The Private Finance Initiative (or PFI) is the government’s favoured means of funding major new building projects such as hospitals and schools. It was introduced under a Conservative government and extended under Labour despite ideological opposition by unions and by ordinary party members.
Private consortiums, usually large construction firms, are contracted to design and build a new project, and also to manage it. The building is not publicly owned but leased by a public authority, such as a council or health trust, from the private consortium.
The private consortium raises the finance to build the project. It is then paid back with interest by the government through regular payments over the period of the contract (usually 30 years), after which time the building reverts to the public body. The amount paid depends on the way the consortium performs, so for example if the building project is delayed or if it is badly managed the consortium gets less money. In theory therefore the risk of the project going wrong lies with
the private sector.
Advantages of PFI:
● governments have always paid for major public building projects by public money raised from income tax. The squeeze on public finances has meant that little has been done to either improve or replace existing public buildings during the last 30 years. Because PFI allows for spread payments the government has been permitted to start a massive building programme of new schools and hospitals.
● in the example of the Edinburgh Royal Infirmary (see below) the £900m fee over the 30-year contract includes operating costs
● under PFI rules, before a contract can be signed it must be proved that the building could not be provided more cheaply using traditional funding arrangements.
Disadvantages of PFI:
● unions claim that one of the main ways that private companies profit from the PFI is by staffing the buildings as cheaply as possible. The pay and conditions of front line workers in PFI buildings is often worse than their counterparts in the public sector
● as any fule kno, buying something on credit is more expensive than paying for it up front. For example, the Edinburgh Royal Infirmary cost £180m to build and it is projected will cost £900m to pay for over the length of the contract.
● in practice a PFI-funded building is cheaper to build and manage than if it were traditionally funded
● accurate assessment of PFI against traditional funding methods are difficult because traditional funds for new buildings are of course not available (hence the need for PFI)
● public authorities commissioning new buildings know that PFI is the only way they will get new schools and hospitals built, so that perhaps the value for money tests are not quite as rigorous as they could be
● the full cost of PFI will not be known for at least another 30 years (the length of most PFI contracts)
● the National Audit Office and the government's favourite thinktank, the Institute for Public Policy Research, have expressed doubts about PFI
● the government's design watchdog has attacked the cheap appearance of many PFI hospitals and schools
● when the buildings become dated in a few years' time the government may still have to pay for their upkeep anyway
Source:
The Guardian
Footnote:
● the government has paid up to 30% more in construction costs for hospitals built under PFI in order to meet deadlines and budget demands
● 26% of the increase in NHS income between 2000-03 has gone towards paying PFI charges for new hospitals
● the main beneficiaries of PFI are the providers of the finance for the projects and some of, but not all, the private sector service providers - rather than the public sector itself
