THE PERILS OF PFI -- COMING HOME TO ROOST

PFI -- Should we now be renegotiating these arrangements

There was always something phoney about PFI and it was not just the accounting. Bodies made a stream of unitary payments to a pfi provider over a thirty year period. These payments were made so that this third party ( usually a special purpose vehicle company) -- would design an asset, build it,obtain the finance for building it, then operate it and repair and renew elements of it over say a 30 year period of the arrangement -- after the end of this period, this asset could revert back to the body which commissioned it in the first place but not always so. 

The body commissioning this asset would have made annual unitary payments over the contract period and these covered the principal repayments for the required financing, any associated  financing costs, runnning costs (employees supplies services etc), repairs, maintenance and programmed replacements of part of the asset in question. In some instances if the asset was an income generating one like for example a sports centre, the unitary payment could have been reduced if specific client numbers and income target levels relating to the asset had not been met,conversely it could be increased if certain client and income targets had been exceeded. This all sounded very interesting and novel.

The other beauty of this approach was that no liabilities were to be included on public sector balance sheets. Isn't that strange when the public sector was committed to making thirty years of payments to a third party? No apparently the risk of failure had supposedly been transferred to the third party away from the public sector and wasn't the private sector better at geting these projects finished on time and to the desired budget and specification -- Much better than the decrepit old public sector. These schemes were frequently of byzantine complexity and the breakdown of the unitary payments into the elements relating to financing running costs etc was extremely difficult and more of an art form than anything resembling something logical and scientific.

For many years, if any public sector capital projects needed to be undertaken, PFI was the only show in town. In local government,authorities received (and some still receive) -- specific government grants to help fund the unitary payments they had to make to PFI providers. It was difficult if nigh impossible to ignore these mechanisms. The public sector balance sheet looked a lot healthier than it should have done -- given that these PFI liabilites were hidden -- but that was alright -- because the risk of failure had been transferred to the private sector,hadn't it? The previous approach relating to PFI and whether these schemes were to be kept off balance sheet related to making a judgement about whether a genuine risk transfer from the public to the private secotr had taken place. Subsequently this was to change but not for the moment.

So where are we now? -- Funding of public sector bodies has shrunk -- however they are still committed to making these unitary paments over the long term. This has caused severe problems in the South London Healthcare trust which had to be taken over by the government last week and 22 other trusts are in similar straits. These trusts will be paying for their PFI hospitals long after they have become obsolete. According to the Spectator, NHS Trusts will have to shell out £70bn to PFI companies over the coming years whilst the hospitals themselves will be worth only £11.4bn -- Is this hire purchase gone wrong? The government can borrow at circa 2% -- would it have been better to do so than to go down the pfi route in any case?

In the private sector, facilities management contracts are for 3 years and not 30 years. Civil servants are not the best people to negotiate these deals -- they will succumb to pressures from the PFI providers but are not strong enough to put the PFI provider under similar pressure in terms of renegotiated deals. The specifications are also resticitve -- Changes to these arrangements e.g. building extensions or increased opening hours of these facilities incur huge charges from the PFI providers. This cannot and will not continue.

PFI companies always knew that in the final analysis the government would pick up the responsibility and any transfer of risk to them was in all practical purposes a sham. We are paying the price of this. When private sector PFI contracts are in trouble -- the providers re-negotiate. It is now the turn of the state to do the same or else PFI driven budgetary problems may transmit themselves to other parts of the public sector. The accounting for PFI contracts has been largely sorted out -- the budgetary pressure arguments still need to be addressed and quickly.