UK abolishes PFI as ‘days of the public sector being a pushover’ end

Chancellor Philip Hammond insisted present contracts will be honoured but vowed to never again sign a PFI or PF2 project.

UK Chancellor Philip Hammond yesterday brought the curtain down on the Private Finance Initiative, 26 years after it was first introduced.

While maintaining the private sector will retain a significant role in financing UK infrastructure, Hammond said the use of the PFI or its PF2 successor model will be abolished for future projects.

“Half of the UK’s £600 billion ($765.2 billion; €673.6 billion) infrastructure pipeline will be built and financed by the private sector,” said Hammond. “And in financing public infrastructure I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither.”

The Chancellor’s announcement comes against a backdrop of the opposition Labour Party promising to bring all existing PFI contracts “back in-house”, although Hammond insisted no operational projects will be cancelled.

“We will honour existing contracts, but the days of the public sector being a pushover, must end,” he added. “We will establish a centre of excellence to actively manage these contracts in the taxpayers’ interest, starting in the health sector. And we will go further. I have never signed off a PFI contract as Chancellor and I can confirm today that I never will.”

Two projects – the £1.6 billion A303 road and the up to £6.2 billion Lower Thames Crossing – were in the process of being procured through private finance. The government said it is still pursuing these projects but said the model of financing is not the deciding factor.

In addition to Labour’s proposals, the PFI programme came under fire from the UK’s National Audit Office in January, which said “there is little evidence that overall construction cost is lower under PFI”. The review came in the same month as the collapse of construction group Carillion, which left a multitude of infrastructure projects in doubt.

One of those projects, the £335 million Royal Liverpool Hospital, had its PFI officially terminated this week and brought into public ownership following an announced move to do so last month. Described as “one of the lowest-cost public-private deals ever” upon financial close in December 2013, it resulted in an investment in the hospital by the Pensions Infrastructure Platform written off as worthless.

‘Woeful’ procurement

The hospital was procured under the PF2 successor programme, designed in 2012 to reboot PFI. Only six of the 716 operational private finance projects have been procured under the system since, although doubts have been raised about a future replacement model.

“Establishing a centre of best practice and abolishing PF2 is hardly going to move the dial in terms of gaining better value for money from public procurement,” said Chris Brown, partner at law firm Norton Rose Fulbright. “It is easy to forget that public procurement before PFI was woeful, and recent procurements seem to be repeating all the bad lessons of the past.”

The government said it will continue to use the Contracts for Difference scheme for renewables, the Regulated Asset Base model currently being weighed up for future nuclear projects and the UK Guarantee Scheme.

“There are many partnering alternative models available for government to adopt to facilitate this investment as opposed to the PFI model,” said Colin Wilson, partner at DLA Piper. “The market must be given confidence by government that involvement in the highly regarded cachet of UK infrastructure is worth pursuing. Otherwise investors will turn their focus to other markets and the UK will fall further behind the other G7 nations in the quality of its infrastructure.”