government is increasing spending by £1.8bn over the next three years alongside an estimated extra £3bn to £5bn in private sector money.

Under the terms of the review, the government's dependency on large-scale private sector investment is inevitable; Labour does not want to increase public spending substantially

as a proportion of Gross Domestic Product and is also mindful of the requirement to reduce government debt as the UK considers entry to European monetary union.

But critics will continue to question whether the PFI and PPPs do present the best long-term solution for meeting public sector investment needs. One problem is that the focus on capital investment rather than current spending, such as salaries, may further erode staff morale.

When assessing the financial viability of PFI transactions, efficiency gains are assum-ed to be made and sustained by the public sector partner over many years. How realistic these assumptions are will not be fully evident for more than a decade.

PFI projects also involve giving the private sector partner a significant annual return over 25 to 30 years for the risk they are taking on by lending on the basis of future cash flow.

And while the cost to the government of the PFI may look lower in the short term, the long-term implications of massive investment in public assets by private sector, profit-making lenders remain uncertain.

There are a number of people within the public service, their unions and professional bodies, and among private lenders who are unconvinced about the long-term viability and value for money of the PFI and the general trend to private funding of public assets.

With the PFI, the private sector funds the capital cost of an infrastructure and the school or hospital contracts to pay a rental stream to the private sector funder for a 25 to 30-year period. In this way, capital funding is replaced by a long-term revenue subsidy. In short, the government spends less now but must find more money in the future.


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