The Scottish government is on the verge of switching traditional, albeit expensive, PFI (Private financial initiative) contracts to a government funded body. In light of the recent challenges for PFI companies, which saw leading PFI contractor Carillion slip into liquidation, there are serious concerns about the expense to the public purse. At this moment in time it is believed there are in excess of £200 billion worth of PFI contracts still running across the UK. So, how would a switch in PFI projects help or hinder the Scottish infrastructure system?
Cost of PFI contracts
The cost of PFI contracts will vary across the board but one example is the cost of building new hospitals in England. The initial PFI finance totalled £11.8 billion and while obviously building state-of-the-art hospitals, funded by private money, the total cost will be a staggering £79 billion over 31 years. For every 1 pound of PFI funding put into the system the PFI companies take out £7.
How do PFI contracts work?
Whether we are looking at state-of-the-art hospitals, office developments, housing projects or any other type of infrastructure expenditure, PFI has played a role over the last 25 years. The idea is that PFI partnerships will raise funding to build the developments and then effectively lease these back to the authorities for a fixed term. During that period the PFI companies will manage the developments leading to regular income, backed by the government, which is effectively goldplated and could not be any more secure.
At the end of the contract ownership of the development is handed to the public sector but, as we touched on above, unfortunately in some of these developments the total cost is seven times the initial cost.
Why did governments use PFI contracts?
The idea was that all risk, regarding finance and development delays, would be taken on by the PFI contractors in exchange for repayments over many years. There is no doubt that in theory this public private partnership should have worked quite well, and has in some areas, but the cost to the public purse is now causing major problems with the electorate. In times of political need this was seen as the simplest way to build new infrastructure, hospitals, homes, etc at effectively “no cost”. PFI debt was held off-balance-sheet and therefore not counted when considering total UK debt.
Many of the earlier contracts seemed to have factored in excessive profit margins with some hospitals reporting large callout fees for something as simple as changing a lightbulb. As the bidding process became more competitive for new and larger infrastructure projects it seems that some of the quotes were simply not viable. As funding issues became apparent, credit ratings were downgraded and new work slowed, the pressure became too much for the sector.
Public sector funding
The Scottish government is considering a public sector body which would fund all future infrastructure projects meaning that they were owned by the public sector from day one. The fact that PFI contracts initially took over from public funded infrastructure projects reflects the growing cost of such investment in the public sector, reliability problems, management issues and union interference. Control of infrastructure spending was taken away from the public sector for a reason, huge inefficiencies, and we can only hope that lessons have been learned – otherwise we could be in for PFI Mark 2 in the future!