PFI – The Biggest Rip-Off in UK Public Sector History?

The announcements in the UK government budget last week about PFI (Private Finance Initiative) came as no great surprise. Chancellor Philp Hammond signaled the end of PFI, but there weren’t any projects in the pipeline really in any case.

He also said a new centre of expertise would be formed in Health, possibly the first of several, to help organisations struggling with PFI contracts. Assuming this is another attempt to “re-negotiate” the deals, then good luck to them, but we hold very little prospect of any real benefits.  This is at least the third initiative to save money from historical PFI and there has been very limited success.

We don’t have much that is new to say about this, but if you’re interested, or maybe under the age of 30, here are two articles we wrote back in 2011, the first giving a brief context as to where PFI went wrong, the second looking at a previous attempt to address historical mistakes. Enjoy!

November 2011

PFI, the biggest rip-off in UK public sector history?

And I was involved.  Yes, I was a procurement director in Government in the 1990s and had some involvement in at least one major construction PFI. Luckily NOT one I'm now seeing featured  in the report in the Telegraph on the legacy of PFI.

It seemed to me at the time that one element of PFI was absolutely right.  That was the concept that whoever was responsible for design and construction of a new building should have to consider also the ongoing running costs - which can, over the whole life of the building, be many times the capital cost.  That was one of the principles of construction PFI and as I say, it seemed very sensible.

But it does appear that in some cases rather dodgy financial engineering was taking place, I assume in order to make projects look good value and affordable.  Why a 60 year contract?  Why are seemingly trivial services or one-off type activities costing a fortune?  "Another school had to pay £302 for a socket, five times the cost of the equipment it wanted to plug in", as the Telegraph says.

That can only be that the payment mechanisms were constructed to make the basic occupation charges look lower, with the provider making their money from these 'extras'. That would improve the apparent business case; then later on the occupier gets hit with unexpectedly high charges. And let's be blunt, this represents a failure of finance and procurement across many organisations while these deals were being done; or at least a failure to stand up to pressure from other quarters and point out loudly the problems that were being stored up for the future.

I also wonder about the role of Partnerships UK (PUK) in all this.  From 2000 onwards, Treasury promoted the use of  PUK's services - at KPMG / PWC type consulting rates - for advice to public sector clients on particularly the commercial and financial elements of PFI deals.  Yet PUK was 49% government owned, and 51% owned by the banks! Might there have been a conflict of interest there in terms of PUK's enthusiasm for PFI deals which made huge profits for .. the banks?

So, what should have been an interesting and useful (in the right situation) procurement option now appears to be a millstone around our childrens' necks.  But as it was introduced by the Tories and enthusiastically embraced by Labour, don't expect to see any great 'lessons learnt' exercise coming from our politicians.

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August 2011 

PFI , no pot of gold from re-negotiating procurement deals

The UK government’s Office for Budget Responsibility, in its recent “Fiscal Sustainability Report”, has finally published details of the total liabilities under the PFI. They come to a fairly astonishing £40 billion.

There was also an announcement about the result of a pilot project to look at how money could be saved from existing PFI schemes. An impressive sounding £1.5 billion was suggested as the potential benefit. But hang on a minute. That’s over the whole life of the current schemes, many of which are up to 30 years. And if we apply it to the liability, that would suggest a saving of less than 4%. And how would it be achieved?

The Treasury said savings have been made through a combination of changes, including reducing wasteful energy consumption, subletting or mothballing surplus building space, and reviewing service requirements such as window cleaning and frequency of decoration.

So arguably a saving of 4% is a little disappointing, given that we seem to be talking demand management, changes in specification and requirements (which may well impact on customer service levels – less cleaning etc.)

Any real “commercial” savings seem to be noticeable by their absence. There is no mention of margin being given up by the providers in the pilot as far as I can see – either the service providers or the financiers. And little hope held out in the announcement for getting anything back from the financial institutions who have made a fortune out of PFI.

The announcement was notably free of the rhetoric we sometimes hear – from whichever political party are in opposition at the time – about the “rip-offs” of PFI. That’s also because neither main party has an interest now in being too negative about PFI. Most of the current PFI projects were let under Labour, so they have no interest in highlighting the relative failure of this latest initiative, because that draws attention to some of the less good deals they did.

Meanwhile, the Coalition have realised they need private sector investment (as per the latest schools announcement), so there is little mileage in slagging off the previous examples of such investment.

In our opinion, some of the concepts of PFI were good and appropriate – making sure whoever was responsible for designing the capital asset had a vested interest in its ongoing running costs for instance. But in some cases there was definitely manipulation of the business case to push through projects, and I’m still amazed no-one ever made more fuss about the conflict of interest that Partnerships UK worked under for years (owned by the banks, and acting as advisers to clients on how to structure PFI deals... with the banks)!

And it now seems a forlorn hope that we can do much about reducing the ongoing cost of these projects, other than at the margins, so I guess we’ll just have to keep on paying our taxes to keep up the payments on the £40 billion.

 

 

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