UK Chancellor Philip Hammond used his national Budget yesterday to abolish use of the Private Finance Initiative (PFI), and its successor PF2, to fund roads, hospitals and other infrastructure, saying "the days of the public sector being a push-over must end".
But he said he was still committed to using public-private partnerships where they deliver value for the taxpayer, prompting questions as to what funding model the government would adopt.
The decision follows scandals over serious defects discovered in schools built under the PFI in Scotland and the collapse of the UK’s second biggest builder, Carillion, in January this year, which led to the termination of its two major hospital PFI deals.
"In financing public infrastructure, I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector," Hammond said. "But there is compelling evidence that the Private Finance Initiative does neither.
"We will honour existing contracts but the days of the public sector being a push-over must end. We will establish a centre of excellence to actively manage these contracts in the public interest, starting in the health sector. And we will go further.
"I have never signed off a PFI contract as chancellor and I can confirm today that I never will. The government will abolish the use of PFI and PF2 for future contracts."
Analysis
Rather than a dramatic departure, Hammond instead made official what had become de facto policy. Since PFI’s peak in 2007, when more than 60 new deals were signed, its use has dropped steeply, with the last two signed off in 2016.
Initially seen as a way of getting cash from the private sector to pay for big, expensive projects, it kept the capital cost of those schemes off the books of the government, which then paid fees for use of the asset, plus interest on the capital raised for many years into the future.
Critics blamed PFI for unnecessarily transferring scarce public money to private financiers by way of their high interest charges.
In January, spending watchdog the National Audit Office calculated the extra cost to the taxpayer of existing PFI schemes to be $200bn between this year and 2040.
The House of Commons Treasury Committee undertook a similar analysis in 2011, which estimated the cost of a privately financed hospital to be 70% higher than one funded directly by government.
These factors led UK construction union Unite to welcome Hammond’s announcement, with its general secretary Gail Cartmail, saying PFI schemes "cost taxpayers billions of pounds, with the spivs in the city coining it".
But she called for more.
"However if the government is serious about using the budget to tackle bandit capitalism then it needs to go much further. It must not only end the PFI scam but adopt Labour’s policy of reviewing all PFI contracts and bringing the worst offenders back in house."
What now?
The chancellor still wants private finance. He said half of the UK’s £600bn infrastructure pipeline would be built and financed by the private sector, leaving observers to question how.
Liz Jenkins, partner at Clyde & Co, told Construction Manager: "The proposed abolition may come as a surprise but in reality it’s likely that a new model will replace it.
We await the details but one would expect a new model that continues to allow the private sector the opportunity to fund public infrastructure – we simply cannot build the infrastructure this country needs without it."
Sharon Renouf, a partner at law firm Bevan Brittan, told CITY A.M.: "There must now be a question about how future infrastructure will be delivered if not via PFI or PF2. It seems unlikely that the need will be met with public sector capital so new models will need to come forward to address the gap."
"While the demise of PFI is long overdue, the government needs to be entirely clear about how it will be replaced," said Unite’s Gail Cartmail. "The UK is crying out for infrastructure investment, including hospitals, schools and roads, and these schemes must not be delayed or mothballed."
She called for direct taxpayer funding of infrastructure: "If the government has learned the lessons of PFI, then future infrastructure projects should be directly funded by the taxpayer, entirely removing financial speculators from the equation."
Other key budget points
Aside from PFI, Hammond’s Budget contained other construction spending giveaways, reports Construction Manager, including:
- The release of £420m for pothole repairs;
- An extra £500m for the Housing Infrastructure Fund, which the government said would enable another 650,000 homes to be built;
- £25.3bn for the second Road Investment Strategy for 2020-25;
- A reduction of the 10% contribution to the apprenticeship levy that smaller firms currently have to pay to 5%;
- £650m to rejuvenate high streets in England through the New Future High Streets Fund;
- £1bn of guarantee support via specialist and high street lenders to smaller housebuilders, to be deployed through a variant of the British Business Bank’s ENABLE Guarantee programme;
- £37m to support Northern Powerhouse Rail, dubbed the Crossrail of the North.
Image: The £380m University Hospital Coventry was deemed the most expensive hospital built using PFI, and required extensive remedial work for fire protection (Snowmanradio/Wikimedia Commons/CC BY-SA 3.0)
- Edited 31 October to correct the amount being made available to smaller housebuilders
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