PFI is dead, long live… what?

Even if the framework’s demise was very much Chronicle of a Death Foretold, to have it stated as a matter of government policy still packs a punch.

The UK’s PFI framework and its successor, PF2,  were unceremoniously terminated at the hands of Chancellor Philip Hammond on Monday.

“I have never signed off a PFI contract as Chancellor and I can confirm today that I never will,” Hammond quipped. And with that, the 26-year procurement framework – one of the most successful large-scale uses of public-private partnerships ever – was put to death by the country that pioneered it.

On the one hand, Hammond’s announcement was entirely anti-climactic. After all, only the most distracted of observers will have failed to notice that PFI hasn’t really been used in years – and you can make a strong case that PF2 was never alive to begin with. But while PFI has long been the punching bag of both government and the opposition, it packs an extra punch to see it officially designated ‘a bad thing’.

“The lack of confidence in the PFI model as expressed by Philip Hammond in today’s budget, and Labour’s threats of nationalisation, are unfortunately clear signs of a lack of trust between the public and private sector,” commented DLA Piper partner Colin Wilson. You can say that again.

Does that mean government has parted ways with private infrastructure procurement? Hammond was quite clear that’s not the case, stating that “half of the UK’s £600 billion ($765.2 billion; €673.6 billion) infrastructure pipeline will be built and financed by the private sector”. But what he failed to do was outline what would replace PFI for the private procurement of new-build infrastructure.

That creates a vacuum at a dangerous time for the country, with the current government consumed by Brexit and the opposition Labour party intent on seizing power and doing away with all things private once it does.

We could spend an entire letter (or three) listing all the common criticisms levelled at PFI – from its contractual rigidity and excesses to its off-balance-sheet ‘original sin’ – but that’s beside the point. Everybody knows there were problems with PFI, just as there are with any procurement framework – not least public procurement.

What has been lost with PFI is a standardised procurement framework, one with a long track record and  which clearly outlined the spending necessary to maintain assets to a good standard – a level of transparency that, ironically, gave its critics plenty of ammunition, as they repeatedly conflated opex and maintenance with construction costs.

Of course, its demise also creates opportunity. For example, to create a ‘public-pensions partnership’ model, one perhaps based on the template set by the procurement of the Thames Tideway Tunnel, in which the public sector acts more as a backstop. But, again, even before we get to the pros and cons of using that model more widely, it’s worth noting it has also received its fair share of criticism.

Across sectors and procurement models, it’s crystal clear the tone has hardened. Or as Hammond put it during his Budget speech: “The days of the public sector being a pushover must end.”

We know many of you will be reading this and thinking that, despite all the tough talk, governments around the world – the UK’s included – have little choice but to engage with the private sector to deliver on their massive infrastructure needs. As the head of one well-known fund manager put it to us the other day: European governments have their hands full trying to keep their welfare models funded as populations age, meaning there’s little appetite to increase taxes to pay for infrastructure.

That’s an entirely rational argument, but we live in emotional times. One could make a similar point about climate change following the recent IPCC report. The rational approach – given the report’s dire warnings – should be to pull out all the stops to keep global warming below the 1.5-degree Celsius threshold.

However, there’s a very good chance that will not happen. Just as there’s a very good chance the vacuum created by PFI’s demise will not be easily filled.

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