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

Two recent bit of news that we’re just catching up with now.

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 (Private Finance Initiative). 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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