The last Conservative government
invented the Private Finance Initiative (PFI) but it was New Labour that made
it into a major instrument for the provision of public facilities and services.
The person responsible for that was Gordon
Brown. As Chancellor of the Exchequer,
he forced public bodies to use the PFI model.
He did so, even though PFI costs
more than the traditional mode of procurement.
In other words, it wastes taxpayers’ money. It does so in two ways:
It involves public bodies borrowing money at a higher rate
of interest than through the usual means of public borrowing. In other words, it’s like opting for a 7%
mortgage when you are buying a house, even though you can get a 6% mortgage.
It normally involves public bodies entering into long term
contracts for services, the need for which may change dramatically or disappear
altogether well before the contract term is over. For example, the pupil numbers in a school
may decline or it may close altogether, but the annual contract charge may
still have to be paid.
A prime example of that has occurred
The PFI model for providing public
facilities and services inevitably costs more than
the traditional way of doing these things.
There isn’t the slightest doubt that Gordon Brown was fully aware of
this from the outset - although he may have many flaws, economic illiteracy
isn’t one of them.
Today, thanks to his “prudence”,
public bodies are committed to paying a total of £170 billion to contractors in
more than 800 PFI schemes up to 2031-2032.
This figure was recently extracted from the Treasury by Conservative MP,
Richard Bacon, who is on the Public Accounts Committee (see the PAC report on
PFI published on 27 November ). And, of course, this figure is growing all
the time as more PFI contracts are entered into.
Despite being the architect of PFI,
Gordon Brown has rarely answered questions about it. When he was in the Treasury, he usually avoided
doing so by putting up one of his minions in the House of Commons. But now that he is Prime Minister, he
couldn’t avoid a question on 14 November 2007 from Labour MP, David Taylor, who
expressed concern about taxpayer liability for the maintenance of schools under
long term PFI contracts, when falling rolls cause these schools to close before
the contract term elapses .
Gordon Brown didn’t
answer David Taylor’s question – understandably, since he had pointed to a
major drawback in PFI procurement.
Instead, he sang the praises of PFI, saying: “It simply would not have
been possible to build or refurbish such a number of schools and hospitals
without using the PFI model”. That is
simply a lie: all of it could have been done, and done more cheaply, by
expensive public borrowing
Let’s look at the PFI in
a little more detail. It is first and
foremost a form of public borrowing, which, like conventional public borrowing,
has to be paid back with interest by the state.
In fact, as I have pointed out already, it is a more expensive method of
public borrowing than the conventional method.
It is more expensive because the state can always borrow money more cheaply
than the private sector (because, whereas a private corporation may go bust and
default on its debts, the state will not).
The essence of PFI is
that the state employs a private agent to borrow on its behalf – at a higher
interest rate. As I said before, it’s
like taking out a 7% mortgage when a 6% one is available.
This is one way in which
PFI wastes taxpayers’ money. There is
worse. What happens is that a public
body enters into a contract with a private consortium, for example, to borrow
money to build a school or a hospital, to carry out the building and to provide
additional services (eg building maintenance or
cleaning) for a period of 25 years or more.
Under the contract, the public body undertakes to pay the consortium an
annual unified charge covering interest, capital repayment and payment for any additional
It is very foolish for
any organisation to contract to purchase services from a supplier for 25 years
or more. The threat that a contract is
not going to be renewed is the most effective lever an organisation has to
ensure that services are delivered as required.
With a contract for 25 years or more, the supplier doesn’t need to worry
about that for a very long time.
It is even more foolish
to take out a long-term contract in circumstances where the services required
cannot be predicted accurately 25 months hence let alone 25 years hence. PFI contracts normally prescribe a mechanism
for the modification of the PFI property and the services to be delivered in
it, but the public body asking for a modification is at the mercy of the PFI
contractor that owns the property and provides services in it. Nobody else can provide the services, and the
service has to be provided, so the public body is in a hopelessly weak bargaining
position when it comes to agreeing the extra cost to the taxpayer.
This is a direct result
of the public body foolishly taking out a contract for a service delivery for a
period so long that service needs cannot possibly be predicted. Why are public bodies forced by the Treasury
to engage in such foolishness? The
answer is that the inappropriately long service contract is dictated by the
fact that the PFI contractor has to borrow over a long period – 25 years or
more – in order to keep the cost of borrowing within reasonable bounds. To borrow over that period, the consortium
has to be guaranteed an adequate income stream throughout the period in order
to service the borrowing. So, there has
to be a contract for service delivery for 25 years or more, even though service
needs cannot possibly be predicted for anything like that length of time.
In other words, the
inappropriately long service contract is a necessary condition for getting
unnecessarily expensive finance for public projects via PFI. Gordon Brown has brought the world of
PFI is completely unnecessary
for public sector procurement. There is
no need for a public body to enter into a contract with a single private sector
consortium to (1) provide finance for a project, (2) undertake the building
work, (3) maintain the building, and (4) provide other services in the building
for 25 years or more.
On the contrary, there
are very good reasons why the process should be broken into its separate
elements. The state itself should
acquire the finance, since that represents best value for money for the
taxpayer, and contract a private company to construct the building. Contracts for building maintenance and other
services, if not carried out by the public body itself, should be set for a
period of time for which service needs can be predicted, and certainly not for
anything like 25 years.
Of course, the
Government is fully aware that long term contracts for the supply of public
services are unwise. You have only to
look on the website of the Department of Children, Schools & Families to
confirm this. There you will find a Purchasing Guide for Schools containing
the following excellent advice in a section entitled Contracts longer than three years:
that is longer than three years may result in inflexibility, particularly if
the agreement does not allow the school to vary its requirements in the light
of changing circumstances.” 
This is written by the
same Government that forces public bodies across the land to take out contracts
for 25 years and more for services that may never be required.
Why was the supposedly
prudent Chancellor, Gordon Brown, addicted to PFI as a mechanism for financing
public projects? Answer: because PFI
debt is not usually treated as public borrowing for accounting purposes and
therefore doesn’t contribute to the Public Sector Borrowing Requirement
(PSBR). In other words, PFI debt is usually
“off balance sheet”, even though the state is ultimately responsible for
So, by using PFI, total
public borrowing is officially less than it would have been had Gordon Brown gone
down the cheaper route of conventional borrowing. This made it easier for him to meet his
self-imposed (and arbitrary) “sustainable investment” rule that total public
borrowing shouldn’t exceed 40% of gross domestic product (GDP). In other words, in order to make himself look prudent with regard to the total volume of public
debt, the Chancellor insisted on the imprudent use of PFI borrowing, which
costs the taxpayer more than conventional borrowing.
In recent years,
Conservatives have been questioning the fact that PFI debt is “off balance
sheet”. On 30 April 2006, Conservative
MP, Brian Binley, raised the matter in the House of
Commons with Des Browne, then Chief Secretary of the Treasury. He posed the question: what would be the
consequences of moving PFI debt on to the Government’s books, to which Browne
replied that “such movement on to the balance sheet would put the country in a
position in which it could not meet the sustainable investment rule and thus
could not invest further in public services and our infrastructure”. There you have it in a nutshell: PFI is used
to keep on balance sheet debt down, so that the Chancellor could meet his
“sustainable investment” rule.
To summarise: as Chancellor, Gordon
Brown insisted on more expensive borrowing, coupled with long term contracts
for services that may never be required, in order to make himself look prudent. You couldn’t make it up.
10 January 2008