Warning shots

Talk about flogging a dead horse: PFI, arguably one of the UK’s most successful financial exports but thoroughly discredited in its home country for years, has been brought out for yet another public beating by yet another
British politician.

The perpetrator this time was shadow chancellor John McDonnell, who, at Labour’s recent conference, vowed to bring all existing PFI contracts “back in house” while pledging never to sign another PFI deal again. The latter is not news and very much the consensus among every major UK political faction. The former, though, is more interesting – raising the spectre of nationalisation that is readily associated with a Jeremy Corbyn-led government.

So, is Labour, assuming it gets into power, going to nationalise a PFI pipeline with a capital value of some £60 billion? No, it isn’t, and Labour itself was the first to admit it when, not long after McDonnell’s speech, it issued a press release saying it would review all PFI contracts and – “if necessary” – bring them “back in house”. In Monopoly, that’s called a Get Out of Jail Free card.

But let’s say Labour did want to go ahead and nationalise the 700-plus PFI contracts procured since 1992. In theory, a sovereign government can do whatever it likes; in practice, as Pinsent Masons partner Jonathan Hart pointed out, it would be a “hugely complicated” task that would land the government with a multi-billion-pound compensation bill.

A spokesman indicated to The Guardian newspaper that a future Labour government could offer to swap investors’ PFI shares for government bonds. Whether investors would accept that is another matter altogether. Cue years of litigation and a costly legal bill to further inflate that costly compensation figure. And then, of course, there’s the chilling effect such a move would have on investors of all stripes, including those that are financing all those UK government bonds.

This apparent disregard for the mechanics of investment is on a par with the ignorance shown towards the inner workings of PFI contracts (most of which, by the way, went through some sort of government-stamped value-for- money assessment).

In many ways, PFI is a classic victim of its own success. It delivered a once-in-a-lifetime refurbishment of the UK’s infrastructure, but it did so by locking the government into long-term contracts that factored in the initial capital expenditure required to build these assets as well as the costs needed to operate and maintain them to a certain standard.

This created the first of many easy targets, with total lifetime costs often conflated with projects’ initial capital expenditure and wheeled out to demonstrate how obscenely expensive PFI contracts were in comparison with public sector delivery.

But it’s the long-term lock-in to a certain standard of availability that was always the most vulnerable to buyers’ remorse. For, while PFI’s excesses are contractually delineated for all to see (How much does it cost to change a PFI lightbulb? Up to £333, as per one oft-reported figure), the costs of the public sector haphazardly maintaining these assets – or deferred maintenance, as it’s known in polite society – are rarely that well quantified.

What’s more, while PFI was once the sole province of builders and bankers (easily caricatured as cardboard villains), a lot of these contracts are now in the hands of funds backed by institutional capital and thus helping to pay for people’s pensions (a harder constituency to vilify).

Ultimately, McDonnell’s pledge underscores the hostility that a Corbyn-led government would bring to what has traditionally been one of the world’s foremost private infrastructure markets. Whether it’s changes to tax arrangements, contractual renegotiations or, in some cases, wholesale nationalisation, investors should prepare for a very bumpy ride – even if reality would probably end up tempering many of Labour’s more ideological wants.