This year marks the 20th anniversary of the Private Finance Initiative. It has been arguably the boldest and costliest experiment in public policy ever conducted, resulting in more than £200 billion of public debt, the burden of which will hang over the British taxpayer for decades.
Initiated by the Tories, PFI was ramped up tenfold by Gordon Brown, who used it to get the cost of large infrastructure projects off the national balance sheet. Under Labour it became “the only game in town”, as roads, schools, hospitals, prisons, IT systems and defence contracts were shoehorned into a single approach, without adequate attention to cost or need.
PFI also became notorious for waste and extravagance. Who can forget the £40 Christmas tree billed at £875 to the Treasury? Or the £963 to install an aerial in the consultants’ common room at my own local hospital, County Hospital in Hereford? But there have also been big PFI scandals, such as the M25 road widening project, overpriced by £1 billion; or the Air Tanker refuelling contract which the MoD signed, then tried to cancel, and finally implemented at a cost widely believed to be £1.5 billion too high.
Finally, there has been the distorting effect of PFI on the economy and public services. This has been most obvious in the NHS, where PFI has created a Maginot line of super-hospitals which have sucked in money and resources, starving smaller local community hospitals and clinics. A case in point is the proposed Royal Liverpool and Broadgreen Hospital, which will merge five different facilities into one, and threatens to undermine other health services around Liverpool. It is little short of a tragedy that huge PFI hospitals have been built at exactly the time when healthcare is moving towards more specialist institutions, better use of technology, and community care services provided near the home.
PFI is now being wound down by the coalition. But where exactly did it go wrong, and what should replace it?
As I argue in a pamphlet published today by the Centre for Policy Studies, the main reason why any big procurement project fails is simple: a bad client. In the case of PFI, hospital trusts, local authorities and ministries were frequently rather bad clients. Often they were dominated by vested interests, such as doctors demanding under-utilised extra operating theatres; or they over-specified projects or changed their minds about what they wanted midway through. They often lacked the necessary commercial and negotiation skills, were naïve about using outside advice, and did not adequately understand the risks. The result was a field day for consultants such as PWC, which alone advised on some 200-400 PFI transactions.
Because PFI schemes tended to be huge one-off prestige projects, bureaucrats and local politicians naturally sought to erect expensive “signature” buildings. For a long period it was quite usual for a new PFI school to have a central atrium and cedar cladding more suited to a multinational corporation than a local educational institution.
Problems were worsened by bundling services like cleaning, meals and car parking into the contracts, making them yet more complex and inflexible. Officials insisted on offloading all risks, however small or poorly understood, onto the successful bidders, who then took out costly commercial insurance. Finally, the highly geared structure of PFI deals, with a large amount of debt sitting atop a small sliver of shareholder equity, created a need for expensive debt insurance. The M25 road-widening programme, for example, included £100 million of unnecessary insurance. Who ever heard of insuring a motorway?
But we should not despair. As the Olympics reminds us, the UK is capable of building the best infrastructure in the world. How do we make this the rule? Overall, we need greater simplicity, better incentives, more transparency on the numbers and smarter clients.
We need to get serious about educating public sector bodies to commission big projects more effectively, and with better support from Whitehall. That means a new centre of excellence to handle infrastructure projects, a single unit that operates across all government departments. Dedicated legal, financial and commercial experience can thus be brought to bear on projects, keeping costs down. This unit could also use its muscle to agree better deals with the contractors.
Transparency is a much overused word, but it is crucial to post-PFI success. All the numbers must be visible to Parliament and the public, with debt on the books wherever practicable. Likewise, costs must be benchmarked and any savings on existing contracts regularly reported to Parliament.
Finally, the national accounts should capture the value of assets created, as well as debt incurred, to underline the long term benefits of investment to the public and reassure creditors that debt is genuinely being used to finance investment, not consumption.
Infrastructure procurement is not sexy. Getting it right is detailed and demanding work. But its implications are enormous. From rail and roads to water, energy and high-speed broadband, the next decade or so will see an estimated £250 billion in infrastructure investment, which can in turn boost long-term growth. What we need now is a remorseless focus on delivery.
[A version of this article originally appeared in The Times on 7/5/12]