The private finance initiative – or at least the PFI as we know it – is dead. That’s what the fiercest critics will hope given the Treasury’s announcement of a “fundamental reassessment” of the model.
But don’t be too sure.
George Osborne, the chancellor, is looking for a model that “is cheaper, accesses a wider range of private sector financing sources, and strikes a better balance of risk between the private and public sectors.”
What does that mean in practice? Well, if the Treasury knew the answer it would have announced it.
The mere fact that the government department that is most prone to examining problems and providing the solution is issuing a public call for evidence shows that the government’s money men do not find the answer easy.
You can count the chancellor among them. In opposition, he declared Labour’s use of the PFI to be “totally discredited”, declaring it to be a model that “must be replaced”.
Yet since he took office, the Treasury has signed off around 40 deals worth a couple of billion of pounds with another £7bn or so of projects in the pipeline.
So what are the options? Some are clear, though they hardly amount to a fundamental change.
First, improve the procurement by getting teams that have done one before to do more. Michael Gove, the education secretary, claims he will do this by centralising to standard designs the £2bn of PFI schools to which the Treasury recently agreed (let’s just hope they are well designed).
There is pressure for the private sector to get lower returns for success – for example through caps on profit, an idea Scotland is testing, or by the taxpayer getting a share when equity stakes in projects are sold on, sometimes at deeply impressive multiples of the original investment.
However, risk (if it is real) needs its reward. And if PFI investors are to invest again they need to be able to recycle their capital and realise a return on their original stake. So any significant change to profit-sharing (and the private sector does, very occasionally, lose big sums on these deals) is likely in the long run only to put up the cost of the original finance. Which doesn’t sound like cheaper.
Ministers, like their Labour predecessors, would like pension funds to provide a large scale and less costly alternative to banks as a source of infrastructure finance, and not just for PFI. But pension funds want mainly lowish risk, long term, investments to match their liabilities. So, except at the very margins of their investment, they are unlikely to take on the riskiest bit of these projects – namely their construction.
Which leaves a whole series of possible permutations where the public sector could take more of the financing risk, providing more of the equity, or more of the debt, or taking on the debt once a project is up and running, and then perhaps handing it off, if it can, to a pension fund. All of these options could cost the taxpayer less in the long run.
There would be questions about how well they preserve the incentives to build on time and too budget – two of the PFI’s few clear cut achievements – and, at least in theory, to design for low lifetime maintenance costs.
The really big problem with all those options, however, is that they will require more government capital, or more government guarantees, at a time when public sector capital is being slashed and the coalition is deeply averse to taking on more debt.
So while the review – like previous Labour ones – will bring some changes, it may well prove to be more of a case of hauling the battleship out of the water to give it a fresh coat of paint and some new armaments, rather than replacing it with something totally new.
The fundamental attraction of PFI to governments around the world – that you can have your project now and pay for it later – is unlikely to go away.
Jim Pickard
Kiran Stacey