True to his campaign pledge of bringing more transparency to the UK’s private finance initiative (PFI) programme, new Chancellor George Osborne has already taken steps to bring over £200 billion (€232 billion; $286 billion) in PFI liabilities back onto the public balance sheet.
Under the Chancellor’s newly-created Office for Budgetary Responsibility – which will be responsible for providing the government with the official forecasts on which its future budgets will be based – “the costs of ageing, public service pensions and private finance initiative contracts” will be factored in the public accounts. Previously, PFI liabilities could be recorded off-balance sheet.
PFI is the UK’s standardised procurement process that tenders public works to the private sector. It was started in 1992 by the last Conservative government but was mostly used under Tony Blair’s Labour government from 1997. Since 1992, about 630 schemes have been procured through it, covering an investment of £63 billion and leaving taxpayers to pay an estimated £217 billion in user charges between now and 2033, law firm Norton Rose wrote in a pre-election briefing.
The move, continues Norton Rose, is likely to “require a Conservative government to make even more difficult decisions in terms of future public spending.” It may also signal the beginning of the Chancellor’s previously stated intention to reform PFI, which he thought had become “totally discredited” under the previous Labour government.
While the new government has yet to announce its plans for PFI, if previous statements provide any guidance Osborne will put PFI’s emphasis on value for money and full risk transferral, making sure taxpayers will not be locked into poorly performing contracts.
Regarding the former, the Conservatives had said that PFI would no longer be considered the default procurement method, with future projects having to demonstrate that they would be cheaper under private sector procurement, or else would be paid from the government’s balance sheet.
However, Norton Rose highlighted that the Conservatives did not specify how they aimed to make sure that taxpayers would not be locked into poorly performing contracts. “To the extent that the Conservatives seek to alter this, there would presumably be an impact on the private sector’s pricing assumptions at the bidding stage,” the law firm said.
On a more positive note for PFI, the House of Lords Economic Affairs Committee’s recent investigation into the scheme is revealing that the majority of projects “run on a PFI basis are overwhelmingly finished on time, on budget and on specification. By contrast, the European Investment Bank submitted that over half the projects monitored that had used traditional procurement had delays of at least a year,” Norton Rose wrote in the briefing.