The disorderly return of PFI assets risks disruption to public services

The private finance initiative (PFI) was controversial from day one. Ten thousand or so days later it still is, as the first of these 25 to 30 year contracts for the private sector to finance, design, build and maintain public assets come to an end.

A fine report in the Financial Times recently highlighted “toxic” relationships, shouting matches, aggressive conduct and the first of what risks being a slew of lawsuits as these contracts come to an end. ²² www.ft.com/content/63d52b95-245b-4c85-8232-b86a054bf777

Everyone is worried. Those in the public sector who hold PFI contracts. The PFI industry itself. The National Audit Office. And the government’s Infrastructure and Projects Authority which recently commissioned an independent report from two PFI experts into the troubles with PFI. ²³ www.gov.uk/government/publications/white-fraiser-report-private-finance-initiative-sector/white-fraiser-report#section-3---disputes-are-using-up-too-…

The big question is whether the government is doing enough to provide the huge amount of support that individual schools, hospitals, councils and other public authorities are going to need to avoid what the FT dubbed “a bitter end” to the UK’s use of the private finance initiative.

Big money is at stake as PFI contracts come to an end

There are some 700 PFI contracts with a capital value of £57bn and with some £160bn still to be paid out for the use and maintenance of these assets. ²⁴ www.nao.org.uk/wp-content/uploads/2020/06/Managing-PFI-assets-and-services-as-contracts-end.pdf  The contracts range from roads to student accommodation, prisons, military equipment, and street lighting, with schools and hospitals prominent among them – there are 219 PFI schools and 160 hospitals and acute health facilities. ²⁵ www.gov.uk/government/publications/private-finance-initiative-and-private-finance-2-projects-2019-21-summary-data/private-finance-initiative-and-priv…

The private finance initiative operates a little like a combination of a mortgage and a full repairing lease. The private sector finances, designs, builds, operates and maintains the public asset with the public sector paying a form of rent – a unitary charge that covers both the capital and running costs over the 30 or so years of the deal. At the core of the current disputes is the last bit of the defining promise: the private sector’s contractual obligation to maintain the asset well. This meant that, at the contract’s end, the school or hospital or other asset would be handed back to the public sector in fine working order. And – whatever the other controversies around PFI, of which there are plenty – the promise of properly maintained assets was an attraction.

Governments of all colours tend to cut capital expenditure when times are tight - producing, as the IfG recently noted, a bill for backlog maintenance that, merely covering part of the public sector, currently totals at least £37bn across hospitals, schools, courts, prisons and the road network. Some £10bn of that is in the NHS and £11bn in schools.

But while the promise of high-quality maintenance was there, it is the reality of that which is causing the current angst. As the National Audit Office has noted, with dry under-statement, “measuring the condition of an asset can be a subjective process” – hence the disputes.

Relations between the public sector and PFI contractors are increasingly toxic

PFI contracts went through several iterations. For earlier ones the public authority can have very limited rights to inspection and information, and even for later ones there can be acutely different views about the quality of the estate. And as cash strapped public authorities have sought to manage their PFI contracts more vigorously – looking for reasons for deductions from the unitary charge for defects – relations have worsened. 

According to the decidedly anxious independent report for the Infrastructure and Projects Authority – the White Fraiser report – that has spawned “a lucrative and self-perpetuating disputes advisory market”. ²⁶ www.gov.uk/government/publications/white-fraiser-report-private-finance-initiative-sector/white-fraiser-report Advisers make things worse by seeking to win the current dispute for their side “at all costs”, leading to increasingly toxic relationships – notably in the health sector but also elsewhere.

The public sector needs to rapidly increase its capacity to manage the end of PFI contracts

When these contracts were being agreed, departments did have central PFI units to advise schools, hospitals and others, and there is no shortage of Treasury and other guidance. Not least on how to prepare for exit, with the warning being that work needs to start many years in advance. ²⁷ www.gov.uk/government/news/new-guidance-published-for-effectively-handling-pfi-contract-expiry

But the fact remains that while departments are often the ultimate guarantor for these projects and several do have PFI units, the original detailed negotiation of these deals, and now of their exit, was (and is) often undertaken by individual education authorities, schools, hospitals and councils –  and by people who have not done this before and are likely only to do it once: while the private side of the PFI industry has always been more concentrated and thus more expert. To the outside eye, this always looked a less than balanced equation.

It is arguable that there was too little central support for public authorities when these contracts were being negotiated. It seems clear that there is not enough now.

The White Fraiser report calls for pretty much a complete “reset” of relations between public authorities and the private contractors, both to manage current contracts better and ensure an orderly exit.

One dispute – over who is liable for a fire at the Whittington Hospital in 2018 – is already in the courts. Without action, the report says, “we expect the current trend towards increased disputes and deteriorating relationships to accelerate” with those disputes wasting large amounts of time and money. And with that comes the risk, in the words of the National Audit Office, of service disruption as well as increased costs.

There is still – just – enough time to do this better. It is only from next year that the number of contracts ending really starts to rise. ²⁸ www.nao.org.uk/wp-content/uploads/2020/06/Managing-PFI-assets-and-services-as-contracts-end.pdf, p. 13

The government and the industry clearly need to invest now in contract expiry in order for both to avoid wasting money in the long run. Failure to do so will be bad for the public purse, good for lawyers, bad for public services, and bad for both the private sector and the government. The government may, in 2018, have abandoned the use of PFI. But it still needs private investment. A poisonous end to PFI will not encourage that.