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  End Is Nigh for PFI?
Although most people view the Private Finance Initiative (PFI) as a product of the last Labour government, it was actually introduced to the UK in 1992 when the Tories were last in power under Prime Minister John Major. However, when Labour took the reins in 1997, it developed a much more comprehensive policy framework and made PFI a major part of its capital investment programme. As a result, the UK became a global model for Public Private Partnership (PPP) programmes.

A PFI contract is generally a long-term agreement whereby a public project, such as a major construction development, is initially funded by the private sector. The winning developer in such a project will typically purchase the land and pay all the capital costs of the construction. Payment will then be in the form of annual fees over many years that will generally also cover the maintenance and often the operation of the property.

The Argument...

The big advantage for both central and local government is that there is no up-front capital cost, enabling many projects to be undertaken for which there would not otherwise be finance available. However, critics argue that, because such projects are kept 'off balance sheet', the true cost to the public is kept hidden. They also allege that such projects often provide poor value for money, with the public sector committed to excessive payments for many years. Where the private sector is responsible for the running/maintenance of PFI facilities then the emphasis is more likely to be be on profit rather than quality of service which is a concern of many (particularly where the facilities are hospitals and schools etc)

Despite the criticisms, Labour adopted PFI whole-heartedly and used it as the model for many of its development projects. Treasury figures show that £210 billion of government money is committed to PFI schemes up to 2035. The huge Building Schools for the Future project is one that has benefited from PFI, although it has been derided as a bureaucratic, inefficient and wasteful process. The healthcare sector has seen some £60 billion spent through PFI since 1992, with most new hospital building reliant on it.

Where Did it all go Wrong?...

PFI hit problems when the credit crunch and recession arrived, with many banks refusing to fund projects at reasonable rates. In order to prevent a number of projects failing to get off the ground, the government provided an estimated £2 billion in public money. The Treasury set up an Infrastructure Finance Unit to handle the finance while various departments concentrated on closing deals at prevailing market rates. This to some degree cut across the whole basis of PFI, given that the public sector paid a bigger share and the private sector assumed less risk, but at least it kept some projects alive. The higher financing costs added an estimated 6-7% to PFI project annual charges. To counter this, the Treasury increased the public sector share of refinancing gains from 50% to 70%.

The whole subject of PFI came to a head during the general election campaign earlier this year. The then Shadow Chancellor George Osborne stated that the Conservatives would find a replacement for PFI while the Liberal Democrats also believed it gave poor value for money. Labour countered by stating that £55 billion of Building Schools for the Future projects were at risk and that PFI was essential to attract investment into the public sector.

What Next?...

In the event, Labour lost power and the ensuing coalition government did scrap most of the school building programme plus many other capital projects. In July 2010, the National Audit Office called for a project by project review of all future PFI contracts and asked for stricter criteria to be applied than was previously the case. It recommended that the lessons of the previous two years should be analysed, projects needed to be re-evaluated with benefits and costs assessed and that a greater mix of financing sources should be considered.

There are criticisms that the previous government undertook PFI contracts without considering the long-term consequences or looking at the alternatives. PFIs were scrapped in Scotland in 2007, with First Minister Alex Salmond branding them a product of 'New Labour's age of irresponsibility' and alleging the cost was rising to £1 billion a year. Their future in England is now in doubt, with a replacement being looked at but nothing having surfaced as yet. Until it does, the prospects for many public sector construction contracts are likely to remain in limbo.

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